By Russ Gaiser
Oh, the budget. Some people who hear this word get angry, stressed, agitated and even scared. For some, the term has become a bit of a dirty word. Unfortunately, the term budget is stigmatized and is often perceived as something negative. If the truth about what it means to have a budget led the conversation, we would likely have a population more in control of their finances, rather than a culture of debt, bankruptcy, and outright ignorance of the destination. of their hard-earned money.
What is a budget?
First, let’s lay out the truth about what a household budget is. Actually is. The budget is a written plan, completed monthly, indicating the cash inflows and their destination. That’s it, plain and simple. More specifically, a zero base budget gives every dollar an allocation, even if there is more money left over at the end of the month (which hopefully there is). Excess dollars should be applied to other financial goals such as saving for a big purchase, investment, vacation, etc. If you find that there is no surplus, there is either an income problem or a spending problem, which can be looking at needs and wants.
Needs versus wants
In America, corporations do everything they can to persuade you to use their goods and services, and convince you to spend money on things you don’t need to impress people you don’t. don’t even like. They are very good at doing this and often know more about your spending habits than you do (but not after reading this article, hopefully!). This brings me to the discussion between needs and wants. If you do in fact find yourself overspending, the first thing to do is determine which budget items are genuine needs. There are four that apply to most, which include housing, utilities, food, and transportation. If there is a shortfall after accounting for these items, the problem is likely on the revenue side of the equation.
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What does the budgeting process look like?
The household budgeting process is a monthly activity that involves you and your spouse (or a responsible partner for singles). This is a forecast of income and expenses for the next month, and begins by listing all sources of income for the household. From there, make a detailed list of expenses and project the cost of each. Fixed expenses should be relatively easy to predict (think mortgage, car insurance, streaming subscription), while variable expenses might be less so (gas, electricity, birthday presents) . Next, subtract your expenses from your household income to determine the excess (or shortfall). Any excess dollars should be budgeted for other financial goals such as eliminating debt, big purchases, vacations, or additional investments. It’s important to keep in mind the dates when your income will be in hand, versus when expenses are due. This process will seem a bit unnatural and clunky at first, but stick with it. It usually takes 60-90 days to become effective with the process.
What if I have irregular income?
Those of you who earn irregular income (vendors, self-employed) may be wondering how the budgeting process can be accomplished. You’ll want to start by projecting what you reasonably expect to earn the following month. If you don’t know, look at the month with the lowest income in the previous year and use that number as a benchmark. Next, list all the needs in your budget, then prioritize a list of worthwhile assets and wants, and allocate excess dollars one by one to each of these categories as they come up.
Although there is no right or wrong budget, due to the variability of a household’s wants and needs, there are some basic guidelines to follow when determining whether the weighting of certain categories is compliant. Too much of one thing is generally unwise, especially if that one thing is a mortgage payment! That said, here are some category guidelines to help you determine your weighting: Housing (25-35%), Savings (10-15%), Charity (10-15%), Utilities (5-10%), Food (5-10%). 15%), clothing (2-7%), transport (10-15%), medical/health (5-10%), insurance (10-25%), personal (5-10%), leisure (5- 10%), debts (0-10%).
Ways to free up money
So, you have completed your budget and realized that you are very close to breaking even, with very little surplus. In addition to increasing your salary, there are a few things to consider to increase cash flow. First, if you usually received a large tax refund, you might have too much money withheld for taxes. Adjusting your W-4 deductions can help free up hundreds of dollars of your own money every month and keep you from giving the government an interest-free loan! Then, if you have student loans, auto loans, or credit card debt, you may be able to refinance and free up monthly cash accordingly. Just be careful not to end up with refinancing for a longer term loan! Finally, take advantage of coupons and sales, but be especially careful of overbuying, even if it’s a bargain.
I hope hearing the word budget now isn’t so bad and that you see it as an empowerment tool. Instead of feeling guilty about impulse purchases, you can feel free to know that you’ve budgeted for those sunglasses, those football tickets, or that night on the town! This fundamental tool gives you permission and freedom to spend, and if used correctly, will give you complete control over your money and how it is spent. So get out your Excel spreadsheet, notepad, or a budgeting app like Every Dollar or Mint, and give it a try.
About the Author: Russ Gaiser III, MBA
Russ Gaiser III is a financial advisor at The Financial Guys in Buffalo, NY, where he focuses his practice on wealth building and retirement planning. He is also a Dave Ramsey Master Financial Coach, helping clients improve budgets, maximize cash flow, eliminate debt and build wealth for the future.