Building a Realistic Budget -- And Sticking To It
For many people, the word “budget” is a four-letter word to never be spoken or used. For those people, there are many legitimate reasons for their feelings. Budgets have been too complex, have been used to manipulate them, too restricting, and they never seem to work.
However, a budget is a tool that can strengthen your greatest wealth building tool – your income. John Maxwell says that a budget is “simply telling your money where to go instead of wondering where it went.” With a sluggish and slow economic recovery, it is more important than ever to know where every single dollar goes. By planning how your money will be spent each month, you can begin to get out of debt and strength your financial position.
But, how does one go about creating a realistic and effective budget? To begin with, we need to establish some ground rules in creating a budget.
Ground rules for budget creation
Ground Rule 1: Everyone has a say in creating a implementing the budget. Everyone involved in the budget needs to have a say in how the budget is formed and agree to the budget. One person does not get to dominate or manipulate over another in the budget process.
Ground Rule 2: Every dollar has a name and every dollar is accounted for. If you do not account for every dollar, then dollars will mysteriously disappear. Giving every dollar a name enables you to have control over your money instead of your money controlling you.
Ground Rule 3: Changes can be made to the budget but everyone must agree to the changes. You will not get every budget right – you will make mistakes especially the first few budgets. You can make changes at any time. Anyone can suggest the change. But, everyone must agree with the change.
Ground Rule 4: No deficit spending. You can only spend your total income and no more than your total income.
Ground Rule 5: When emergencies happen, work together to make the necessary changes.
The unexpected will happen. You must work together to make all the necessary changes to your budget in order to meet the emergency. However, make sure that planned events such as school supplies, new clothing for your children, etc. do not become an emergencies! Remember, everything, including your car and your roof, will wear out. Plan and save to replace them!
Ground Rule 6: Set a time to meet each month. Establish a time when you can all get together. When you finish a budget, set a meeting to establish the next budget and to review how the current budget did.
Steps to creating a realistic budget
- Establish your goals. By establishing and writing down your goals, everyone knows what you are striving for. Zig Ziglar says, “If you aim at nothing, you will hit it every time.” Without established goals, a budget will not work because you do not know where to aim. Once you know your target, you can accurately aim and hit the bull’s eye. The budget enables you to reach your goals in a systematic way.
- List all your anticipated income for the month. Include in your income all salary and commissions that you anticipate making. Do the best you can in predicting commissions. It is better to be conservative and predict low. Add up your income – this is the total amount you have to spend for the month.
- List all your anticipated expenses for the month. List all the expenses you anticipate incurring for the month. Including any planned savings for the month. Add up all your anticipated expenses.
- Make sure that Total Income = Total Expenses. You want to make sure that every dollar is given a name. Adjust your expense column to equal your income. You may be able to pay more on debt or you may have to cut back on eating out.
Your budget is set. You know have a target. The trick is to keep your eye on the target throughout the month. Make sure that you are tracking every expense. Do not use credit cards because it can be very easy to overspend with them. Using cash can be very helpful in staying on your budget. Simply place your budgeted amount into an envelop for your major expense items – rent, food, utilities, etc. If there is no money in the eating out envelop, you cannot eat out.
You will not get it right the first time. You will need to have extra meetings to deal with the unexpected and forgotten expenses. Work together and adjust the budget as needed so that you can continue to aim at your target.
It will take a few months and even up to one year to get your budget running smoothly. You will make mistakes! But, over time, the mistakes will be fewer. And you will discover that your goals are within reach after all!