Benefits Of Using a Budget

In a previous post titled How To Do A Budget, I showed you the How of doing a budget. How to identify what categories need to be included, the basic math used and a spreadsheet to start creating your own budget. You can use this spreadsheet, a pencil and paper, or one of several apps for budgeting. Some of the more popular are YNAB, Mint, and Every Dollar.

This post talks about the Why of Budgeting. A budget is just a list of categories with math behind it, but the emotions and decisions that are wrapped up in putting together your first budget can be overwhelming. This post will help you work through your own Why as you wrestle with these concepts.

Budgeting can be a scary word. Many people approach budgets with fear, especially if they don’t have much experience with them. But budgeting does not mean you will have to start scrimping and living like a miser. It just means you understand your finances and have control over them.

It’s stressful not knowing what money is coming in, what’s going out and what our obligations are. No matter how big our checking account is, we can feel stressed.

Budgeting is creating a plan to help you get your finances where you want them to be. A budget is the ideal way to get an understanding of the way you spend, the way you save and then identify ways to improve. A budget also helps define your values. Look at where you spend your money. Does that align with your goals and values? If not, changes can be made.

9 Benefits of Budgeting

(1) Gives You a Framework for Money Conversations:

There was a time in my marriage when money conversations almost always fell off the cliff into the abyss of arguing, pain, and indecision. We couldn’t agree and the conversations led us nowhere. I talk about this in the post Being on the Same Page With Your Spouse.

If you’re married, don’t start the conversation by talking about money. Start by talking about your WHY. Talk about your wants, dreams, and goals. Why are you saving , why would you care about how much you’re spending? Will it relieve stress in you life and your relationship? Will it allow you to go on that vacations you’ve been dreaming of? What’s your WHY?

After you’ve had a few of these conversations, THEN you can talk about money. Working on your budget together can become the basis for many interesting and productive money conversations. Make the decisions together. Compromise together. No matter where you are starting…have patience with each other.

(2) Provides Control Over Your Money:

You have total control over where you spend your money. If you choose to spend money on A, then you may not have as much for B. If you want a latte three times a week, put it in the budget. If getting a babysitter once a month is important, put it in the budget. If there’s not room for those discretionary items, cut back somewhere else.

What if there’s not room for any of those things? If your finances are a dumpster fire, cut everything you can! Just remember, it won’t be like this forever. There was a time when I told my kids, “If you can’t eat it, we’re not buying it.” These times were not pleasant, but they were temporary. We dug ourselves out and you can, too!

(3) Let’s You Track Your Financial Goals – Saving, Long-Term Spending, and The Emergency Fund:

A budget will not only help you plan for this week and this month, but it will also help you with long-term goals. Do you want to take a big vacation in five years? Will you need a roof or major car repair next year? Do you need to beef up your Emergency Fund? A budget can help you find and accumulate cash for these kinds of issues.

(4) Budgeting Will Open Your Eyes. It Helps Shed Light on Bad Spending Habits:

Do you get to the end of the month and think, “Where did all my paycheck go?!” Does it feels like it disappeared? Once you really start looking at your spending, you will be able to identify where it’s going.

You may have large medical bills that you just have to gut through till they’re paid. Or you may find that you’ve got some bad spending habits that need to be reigned in, like going to the drive-thru too often or all those Amazon boxes! How about bank fees? If you are paying the bank for overdraft fees, this needs to stop now!

(5) Helps Create a Cushion for Unexpected Expenses – Emergency Fund:

Do you have an emergency fund? If not, you need to start working on that today. We all have emergencies! No one is exempt. For some people, a flat tire or car repair is a real emergency. An illness or a broken heater can be financially devastating.

The lack of an emergency fund is what caused most of mine and Stephen’s financial hardships earlier in life. “Stuff” happened and we had no safety net.

Could you cover a $500 emergency without going into debt? $1000? $5000? How about a job layoff? You need 3-6 months of living expenses in an emergency fund. This needs to be kept in an easily accessible place. But not too easy. A savings account or money market fund will do nicely for now. Remember, this is not a new couch fund!

(6) Helps Identify Money for Paying Down Debt:

If you are paying down debt like credit card or student loan debt, a budget will help you identify cash you can send toward that debt. Any extra cash you can use to pay down debt will get rid of it sooner and save you money in interest payments. If you’re having trouble making your minimum payments…see dumpster fire above!

(7) Helps Identify Money for Investing:

If your Emergency Fund is in place and you are paying on your debt, you may be able to identify some extra cash to start investing. If you can identify money to invest, I would start with your employer’s 401k and get the match. I will talk more about investing in a future blog post, but for now, do everything you can to get your employer’s match if you have one. Don’t turn down free money!

(8) Helps Ensure You Don’t Spend Money You Don’t Have:

You may be in a place where you are spending more money than you make. Stephen and I did that for a while when he had no income. It felt terrible! We were living on credit cards and digging a bigger hole with our debt every day. Again, this is a dumpster fire. You may not realize you are doing this. One reason would be because this is “normal” in our culture. A budget can help you identify the problem when more money is going out than coming in.

(9) Helps Keep Your Eyes on the Prize (Motivation):

After Stephen and I put out our dumpster fire and got on track with a budget, it helped to keep us motivated. If you’re paying down debt or just starting to invest, the numbers don’t seem to change very quickly. It takes some time to get traction. The budget helped us to “Keep Our Eyes on the Prize!”

Assignment 1 – Evaluate your budget WHY. Where do you find yourself with your money right now? Are you in a dumpster fire or are you ready to start investing?

Assignment 2 – If you haven’t done a budget yet, start working on you first draft. There is a spreadsheet template in Personal Finance Basics Part 3: Let’s Do A Budget.

Key Takeaway – A budget is the ideal way to get an understanding of the way you spend, the way you save, and then identify ways to improve. A budget also helps define your values. Look at where you spend your money. Does that align with your goals and values?

How to Do a Budget

Do you get to the end of the month and say, “Where did all my money go!”? Are you living paycheck-to-paycheck. If you are, you’re not alone. Around 70% of Americans live paycheck-to-paycheck. I did for a long time. In fact, I not only didn’t save anything, but I didn’t have an emergency fund. I was one emergency away from disaster financially. And then disaster hit! That’s when my husband and I sank into the darkest days of our marriage. I never want to be there again. And, I don’t want you to be there, either! I’d like to help you get out of that pit or never fall into it.

Is the “B” word a dirty word for you?!

This post is going to show you how to do a budget. I know, the “B” word is a dirty word for some folks. Like the assignment to add up all your debt in the post How Do I Get a Handle on My Money, putting together your budget will take some time and effort. It may bring some heartache and frustration. It’s like starting to exercise. It’s not pleasant at first, but it will be worth it if you stick to it!

How do you start?

The first step to putting together your own Monthly Budget is to look at your monthly inflows and outflows of money or your Monthly Income and Monthly Expenses.

Gather Your Income Data

First, you will need to gather all your monthly income sources. This will be your monthly paycheck (take home) and any other income source you have, such as side jobs, dividends or even alimony.

Gather Your Expense Data

Next let’s look at your expenses. This will take some time, so be patient with yourself! Write down everything you spend throughout the month. There will be lots of categories.

As with the Net Worth Statement, you can track these categories and their corresponding numbers with pencil and paper, or I have created a Monthly Budget Spreadsheet. The spreadsheet has columns for 6 months, and you can expand that as needed. You may want to change the headings from Month 1 to Jan 2020 and so on. The picture of the spreadsheet can be found below, and the link to the actual sheet is below that. Again, the spreadsheet is protected and you will need to make your own copy.

Giving and Savings First

Let’s look at those expense categories. For me and my family, Tithing/Giving is always at the top of the list. We believe in the Biblical principle of “first fruits” giving. This just means we give first and budget what’s left. For us, right behind giving is saving. Have you heard the term “Pay Yourself First”? This is a basic concept in saving for the future. (unfortunately, one I did not do for a long time!) Again, it is the idea of do your saving first and live on the rest. Or Pay Yourself First and then pay everyone else!

You may not be Tithing/Giving and Saving yet. Don’t worry. Both of these concepts are VERY important, but they can be addressed when you have a clear picture of where you’re money is going every month. Saving and Giving are like a muscle…they can be developed with exercise.

Other Expense Categories

Next, let’s look at the other categories. Start with the big ones like mortgage/rent payments, food and car expenses. You will also need categories like insurance payments, cell phone, utilities, cable and internet. Anything that you pay monthly needs to go on this list. And don’t forget those pesky subscriptions. Netflix, Pandora or anything that is automatically paid on your credit card.

The next step is to add categories for things that happen seldom or once a year like birthday and Christmas presents. How about printer cartridges and school pictures. There’s also car repairs, vacation and property taxes. These are not spent monthly, but they need to be considered. Take some time to think about how much money you normally spend in these types of categories in a year’s time, divide it by 12 and add that amount to your list of expenses.

Let’s Do the Math

At this point, if you’re doing this on paper, add up all your Monthly Expenses and then subtract that from the Total Monthly Income. If you’re using the spreadsheet it will do the math for you.

Look at the number at the bottom or Total Monthly Income minus Total Monthly Expenses. Is that number positive or negative? Are the Expenses greater than the Income or are they less? If they are less, great! The difference between Income and Expenses can be called the Gap, and we will talk in a future post about how to grow that gap. This is what will allow you to save for the future.

Are your Expenses greater than the Income (or the number at the bottom is negative)? This is what some would call a “Dumpster Fire”! This requires some immediate action. Look at your expenses and see what you can trim TODAY! See where you can cut in order to get the bottom number to zero.

Having Zero at the Bottom

Speaking of the bottom number being zero, my instructions on the Monthly Budget Spreadsheet say the bottom line number should equal zero. The reason for this is if you have trimmed your spending down to be less than your Income, there is excess or what I called earlier, the Gap. This Gap is where you can start saving! If you have a Gap now, great! This amount can go in the Saving Category at the top of the list of Monthly Expenses. This should bring your bottom line to zero. This method of budgeting is called a “Zero-Based Budget”

Give Yourself A Break!

This is NOT an easy task if you’ve never done a budget. In fact, it takes most people about 3 months to get the hang of it. You’ll forget categories, you’ll over or under estimate what you spend. One month will have a minor disaster that has to be handled. It’s OK. Give yourself a break. Just DON’T GIVE UP!

What Does Your Spending Say?

Now that you have done your first Budget, what do you see in it about yourself. Remember the “10 Things That Make Me Happy” list? How does your spending align with what makes you happy? Or stated another way…How does your spending align with your priorities and what you value? There may need to be some changes made to your spending to align it with your values.

Wrapping It Up

If you’ve never done a budget or it’s been a while, spend some time this week gathering your data. Use that data to create a current budget for yourself and your family and then see what it’s telling you. Let it guide you to evaluate what areas of your life might need some tweaks. Don’t be overwhelmed by thinking LOTS of major changed have to happen all at once. There’s a phrase coined by Brad and Jonathan at ChooseFI. It’s called the “aggregation of marginal gains”. That means if you continue to stack small changes, eventually you’ve made Big changes. Think about what small changes can be made over the next 7-10 days.

What Does God Say?

But he who listens to me (wisdom) shall live securely, and shall be at ease from the dread of evil

Proverbs 1:33

Looking Ahead

In the next post, I’ll talk about why do a budget and some tips on how to use it.

Monthly Budget Spreadsheet

Link To Monthly Budget Spreadsheet

Assigmnent and Key Takeaway

Assignment – Download the Monthly Budget Spreadsheet (or get a pencil and paper). Gather all your income and expense numbers and fill in all the categories with YOUR numbers. Add or delete categories as needed.

Assignment 1 – Evaluate the bottom line. Is it positive? Great! Is it negative? See what you can change today to bring that back to zero.

Assignment 2 – What can you improve over the next 7-10 days to help your GAP.

Key Takeaway – Evaluate your budget in light of your “10 Things That Make Me Happy” list. Your spending should reflect your values and priorities. If it doesn’t, what needs to change to bring those into alignment?