One of the main reasons that people overspend is that they do not have a household budget. They either don't know or forget how much they earn and how much they spend. If you spend more than you earn you get in trouble. To avoid that a simple household budget is a great help.
A budget helps you project your income and your expenses. Once you have them down on paper you can see, at one time and in one place, how big or small each figure is. Once you do this you can take steps to make sure that the expenses do not exceed the income.
A budget also lets you track your income and expenses over time. This allows you to see if your projections were correct, or if you need to make some adjustments. It also allows for budget items that you may not have considered when you first put your budget together. Don't worry if you make changes to your budget. Just be sure that the numbers are correct, and that income always exceeds expenses.
You can make your budget on a piece of paper, on an Excel spreadsheet or home accounting software. Use whatever you're most comfortable with. The goal is not the best budget anyone has ever seen. The goal is a budget that you will use and stick to. Do not make the perfect the enemy of the good.
You can get your numbers from your bank statements, pay stubs, credit card bills and receipts. Get some paper and a pencil, along with a calculator. You'll probably find these handy even if you're using software to create your budget.
Start with your income. Gather your pay stubs, or bank deposit book, or your tax returns. The key is to get a realistic and correct number for your income. Include anything that is money coming to you - wages, dividends, disability, alimony. It doesn't matter where the money comes from. If it comes in, and you then spend it, it goes into income.
You can divide the income according to its sources, but you don't have to. You can also divide the income according to who brings it in, but again, this isn't necessary. It might even be a bad idea if one family member has a high paying job while another stays at home to care for children. The goal is to get an exact income number, not point fingers.
Here's an example:
Income per Month
- Full time wages: $2,000
- Part time wages: $250
- Online income: $75
Total Income per Month: $2,325
Remember, anything that is money into the household goes into the income section. It doesn't matter how small or how big the number is. Put it in, and then total it.
Your expenses list will be longer than your income list. The big items will be easy to track, and some of the numbers will be easy too. Rent or mortgage payments are single lump sums that are easy to track. Food, however, is an expenditure that goes to many places - grocery stores, restaurants, schools, etc. After that come the smaller or more complex expenses. You have to buy, fuel, insure and repair or maintain automobiles. That's four expenses in one. Morning coffee at Starbucks seems small, but if you buy it every day it adds up, and probably doesn't get tracked with receipts.
Do your best to get all your expenditures down on paper. Remember that if you miss some you can add them later. Remind yourself that the goal is to spend less than you earn and save yourself stress and worry. Small mistakes are acceptable as long as you're making progress on a big, worthwhile goal. Here's an example of an expense list:
Expenses per Month
- Rent/Mortgage: $900
- Car payment: $200
- Car insurance:$100
- Fuel: $100
- Food: $800
- Clothing: $100
- Telephone: $50
- Debt servicing (credit cards):$150
- Taxes (property/income)$100
- Health care:$100
Total Expenses per Month: $2,735
Putting It Together
Take the totals from the two sections, Income and Expense, and subtract the total expenses from the total income. In this hypothetical case we get:
$2,325 - $2,735 = ($410).
The budget tells us a couple important things right off the bat. First, we're living beyond our means. Second, we're doing it to the tune of exactly $410 per month. This can't continue. The laws of arithmetic combine with human nature to punish people who spend more than they earn.
The budget also gives us some hints. Debt servicing costs us as much as clothing and telephone do together, and more than health insurance or clothes. Where did the debt servicing come from? We don't seem to have any investment income at the top part of the budget, so there's a good chance that our debt is consumer debt. There's a good chance that we got that debt by living beyond our means - buying things on credit that we can't afford. Remember, not all debt is bad, but if we're spending more than we earn and our debt doesn't generate more income than it costs, then it's probably bad.
The budget also tells us that our three biggest expenses are shelter ($900), food ($800) and automobile ($500). What the budget doesn't tell us is how much money leaks out of our pockets on things we haven't put on the budget. Remember the Starbucks coffee each day? Not on the budget. The iTunes downloads? Not on the budget. The money you put in the Salvation Army kettle? Not on the budget. The beer after work with the boys, or the movie, or the game, or the...you get the idea. (And we didn't even put utilities down!)
Don't Quit Now!
So, although the budget tells us we're $410 short each month we are probably doing worse. Without a change we're going to start missing credit card payments, or rent, or healthcare insurance. That's not a rosy picture. But here's an important point: the budget isn't telling you anything new and the budget isn't causing the problem.
You knew you were spending more than you earned, because let's face it, you're the one who was always short of money. And you're the one spending the money, not the budget. If you let the budget control the spending you'd perhaps enjoy life less in the short run, but you wouldn't go into debt and you'd have enough money for your expenses.
The next step is to compare your income and expenses and see what you can change. In our hypothetical case we need to come up with at least $410 each month. The easiest solution is to get rid of the car expenses. As a bonus, if we sold the car we could apply the income to debt reduction, and get rid of the $150 debt servicing cost. Real life won't be so easy. You might need the car to get to work. You might need the car for work. If that's the case you'll have to find other cuts. Renting a smaller place or re-mortgaging might be an option. Moving to a smaller place closer to your job may save fuel expenses and lower your shelter costs. Buying groceries in bulk, eating healthier and not dining out might lower your food costs.
You can also try to increase your income, but that's often harder than reducing your expenses.
The Benefits of a Budget
A budget is an exercise in honesty, and as the saying goes, honesty just speeds up what's going to happen anyway. Making the changes that our hypothetical budget dictates is unpleasant, but going further into debt until you go bankrupt is more unpleasant. The budget reduces the pain and does it fast. Putting your head in the sand does neither of those things.
A budget also helps you live within your means. As old-fashioned as it may sound, living within your means is a moral way to live. If we all did that (including our governments) we'd all be in better shape today. We'd be happier and our lifestyles would be more sustainable.
This is a how-to article. It shows how to create a rudimentary budget. Yours will be different. Your challenges will be different and your goals will be different. The instructions remain the same:
- Start now
- It doesn't need to be perfect to begin with
- Adjust the budget over time
- Stick with it.
You are responsible for your own financial well being. Other people are only going to get involved if you lose control and things get ugly. Before that happens you should make a simple household budget.