The B Word! What is a Budget?
As defined by Merriam Webster a budget is a plan used to decide the amount of money that can be spent and how it will be spent.
Many people hear the “B-word” and draw the conclusion that a budget is a negative thing that broke people endure because of lack of finances. However, the opposite would be true. No matter what your income is, you need a budget. If you have ever wondered where your money has gone, or find it difficult to keep, it is because you don’t have a plan for your money.
A budget decides where your money goes. The weird thing is that most people don’t budget their income. They simply deduct expenses from their income, and end there.
If we want to keep the money we make and get off the hamster wheel, then we need to do something besides planning what we are going to buy with our next paycheck. Instead there needs to be a plan of how much money we plan to keep from our earnings. It is shocking how people treat money with such disregard. We treat money like it is a never-ending renewable resource and we carelessly spend on “stuff”. Some of us even give and loan money away. Money is a precious resource that you work hard for, you need to treat it as such and question every dollar that you spend. The average person owns a $700 smart phone and pays $80 on cable television. That same average person wears luxury brands and looks like they have a substantial income. However, that same person doesn’t have a luxurious income and most likely has a negative net worth.
We live in the richest nation that has ever existed, and seem to desire slavery over wealth. If you work to earn an income and use that income to feed yourself, pay for housing, just so you can commute to work , that’s slavery. You need to get above water and add some meaning to the earnings you bring home. Don’t accept that “the struggle is real” because it is not. Here are a couple of things that are real, a ship with no directions stays at port and poor planning leads to failure. A budget is simply a monthly financial plan, if you aren’t planning to have money then you won’t. People have a propensity to use all available resources when they know those resources are renewable. So when you bring home $3,000 per month and get a $500 monthly raise you are likely to absorb the additional funds and increase your lifestyle.
So enough on why you need a budget, lets talk about how to do a budget with a few rules.
Treat your money like a business.
Businesses operate for a single purpose and that is to create profit. All businesses use budgets. Whether it be for departments, labor hours, or charitable giving, there is a plan for what funds are going where. If you want to be successful in achieving wealth you need to budget like you are a business. This means writing out your monthly income and subtracting your expenses from it. The balance after a business has subtracted expenses from operating income is called income or net profit.
Create net income
If you feel like you can barely breathe and that net income is not possible for your situation, then you need to analyze your true problems. These posts wont help those who aren’t ready to change how they view money. Your goal as an earner is to actually earn and retain earnings. It’s not about your salary/wage. I have a favorite saying that expresses my view on income. “It is not how much you make, it is how much you keep!” The goal of getting your business (and by business, I mean your money) to grow, is to do what businesses do when they want to expand profitability… reduce expenditures.
The easiest way to create instant income is to reduce expenses. It could be your $120 cable bill, the $200 you spend each month eating out, or the negative vise like cigarette smoking. Maybe even designer brands and social badges like Starbucks. If you have no monthly surplus, immediately stop all retirement contributions, loaning money, and borrowing money. Start reading to improve your financial knowledge so ignorance doesn’t cause you hardships.
Budget your surplus
The balance of your funds after subtracting your expenses, lifestyle wants, and basic needs is called a surplus. Lack of a surplus is a deficit. Here is where most people go wrong. Most surpluses end up being spent as “pocket-money”, “fun money”, or “blow money”. The surplus disappears instead of being budgeted. What happens if a business always took its net income and spent it all? You and I could agree that, it wouldn’t be a business that would survive very long. Spend every dollar you earn via your budget.
The first step to wealth is to start shoveling dirt out the hole instead of standing in it. I realize that people have debt, low incomes, and life events that disrupt the ability to create a surplus, but you have to start! The first task of ALL extra dollars (surplus) in your budget should go to your emergency fund.
Create your Emergency Fund
I always hide my expression when I am asked to help solve a financial problem for a client or friend, only to see that they are broke but have the latest Iphone, have cable, eat out, and are dressed in the latest fashions, but can’t figure out why they have no savings. If they weren’t spending money to look 3 pay grades above where they actually are, they would have savings. But having no savings is normal in America, as 62% of people have $0 saved for emergencies and around 34% are a job loss away from financial ruin. How much easier could you sleep if you knew you had an emergency fund to cover the unforeseen?
An emergency fund should be $1000 and you should fight with everything you have to get this fund in place. Put the funds in a typical savings account and never touch it unless you have an actual emergency.
Now you can budget with peace of mind that car problems or other issues will not derail your financial goals. Goals you should now budget towards could be:
- Eliminating all debt
- Beefing up your emergency fund to 3 months of expenses
- College savings
- 15% of income into retirement savings
- Investing (no load index funds and Roth IRA)
A budget is simply a monthly financial plan that you should make each month before the month begins. Additionally, you should review it weekly to make adjustments and access your progress. I budget up to 1 year from the current month. If you have long-term goals it is great to see what your financial position will be in the future. That strategy works well for paying down debt or saving for large purchases.
Here are a few great budgeting tools that I use. All are free and have mobile apps (posted below are the App Store links)