This summer I wrote a series on budgeting. Now that you are (hopefully) operating beautifully on your system, you should know how to make adjustments when necessary. One of the most frequent questions I get and one of the areas where most people go wrong is in the area of one's budget allocated to living expenses.

Most budgets have determined that the affordable percentage of one's budget allocated for housing expenses is 38%. That means if you bring in $50,000 a year, you should be spending no more than $19,000 or about $1,500 a month in housing expenses. You can do the math. But think about it... there is more to housing expenses than simply owning a home. We also pay for electricity, water, cable, phone, etc. If you added these additional expenses, you will likely climb well beyond the 38% mark. The government determines 38% for the cost of your home alone, but savvy budgeters will strive for 38% of income allocated to all housing expenses.

Obviously, the closer you are to the 38% threshold, the better you fare. Take a glimpse at your budget. What percentage are you?

Budgeting 101- Part 3
Setting a Budget


We're back with our discussions on budgeting. This is the #1 requested session during our financial counseling classes. If you missed the first two posts, never fear, you can access them here: Budgeting 101- Part 1 & Budgeting 101- Part 2. Since our talks build upon previous discussions, be sure not to skip any sections or homework- it's important.


Today we will be actually setting your budget based upon the work you did in Part 2 by tracking your spending. What we develop today, you'll use next month and from now on. It's always interesting to me that many people try to jump right in to setting a budget with no concept or overall picture of what they actually spend. We're budgeting for success, not just to have one that doesn't suit our needs. Now that you've done all the groundwork, let's begin...

1. For starters, let's look at a comprehensive view of how you spent money last month. Take what you spent last month and place it into the categories found on this sample budget worksheet (you'll need to print this out). Are you shocked by anything? Was this month typical of your lifestyle and spending habits? Perhaps, you are surprised at how much or little you spend in a certain area. No worries, we will make modifications shortly, but this is an important strating point.


2. Next, we begin with how you earn income. This will apply to everyone, even if you work on commission or tips. We begin here because as a rule of thumb (and common sense), you cannot spend what you do not have. Period. This budget is based upon your actual earnings. We'll develop a system that does not allow you to depend on credit or payday advances in order to function financially.
   


• Place your total net (employment and social security taxes are taken out) monthly income on the modifiable spreadsheet. For most people, this number matches the deposit or automatic deposit in the bank.



• If your income fluctuates significantly, such as those of you who work on commission or tips, take the lowest monthly earnings you had in a single month over the last 12 months and use that number for your budget. In this case, using the lowest earnings helps to ensure that you continually have enough for your expenses even in harder times. Another option is to add up the last 12 months and divide by 12 to get an average of what you earn. Your budget will be more difficult if you choose this option because some months will be lower and others higher. If you don't mind the inconsistency, you can select this option.
  
  
3. Next, place the essential life items in the total budget column of your budget spreadsheet. These are your major expenses that are often non-negotiable like mortgage/ rent, health insurance, loan payments, etc. For the most part, these should be expenses that do not fluctuate very often. Now take an assessment of how much money you have left to spend.


4. Beginning with what you need/ want the most start placing a budgeted amount in the total budget column on the remaining items. Starting what what you need like groceries and gas and ending with what you like such as eating out and clothing, for example, fill in all of the boxes skipping anything that does not apply to you. The taxes will not be filled in unless you have discussed paying federal or state taxes ahead of time with your tax professional.


5. After placing in your numbers, let's check some math. Does your total budget box = the total monthly income box? This is the goal. Ideally, you will design a budget that equals what you earn. You may budget less than what you make but you may never budget more than what you earn!


6. If your numbers do not match, take some time now to tweek your budget. Be realistic, you'll be living with this guide from now on. Could you get your hair done less often? Spend less on groceries? Save more? Cancel the gym membership?


7. Once your budget= your income then revisit your dream list. Are you planning financially for your dreams? If, for example, you want to send your kids to college, are you reserving some money in your budget now to do so? Your new budget should reflect both your present and your future.


8. Finally, do some give and take. It's time to see an overview of what your spending plan is for this upcoming month. Can you live with the numbers you entered? Are you balanced & realistic? Take a second to just double check. As a rule, your budget must have an emergency fund/ savings built in. If this causes you to be over budget, then some other area has to decrease. The motto you will hear again is simply: it has to come from somewhere.

Homework

This month's homework is going to be easy and complex at the same time. I want you to see about living by this budget. That means that as you spend, you should enter your total in on the spreadsheet right away. If your eating out budget is $50 and you get take out tonight, subtract the $20 right away. That way, you always know how much you have left to spend.

In our final segment, we will discuss what to do if you overspend or underspend. For now, focus on tracking what you spend in your new budget plan. Congratulations, you've come a long way!

Budgeting 101 Part 1 Budgeting 101 Part 2

Are you following our budgeting series? We could all use a financial tune-up. So I challenge you to join us even if you already have a budgeting plan. I am constantly re-vamping the way we do things around our house to achieve financial success. You can catch up by reading the first two parts of our series & doing the homework.

Budgeting 101- Part 1
Budgeting 101- Part 2

Our next order of business launching at the end of this month is to actually set a budget. I'll have sample worksheets and spreadsheets for you to use. But first it is essential that you are diligent in completing the homework from part 2, tracking your spending. Since we are 1/2 way into the month, I thought I would do a friendly check-up. How diligent are you? Tracking every dollar? If you've not done so great, make it a point to finish this assignment strong. Your financial success depends on it!

Budgeting 101- Part 1
Why Budget & Setting Your Dreams

I'm going to begin a series on the #1 most requested session in our financial counseling appointments- budgeting. Creating a realistic and well designed budget is the key to financial empowerment.

I must confess that I have not always seen budgets as "empowering." When my husband and I were first married, we were polar opposites. I kept a balanced checkbook register but spent whatever I wanted until the money ran out. He, on the other hand, advocated for a family budget. I kicked and screamed.... and then some more when he suggested we should adopt a family spending plan. I didn't want to use a budget when there was money in the bank. And why since I'd never had a problem before! But, my attitude has since drastically changed... yes honey if you are reading this I was wrong. There, I said it!

Experts say that money issues are the #1 cause of divorce in America. With over 50% of all marriages now ending in divorce, I guess we still have a lot to learn about financial management. I found freedom in creating a family spending plan since I found it brought my marriage an entire family on the same page. Here's a few ideas of why I think you should consider a family spending plan also:

1. Budgets are a way to reflect your dreams and deepest desires. What do you dream about? Do you desire to own your own home? Pay off your existing home? Pay off debt? Put your children through college? Travel the world? Retire? The personal goals we have cost something, whether physically or financially! When we put our money toward our personal goals, we make progress and that feels awesome.
2. Budgets help to keep us from making boneheaded decisions. Boneheaded is the term my grandmother used to use when us kids did something really stupid or if we were being particularly stubborn. Having a budget helps us to plan intelligently instead of making impulse buys and buying "great deals that just couldn't be passed up". Having a plan doesn't mean you can't have nice things. It simply suggests that you think about things first, before you buy.
3. Budgets can reveal imbalances in our lives. Think about it.. how much do you spend on eating out? A smoking addiction? Or even the soft drink machine at work? I heard a pastor say once that you could look at the last five entries of your check register (nowadays it would be more like the last five credit card swipes) to see where your priorities are. Hmm... do you spend more on cable than savings or your nails than groceries. A budget gives a snapshot that doesn't lie about what's going on with our wallets.
4. Budgets can provide a source of restraint. Okay, so if I'm honest I think one of the reasons that I did not want a budget was because I liked to shop- a lot! It was fun, a way to unwind, spend time with the girls, yeah, yeah, yeah. My favorite was even shopping for great deals, it's just that I would find a great deal and go a little crazy. I still remember the look of horror on my husband's face when I explained to him that all of the women in my family got up at 5 am the day after Christmas for 50-75% holiday items. He was even more shocked when I returned with nearly 20 shopping bags and $300 worth of purchases in Christmas designs. Needless to say, my favorite holiday pasttime is now a part of the family spending plan in the month of December!

The reality was that I never had to exercise restraint in my shopping. My excuse was that I was saving a bundle. But, the problem was that I had no target amount to spend & drove my poor hubby crazy.

Sooo...

There are a million more reasons why my family uses a budget. Over the next few weeks we'll be discussing how you should go about creating one for yourself that fits both your dreams and your personal family situation. Each of the parts will also include a list of homework tasks. Be sure to complete them all in order and in the entirety.

Your First Assignment

Here's your first bit of homework. Create a dream list by jotting down your top 10 aspirations of things not in your life that you are actively considering. If your married ask you spouse to join you also. You might have lofty goals and that's okay. Let's begin your list of 10 dreams of things that you are actually considering. This might include retiring early, sending your kids to college, private school, starting a new business, taking an international trip next year, etc. These things will be incorporated in the budget that you will soon create so be creative but selective.

Next time we meet on this topic, we'll be talking about what you actually spend now. This is best done at the beginning of the month so you have the rest of the month to consider 10 dreams. Dream on!

Budgeting 101- Part 2 Part 3 Part 4