Whether you’re running a business, working for the man, or transitioning between the two – you need a budget. If you don’t have a budget, you will not succeed at becoming wealthy. Period. A good budget will define your success this month, this year, and the rest of your life. If you get the budget right, you will see other areas of your life falling in sync with the rest. So, how do you “do” a budget?
Give Every Dollar A Name
The most important factor in a successful budget is giving every one of your dollars a name. No, you won’t have George, Tom, and Drew causing a ruckus in your wallet. You will have an intended purpose for every single dollar you earn. Start off by asking yourself these three questions:
- How much do I earn each month?
- How much do my bills cost each month?
- How much do I (want to) spend on miscellaneous items each month?
First, you’ll analyze how much money you make each month. If you get a paycheck every two weeks, 2 x paycheck = your monthly income. If you combine your expenses with a spouse, add those to the mix. If you are paid hourly, multiply the average number of hours you work each month by your hourly rate (and of course, subtract approximately 15% for taxes). Once you have this figured out, you know how much you have to work with.
Second, add up all your bills. Cell phone, cable, Netflix, car fuel, electricity, water, rent/mortgage, etc… While you’re going through your list of bills, you might realize that you need to cancel some subscriptions or services. If you’re paying $65 per month for a super awesome digital TV package, and you only watch one hour of TV every week, the cable has got to go. Once you have this number figured out, you’ve calculated your fixed monthly expenses.
Lastly, figure out how much you spend on random items each month. Add up all the ATM withdrawals, online purchases, shopping outings, and get an average of your miscellaneous monthly spending. Once you have an average, you know approximately what you’re spending each month on random things. If you haven’t looked at this in a while, it’s likely that it will shock you.
Now it’s time to plan. Planning is key to financial success. If you go into the month and say, “I want to save $2,000 this month,” you probably won’t. However, if you start off by saying, “I’m going to make $2,000 by spending only XX on bills, and XX on miscellaneous items,” you are very likely to meet your goals. Going into the month with a plan will lead to much greater success than you’ve ever seen before.
Giving every dollar a name means giving a purpose to every single dollar you make, before you spend it. As you write out your budget before the month begins, write down exactly how you will spend every single dollar you make. Don’t worry about messing up. That’s the beauty of a budget. It can always be modified. If it doesn’t happen exactly how you plan this month, change it next month and get closer! Here’s an example of how to write a budget:
- $3,200 (fixed)
- Rent – $680 (fixed) | [$2,820 remaining]
- Auto Fuel – $260 (dynamic) | [$2,560 remaining]
- Internet – $30 (fixed) | [$2,530 remaining]
- Cell Phone – $70 (fixed) | [$2,460 remaining]
- Utilities – $40 (dynamic) | [$2,420 remaining]
- Food – $350 (dynamic) | [$2,070 remaining]
- Dental – $320 (dynamic) | [$1,750 remaining]
- Entertainment – $200 (dynamic) | [$1,550 remaining]
- Savings (travel) – $500 (dynamic) | [$1,050 remaining]
- Savings (emergency fund) – $1,050 (dynamic) [$0 remaining]
Total Income = $3,200 | Total Expenses = $3,200
You see what I did there? I spent every single dollar before I even got a paycheck. When I got through my bills (fixed expenses) and other spending (dynamic expenses), I applied the rest of my income to savings. If I get to the end of the month and everything doesn’t line up, I adjust the budget for next month. For example, if I end up spending only $220 on Auto Fuel, I’ll maybe set next month’s Auto Fuel budget to $240.
Stay Honest With Yourself By Setting Goals
The best way to make sure your planned budget actually happens is to set some goals. What do you want to do? Where do you want to travel? What do you want to buy? How much of an emergency fund do you want at your disposal? Once you write out your goals (and you need to write them down), you can calculate how much you want to distribute monthly to each. When you have goals, you work harder, so set some goals! They’ll keep you honest, and they’ll keep you motivated.
I use Mint.com for my budgeting and transaction tracking. They have a Goal feature built in, and it works beautifully. If you tell it you want to save $10,000 in your savings account, it will suggest how much to save each month to achieve your goal. I can’t suggest Mint highly enough, as it will help you see your entire financial picture.
I also recommend reading The Total Money Makeover by Dave Ramsey. Dave is the ultimate when it comes to personal finance. He goes into a ton of detail, and his plan works. Dave rocks.
After you get through your first month, you might be discouraged by the deviance from your plan. Don’t be! It will take approximately three months to get the hang of near-accurate budgeting. Once you get the hang of it, try to earn more! When you’re responsible with your money, it shows in your personality. Your friends will have more respect for you. Your employer will value you more. You will make wise decisions in many more areas of your life because you chose to take financial responsibility for your own actions.
When you really get the hang of it, you’ll realize how much money you’re actually making. Don’t let it all go to useless subscriptions and junk. Give every dollar a name, and get the most bang for your buck. They’re your bucks, for crying out loud. Get on a budget, start winning with your money, and don’t stop.