An excerpt from Life After Bankruptcy by Seth Hanson
If you sometimes wonder where your money has gone at the end of the month, my bet is that you’re not budgeting very well or at all. Don’t beat yourself up for that, most of us have difficulty budgeting. We often think of budgeting as boring. Maybe it is, but it’s also very empowering.
Imagine not fighting over finances with your partner, or getting surprised by an unexpected bill, or something that you “forgot” to pay. The principles of budgeting will help you achieve financial security and freedom that you wouldn’t have otherwise. Within your budget you can incorporate not only your daily, weekly and monthly expenses, but also your wish list, be it a car, a family trip, or a home improvement.
Budgeting is quite simple. Budgeting involves planning your income and your expenses, on paper, and deliberately, BEFORE the month begins. It is a matter of controlling your money and impulses rather than being controlled by them.
If you haven’t budgeted before, make sure you give yourself some time to learn this process. It’s not complicated, but anything new can be a little tricky. That’s where a partner can really help out. Sit down with your significant other, a family member, mentor, or trusted advisor and discuss the budget in detail. If you are married or are in a household with shared income and expenses, get away from the idea of “his” or “her” money. Also refrain from using the budget as a point of chastising someone in the partnership if there’s been a mistake or overspending. You must work as a team. I cannot overstate the power that comes from being unified with someone else in the achievement of your financial goals.
If you’re single, enlist the help of a mentor or trusted friend and adviser. This can be a friend, coworker, or a family member. This person will help you put together a budget and hold you to it. They will also be someone that will review big purchases with you, and advise you. It must be someone who is not afraid to tell you when you’re not doing what you need to do and when you’re doing a great job. So choose carefully.
Here is a list of budget fundamentals:
Don’t reinvent the wheel. There are plenty of quality budgeting tools out there, whether you prefer to budget on the computer, on paper, or an app. Find one that will work for you.
If your income varies month to month, enter an average monthly income so you can make up for any differences between low-income months and higher-income months.
Some of your expenses are fixed and some are not. For fluctuating expenses, like your gas and electric bill, do your best to predict the expense. I suggest overestimating these expenses so you don’t come up short each month.
For the first couple of months as you get used to budgeting, overestimate your grocery bill and your transportation expenses (gas and maintenance) as these categories are often underestimated. It’s better to have “too much” budgeted for these items than not enough.
Build in some savings. First, save for your $1,000 Emergency Fund. After that, try to save at least 5-10% of your income.
Post your budget in a prominent location where you can see it regularly. A great place would be on your refrigerator, or on a bulletin board. Give yourself a visual reminder that you will see every day.
Track all of your expenses daily. As you see exactly where your money is going you can adjust your behavior. If you only have $100 left in your food budget for the last week of the month, you know you have to eat cheap for the next seven days (beans, rice, spaghetti, potatoes, etc.).
Review your budget at the end of the month and tweak anything that needs changing. Make those changes to determine how you will spend your money the next month. As you get more experience budgeting, you will be more accurate in your budgeting for the next month.
Remember, you control the budget. You control your money. Your budget and your money do not control you. You will write the budget. You will sign-off on it. You will control it. You will modify it when you need it. You‘re the boss!
The Budget Meeting
You start the process by having a meeting with your budget team. Yes, a meeting. The budget team is you and your spouse or significant other. If you’re single, you should include a mentor or trusted advisor.
Each person needs to come prepared. Do your research on budget formats that might work. Be prepared with your fixed expenses and estimates on what your fluctuating expenses are. Be prepared with your income amount.
From there, you can discuss how to proceed. If your income is less than your expenses, discuss where expenses can be cut, and how income can be increased. If your income is more than your expenses, double check your expenses and make sure you’re not underestimated a basic expense. If you still have more income than expenses, increase your “savings” budget, starting with your Emergency Fund. Some questions you might consider during your budget meetings include: where can we cut expenses (eating out less, cutting out expensive morning coffee, shutting off the cable, getting rid of the car loan)? Is there any way to increase our income (getting a second job, changing careers)? Can the kids contribute to the family expenses? Are there any large irregular expenses coming up?
Bear in mind that each dollar you save has a greater effect on your finances than each extra dollar you earn. That’s because each additional dollar in income is taxed at your marginal tax rate. For example, if you earn an extra $1,000 per month and you pay 25% in combined FICA and income taxes, you will only take home an extra $750. In contrast, if you cut your expenses by $1,000 per month, you can contribute all of that $1,000 of that to your savings.
The conversation during your budget meeting has to be gentle, kind, and respectful. Talking about money can be very stressful. Different partners in the relationship almost always want to use the household resources differently. Making decisions jointly is difficult because it involves compromise and often exposes one’s own shortcomings. If you sense the meeting is resulting in unproductive tension and a lack of unity, hopefully each of you can take a step back and remember you are both working for the same goal – financial independence.
Take a break if necessary. Then reconvene when everyone is ready again.
Here are some things to think about as you work with your partner during the budgeting process:
- Working as a team means that each of you will be more likely to “buy-in.” When there is a money decision that comes from what you’ve built into the budget, it is less likely there will be fights.
- No secrets! A budget team cannot hide money or spending from each other. If a partner is hiding money from the other, there are fundamental problems in your relationship that are beyond the scope of this book. If you don’t resolve that issue first, you will never succeed together financially.
- When you first start this budget process, you might have to say “no” more than you want. Sometimes that “no” must be directed to yourself. Be kind, but firm. The budget is the budget. That’s it. You can always adjust it NEXT MONTH, but this month’s budget is this month’s budget.
- The budget is boss, but you’re the boss of the budget. You and your team member or members. Once you get the swing of things (again, give yourself a few months), it will feel like financial freedom, you will actually feel your money stresses start to disappear.
- Spend your money on purpose. Everything you spend needs to be on that budget, somewhere. Save all receipts to review at the end of the month to help adjust where you underestimated and overestimated.
Every Penny Has A Purpose
If you don’t control your money, it will control you. The way to gain control over your money is to tell it what to do – down to the penny. If at the end of the month, you are looking around, thinking that you should have more money left over, you are not managing your money correctly. You must remember a key tenet to money management – part of the budgeting process is giving an assignment to every penny.
What I mean by this is quite simple — every penny, and I mean, EVERY PENNY has a purpose. Tell yourself and your family where each penny must go. That’s what a budget is, plain and simple.
If you want this budget process to be successful for you, you must take it very seriously. Your financial security and future depend on it. It is now time to treat your money the way it deserves. It’s now time to be deliberate with your money and do away with spontaneous or whimsical purchases. Your money, every penny, has a specific name or purpose. Use it wisely, and watch yourself grow into a person who has financial freedom.
For more information contact your Modesto bankruptcy attorney.
Categorized in: Debt