Budgeting Basics: How Not to Fail
Recently, a forum question popped up on my feed. "Budgeting idea. Why do some people not succeed?" I could have simply answered, but it's an old question. I could leave these matters to the experts. But, no. I can't leave well enough alone. So I will start a hub...on the fine art of budgeting.
I'm not sure why it's such a challenging concept. We all have a finite amount of money to work with. Some of this cash is easily accessible, and hopefully some of it is caught up in savings accounts, or even more difficult to access as it gains interest in vehicles like CDs and retirement accounts.
Most families have an income. If you don't have a source of income, this probably isn't the hub you need to be reading. If you do, you already have a budget.
A budget is the amount of money you have to spend. Your job its to create a budgeting plan to keep your spending on track with your goals...and keep yourself from going into out-of-control debt.
I think the reason some people struggle with a budget is that they create unrealistic boundaries. Or they don't understand the fluid nature of the budget. You have a finite amount of money. It's like...it's like baking a pie for dessert.
Your income = the pie.
You need to pay rent (or a mortgage) every month. So the landlord (or lender) comes by and takes their same slice of pie. No matter how big the pie is this month, they will take the same exact sized pie slice. Your utilities are generally similarly sized each month. They're a fixed cost, you need to save the same slices of pie for each company. So...set those aside. Any other fixed payments need to be assigned a slice of that pie. Set those fixed, expected payments off to the side. You can not touch those slices of pie, or someone will go hungry.
Now, look at what you've got left. Hopefully, you're still looking at half of a pie or more. You need to have a realistic idea of grocery and food costs every month. You could give yourself a hundred dollars a month for groceries...but really, you'll be hungry in about a week and a half. Even if you budget carefully. Trust me. I went grocery shopping earlier.
You also need to think about what else you tend to spend money on regularly. Clothes, entertainment, books, subscriptions...any of those things need to be fed a slice of pie. The nice thing about these slices of pie is that you can start to decide how big (or small) they can be. They aren't fixed expenses. The movie theatre isn't going to show up at your door and demand it's slice of pie if you decide to stay home one night. It'll just eat up less of your budget.
Now. Hopefully you have a decent slice of pie allotted to each of your necessary expenses. You'll need some mad money. But there's a very important guest who hasn't been fed yet. You have not yet...fed yourself any of this delicious pie.
Ideally, you'll put some cash into savings every month. The same amount, paid to your savings account when you send off the rent check. Plus, add in any extra you happen to wind up with. For some people living paycheck to paycheck, there isn't anything left for savings. This is simply a wake up call that your expenses are too high for your income. (Don't worry, I'm there too. Acknowledgement is the first step, and helps you to stay on track rather than falling into a looming pit of debt. Be aware, and spend smart if you don't have any buffer to your budget.)
Alright then. Your pie is now all accounted for. You've fed all your guests, and even had a bit to eat yourself. Budgeting is simply taking the pie that you have already baked, and cutting a slice for every guest. Some guests (your landlord) expect the same size every month or they get upset. Some don't care, and can even skip a slice (like that movie theater), leaving extra pie for your own savings account. But once in awhile, an unexpected guest will come banging on the door and insist you let them in and serve them some pie too.
This is where budgeting will either fall apart, or save the day. This unexpected guest might be your best friend's wedding; and the strong desire to purchase an expensive gift. It might be a worn out brake pad that needs replacing now. Or maybe it's an emergency room visit. Whatever the nature of the call; that slice of pie needs to be served.
You might have enough in your discretionary funds. Skip the morning coffee, the weekly restaurant meal, and you've covered the expense. More likely, it cuts a little deeper. The beauty of a budget is that when this unexpected guest comes to call, you can look at the budget and re-think the slices of your discretionary half of the pie. You can usually trim the food bill by eating in and bringing a brown bag lunch. Serve spaghetti and jarred sauce, or make a big pot of rice. Meals might be less exciting, but it's only temporary. Just until you finish slivering off enough pie to feed that unexpected bill, and send it on it's way.
Income - (Fixed Expenses + Self Imposed Savings)
If you want a formula, look to your right. A budget is just the money you have to work with. If you don't balance that, you go into unhealthy debt. Unhealthy debt is debt that you are not in control of. It means that your monthly expenses exceed your income, and you don't have a way to pay it off. Healthy debt is debt (preferably for something like a house or medical expenses) that you are paying down every month, while continuing to also put money into savings.
Not everyone can contribute to savings of course, and not everyone can stay out of debt. There are doctors to pay, babies that insist on coming near their due date, and tires that will go flat at the oddest of times. But knowing what the ideal is, and living below your means most of the time, will help you to stay in control (or even give you a bit of a buffer) when the big things hit.
Going back to the pie analogy. Once in awhile, you might be able to run to the kitchen and bake an extra pie for emergency guests. But if every night you keep running out, eventually your guests are going to stop coming. Cutting you off from the resources they offer. (like shelter, transportation, heat...) So if someone takes a bigger slice than you anticipated, you're going to have to give the people you like (the ones who are most willing to be put on hold...like Ms. New Shoes, or Mr. Movie Ticket) a smaller slice. Just this time.
And if every night, you make sure to stick any leftover pie slices in the freezer instead of overindulging...you'll have a nice variety of slices to munch on the next time someone else polishes off the last of your fresh one.