How do I make a budget?
So we’re back to that dreaded “B” word again, aren’t we? Like we mentioned in the previous chapter, a budget is a necessary evil if you are going to win with money. But for most of us, we think we can live without that budget. We assume we won’t stick to it, so what’s the point of making one in the first place? We assume it never works the way we wrote it out. We figure that if we’re not good with numbers or that we have to use our fingers and toes for counting, we’ll be a disaster at putting together a budget. But creating a budget and sticking to it can be done and done well. Here are a few principles for making a budget:
Make a new budget every month
Sometimes we think we can make this error-free budget from heaven that will work on any given month. But I think we’re all smart enough to realize there is no such thing as a perfect month. Your income and expenses will almost always vary, and that is something you have to plan for. At the end of every month, my wife and I sit down and make a new budget. Every month is different, and you ought to plan accordingly.
Write it down
A lot of us like to think we have our budget in our head. It’s stuck up there, and we can remember it perfectly. But that just doesn’t work! You have to write it down. Part of the reason you’re doing this is to create a visual goal for yourself. According to Brian Tracy, a motivational speaker, a recent study of Harvard graduates found that after two years, the three percent who had written down their goals achieved more financially than the other 97 percent combined!
Use the envelope system
The envelope system is a process in which you pay for as much stuff as possible in cash. Here’s how it works. The first thing you do is determine the common expenses that you can pay for in cash. These are categories such as groceries, gas, entertainment, clothing, eating-out, etc. Once you have set up your budget, and you know what the amounts are for each of these categories, go through and withdraw the budgeted amount in cash from your checking account and stick each amount in its own envelope. This is a way to force yourself to budget. When you need to buy groceries, you take money from the grocery envelope and spend only that. Any change left over goes back into the grocery envelope. If you only have $20 left in grocery envelope, and it’s only the seventh of the month, you’re going to be eating a lot of Ramen noodles!
Think about why this works so well. Let’s say you go to the mall and pay for your purchases with a debit card. You’ve made a budget, and you know you have $50 to spend so you’ve picked out $50 worth of stuff to buy. But as you’re walking up to pay for it, you notice a great shirt that’s on sale for only $10. Ten bucks! No big deal, so you go ahead and add it to the pile, and your total comes to around $60. You know you’re $10 over, but what’s the big deal? But what if you used the envelope system and paid for your items in cash…guess what? If you walk into the mall with just a $50 bill, you’re not leaving with $60 worth of stuff unless you want to be arrested!
My wife and I have used this system for almost two years now, and I’ll tell you…it works! You are forced to pay attention to where your money is going, and how you are spending it. On top of that, when you pay for something in cash, it is more difficult than just swiping a card. If I go the grocery store, and my tab is $100, it is much more difficult to hand the cashier a crisp $100 bill, as opposed to just swiping a piece of plastic that I don’t have to think about. At least try the envelope system for a couple of months, and if you don’t like it, then you can go back to your system: being broke!
Spend every dollar before the month begins
You want to create a zero-based budget. In one month, you figure every dollar of income you have coming in and every dollar of expenses going out. Then you do the math to make a zero come out at the bottom. Your income minus your expenses should equal zero for that month. When you pay attention to where your money is going, you will be shocked at how much you spend in some areas, and how little you spend in others. But you don’t know unless you write it down and have a plan.
Let me reiterate. If you want to win with money, you’ve got to make a budget. Every month. Accounting for every dollar. You have to do it. The first couple of times you make a budget, it may be a complete disaster. You may even prefer to have a root canal instead. But I promise you, if you work at it and stick to it, each month you make a budget will be a little easier than the previous. Before long, you’ll be able to do a budget in your sleep. And when that happens, you’re on your way to being wealthy well into the future!
By Grant Baldwin
