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How to start budgeting...vol. 2

So last time we discussed why budgeting is important and no one can determine the reason but you. If you need help figuring out your why, you'll need to do some good ol' self reflection. In this post we are focusing strictly on what a budget actually is and what's included (hint: everything!). So let's start with that actual definition of what a budget is. Cliché, I know!

According to Merriam-Webster a budget is defined as the following:

My favorite of these three definitions is "b". So let's examine "b" a bit further, "A plan for the coordination of resources and expenditures". Simply put, a budget is a plan on how you are going to spend money. Okay, that is easy enough. What is the end goal? Zero, I recommend something called a zero-based budget where the basic math is this...

Income - Expenses = 0

Everyone can do that math! But you might be thinking, "wait a second Matt, you are saying I need to spend every single dollar I make?!?" Not exactly, there are only three things you can do with money:

1. Spend

2. Save

3. Give

And you should make room for some of each in your budget. So where do you start? With the first part of the formula, your income.

List all of your expected income (jobs, retirement income, alimony, child support, payments from "the guy" who owes you money, etc...). The keyword here is expected. We will explain what to with unexpected income later. Add all of the expected income up and you've completed the first (and easiest) part of our formula. Now onto the tedious!

When it comes to your expenses, same deal applies. List everything you can think of. I like to include giving as my first expense. This can include a tithe to your church, if you have one, or other charities you regularly donate to. Of course, you will need to save some money as well. This should include things like your retirement contributions and saving for your emergency fund; a big vacation would be classified here, but may be a lower priority of savings after other expenses.

After the giving and savings portions, focus on all your other expenses. Priority expenses to concentrate on and protect are what we call the four walls: housing, food, transportation and clothing (see below for more details). They are the necessities.

Housing includes your mortgage or rent, utilities, repairs (unless you rent), HOA dues. Food is pretty self-explanatory, but here is a great resource from the USDA if you are trying to figure out where to start with you food budget. Eating out or ordering takeout/delivery is a luxury when you are trying to protect your four walls. Transportation is gas, tolls, mass transit expenses, car repairs/maintenance and your car payment. Clothes for most of us - we have everything we need so keep this as low as possible. Remember your kids are always growing! My wife and I just got caught by a cold snap and we couldn't find our daughter's coat from last year (pretty sure we donated it). Bottom line, have something in this category for something you might need (not for something you want).

Now that your four walls are covered, time to list everything else out like insurance, school lunches, your gym membership, etc... Plus all the entertainment and leisure activities that will help keep you sane in this day in age. Be real with yourself when listing expenses. If you go out to eat (or order delivery) and always have a glass of wine, just make sure you plan for it. If you have to have the latest and greatest tech gadgets, save up for those and make it a part of your monthly budget. If you like to donate money for natural disasters, set a portion of your budget aside for the Red Cross or insert your charity of choice here. Last piece of advice, make sure you have a miscellaneous category funded. When your kids' school pictures or yearbook payment is due and you didn't plan for it, this category can be a lifesaver!

Whew! You successfully listed all (you sure?) your expected income and expenses. Apply the formula of income minus expenses, does it equal zero? It does? Great, you are a budgeting expert and no longer need to listen to any of my advice! If it doesn't quite work out to zero, then you will need to adjust some of those categories up or down so it does equal zero. But which ones should I adjust? I can't tell you that. You have to determine which ones are most important to your household. If you are struggling, please contact me.

Why does it need to equal zero? Why can't I just keep some cushion within my budget? In my experience, if you don't tell every single dollar where to go and what to do, then you will get lazy and stop paying attention to your money. When you aren't paying attention to your money, guess what? There are plenty of companies, that have plans for your money when you don't. Starbucks, Target, Amazon, plus so many others, have a great deal just for you! What I'm trying to say is you will simply overspend in categories if you aren't diligent.

So what happens when you get unexpected income or an extra expense or 12? Well, income is a lot easier to answer. Since it is not a part of your budget you can toss the excess to pay down debt, save more toward you kids' college fund, or just plain let it sit in your emergency fund for some extra expenses. You'll just need to make sure you apply somewhere that aligns with your long term goals. Now, extra expenses you will need to determine whether it is considered an emergency or not. If it isn't an emergency, then you either need to adjust your budget to absorb the extra expense or delay the expense until the next month. Emergencies will be covered more in depth in future topics. I promise!

Now to give you some perspective, my wife and I have been budgeting for just over five years. I wouldn't say we're perfect, but we are WAY better than we were in 2015. When I started budgeting, I tried to do a budget like I did at work, which was on an annual basis. Once the budget was created there were no changes. I can tell you now...that is a horrible way to do a household budget. You will need to develop this plan EVERY SINGLE MONTH! When my wife and I began budgeting together, "this month is different because...." was a common phrase - but if 2020 has proven anything, it's that no two months will ever be "standard". Trust me, if you are just starting out with budgeting YOU WILL miss something. It will take you about three months to figure it out. Forgive yourself and make adjustments. In our next post, we will discuss who needs to be a part of the budget process.

Matt Lampe is a Ramsey Preferred Coach, which is a fancy way of saying he's a Financial Coach. He can help you realize your financial goals and guide you through the steps. If you'd like to schedule a complementary call with him to see how he may be able to help you and your family visit here.

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