Today there are way too many people living paycheck to paycheck. This can add tons of stress to you and your family which also sets you up to fall deeper behind. An example would be that you are barely making the monthly payments, then the clothes dryer breaks down. You have no cash to pay for the new dryer, so the only option is to borrow the money. Now you are paying 19% interest on that $300. Before you know it, that dryer cost rises to $600 because you can only make the minimum payment on your credit card. We would rather have that extra $300 in our pockets. It happens across all different income levels and there are couples making $50,000 a year that may be in better financial shape than a couple making $100,000 a year. It all comes down to knowing and controlling your expenses.
We live in a society where buy it now and figure out how to pay for it later is acceptable. All this does is keep you in the spin cycle; working to pay for things you bought years ago. This is where developing a budget can help pull you out of the spiral. We bet if you were to stop ten people on the street and ask them, "How much did you spend groceries last month?", more than half would not be able to answer. If you do not know where you money is going; how can you fix the problem? This is where tracking your expenses and developing a budget can step in and help.
The first step in making your first budget would be to start going over your current monthly income and expenses. We would recommend doing this for at least three to six months. This will give you a good idea of what your true monthly expenses are since some bills may be quarterly or semiannual. You can track this in a simple notebook, google sheets, or an excel spreadsheet. We use google sheets (we will show an example in the near future). Now you need to make a section for income and then expenses. The income section is your take home pay. The expense section can be as detailed as you want. We break our expense section down into eighteen categories. Some expenses are fixed, like rent or mortgage payments, while others are variable, like groceries and dining out.
Now that you have an idea of where you money is going; you have the opportunity to setup your budget. Your fixed expense you really will not have any control over without making decisions to move to a cheaper home or change vehicles if you have an auto loan. The area that you can really control are: your variable expenses, like groceries, dining out, entertainment. This is where the envelope system can help to control those expenses. Here is an example of a budget for a family bringing home $5,500 a month in take home pay:
INCOME
INCOME1 $3,000
INCOME2 $2,500
TOTAL INCOME $5,500
EXPENSES
MORTGAGE INCLUDING PROPERTY TAX $1,000
AUTO LOAN $400
UTILITIES $200
INTERNET $57
PHONE $134
INSURANCE $195
GAS $325
AUTO MAIN. $75
CHILDCARE $600
DINING OUT $300 ENVELOPE
GROCERIES $500 ENVELOPE
WATER/TRASH $65
VACATION/ENTERTAINMENT $400 ENVELOPE
MEDICAL $200 (PREMIUMS ARE TAKEN OUT AT WORK PRIOR TO PAYCHECK)
MISC(CLOTHES,GIFTS, ETC.) $400 ENVELOPE
SAT TV $99
SAVINGS (PAY YOURSELF) $400
HOUSE IMPROVEMENTS $150
TOTAL EXPENSES $5,500
It will take some time, but following this budget would allow a person to save at least $4,800 in just 12 months. We spend about thirty minutes a week entering expenses. Any excess money left in the envelopes at the end of the month could be applied to paying additional on debts or saved. Even though there will be months that you don't meet the budget when unexpected expenses occur, because things happen in the real world, getting on track and controlling your money most months will eventually get you headed in the right direction!
Next post we will look back to where our journey towards becoming debt free began.
