What should you do that governments can’t? Create a balanced budget. A budget is good since it will help you keep track of money in and money out, prevent overspending, stay on top of your monthly bills as well as plan for the future. Big ideals? Yes. Overwhelming task? It need not be once you break it down into manageable steps.
Income and expenses
Before you can develop a budget you need to know how much money is currently coming in and going out. On a piece of paper or spreadsheet… or whatever, make two columns: one for income and one for expenses. Then go down the list and write down everything you can think of. Look over your credit card and bank statements for anything you might have missed.
Examples of income:
- Regular wages
- Interest or dividends on savings/investments
- Pension
- Alimony/child support
- Government assistance
- Other
Examples of expenses:
- Mortgage/rent
- Car payment/ repairs/petrol
- Taxes on income/property/etc.
- Food
- Utilities
- TV/Internet/Phone
- Debt payments (credit cards)
- Insurance for home/life/car/medical
- Savings
- Other
Beside each category make sure you list it as fixed or variable. There may be ways to incrementally change variable expenses but not fixed.
Rate your expenses
Next, go down your list and write a 1 to 5 beside the expense as to order of importance. One is medicine you need and five is that funny t-shirt you bought from a street vendor.
Income vs. expenses
Next, take a one year average of your income vs. expenses. Make sure you include things such as new tires, annual gift buying, vacations or those once a year (or two year) items and pro-rate if necessary.
Total and look at the amount. Hopefully you are not in the negatives…too far.
Adjust Expenses
Thus far you have just outlined what you are making and spending, but creating a budget is the hard part. Look for areas that you can reduce your spending. To start, look at some big ticket items such as vehicle and home. If you are not quite ready for a major downsize, look for other ways to curb your expenses.
Go over your variable costs:
- Can you cut down on some of these?
- Could you buy food in bulk or at lower prices? Coupons?
- Are you willing to go consignment or second hand for clothes?
- Are you making needless trips in the vehicle and could cut down the fuel bill with better scheduling? Car pool? Ride your bike?
- Are you eating a lot of fast food or specialty coffees?
- Willing to buy generic coffee, medicine, food?
- Can you make long-distance calls on VOIP on the Internet for cheaper?
- Can you adjust the thermostat or AC unit to save a little?
Go over your fixed costs:
- When is the last time you checked interest rates on your mortgage?
- Have you shopped around for insurance rates lately?
- Can you cut your cable bill and watch TV (legally) on the Internet?
- Can you lower your Internet bill?
- Can you have your home reassessed if property values have gone down?
Priorities First
Next, go over your list of priorities. Make sure the higher numbers are allocated money first. Don’t forgo paying your heating bill because you want to eat sushi again this month. The lower numbered priorities are on the chopping block for getting cut out of your life completely. Carefully analyze each one and determine if it can go…even for now.
Be cautious that you didn’t dress up your wants as a need. If you are overspending and everything is a priority 1 or 2 – the problem might be defining a want vs. a need or a luxury vs. a necessity. Get a second opinion if in doubt.
Be Aware of Mental Trickery
Our brain is a complex organism that will try to rationalize ways of getting us what we want. It may take you to the ATM and take out cash so you don’t see the wasteful purchase on a bill. It may depend and spend income you haven’t made such as a bonus, raise or tax return. The heart is a treacherous beast and will continually find ways to try and cheat the budget. If you save $30 on groceries one month it may prompt you to treat yourself to an extra meal out. But you may have merely skimped on food at the grocery store and next month you’ll need to spend an extra $50 to make up for it. Beware the mental trickery!
Keep Re-evaluating Monthly
Continue to re-evaluate and adjust your budget every month. Your target should be come in under budget by 5 or 10% every month. There will always be those unexpected surprises that you didn’t count on such as a leaky roof or a cracked windshield. Your goal is not to live as an ascetic but to have enough money for the things that really matter while being thrift in areas of less importance.
A good budget is not like the 10 Commandments etched in stone, but it is a flexible set of guidelines to keep expenditures less than income while providing an acceptable standard of living.