Monthly Budget

The two side pieces on our ladder are the monthly budget and the envelope system. You hold onto these all the time you are climbing out of the financial hole. While you move up the individual rungs sequentially, step by step moving from one set of tools to the next--learning new tools and discarding the old tools you no longer need--you don't do this with the budget and the envelopes. In fact, the ladder keeps going even after you are out of the hole, but you ALWAYS keep holding onto these two elements of financial management. You never stop doing your budget or using the envelopes. First, the budget.

What is a budget? Good question! The budget is a financial tool in which you decide how your income for the next month will be used. The budget is your friend, your partner, your slave. It is not your master.

Here's how it works: You must allocate every dollar of each upcoming paycheck before you receive the check. For each dollar, you must tell yourself--on paper or in a spreadsheet--what the money will be used for and where it will be stored until it is used. For example, in January, you budget for all the paychecks you will receive in February. In February, you budget for March, etc. Each month, before the next month begins, sit down with a pencil and paper (or spreadsheet) and create a budget for the upcoming month. There are 8 steps to creating your budget:

1) Count the number of paychecks (or income checks) you will receive next month. Then take a piece of paper and draw a column for each of these, plus two extra columns. So if your family will get 3 paychecks next month, you will have 5 columns in your budget form.

2) Label the first column "Budget Category," the second column "Location", the third column "First Paycheck," the fourth column "Second Paycheck," etc.

3) Decide on your budget items. Most people have expenses in 10 broad categories. Make sure you list specific budget items for each category, and make sure you don't leave anything out. Here is a list of the budget categories and the budget items you can start with. Cross anything out that you don't have in your life, and add any extras specific to your family or lifestyle:

i. Giving

Tithing (church)
Worthy Causes (Habitat for Humanity, United Way, American Cancer Society, Save the Animals, etc.)

ii. Savings

Emergency Fund
College Fund
Retirement

iii. Housing

Mortgage/Rent
Taxes
Homeowners/Renters Insurance
Future Repairs
Down payment for Next House
Future Furniture Purchases
Electric
Water
Gas
Trash Pickup
Internet
Phone (home)
Phone (cell)

iv. Food

Grocery
Restaurant

v. Transportation

Car Payment(s)
Gas and Oil
Auto Insurance
License and Taxes
Future Repairs (tires, unexpected repairs ...)
Savings for Next Car Purchase

vi. Clothing

Children
Adults
Cleaning/Laundry

vii. Medical/Health

Health Insurance Premium
Future Co-pays/Deductibles
Future Glasses/Contacts
Eye Doctors
Dentists
Specialists
Medications

viii. Personal

Life Insurance
Disability Insurance
Child Care
Baby Sitter
Toiletries/Cleaning Supplies
Hair Cuts/Care
Tuition
School Supplies
Professional Memberships
Upcoming Gifts/Presents (Valentines Day, birthdays, anniversaries, Christmas, etc.)
Children Commissions/Allowances
Blow Money

ix. Recreation

Entertainment
Cable TV/Satellite
Magazine Subscriptions
Kid's Activities
Adult Hobbies
Internet
Summer Camps and Seasonal Sports
Upcoming Vacation

x. Unsecured Debts

Credit Cards
Student Loans
Personal Loans
Outstanding Medical Bills

As you look at this list, you will probably be tempted to skip over car repairs, car replacement, and a few other budget items because you think these are too far down the road. Don't skip them. They are the items that shoot big holes in household finances, so make sure you budget for them. Auto repairs and car replacement WILL come up at some point, and since the family car is the second biggest purchase in most homes, you better save for it long term.

4) List your budget items in the first column of your form. Make sure you label the categories (giving, savings, housing ...) as you go.

5) In the second column of the form, identify where you will store the money for each of your budget items. For example, if you will keep your grocery money in an envelope using the envelope system, write "envelope" in the second column next to "groceries." If you collect money all year long for your property taxes and you keep that in your savings account #4, write "Savings #4" in the second column next to "property taxes." Do this for each of your budget items.

Be careful about putting money for multiple budget items in the same account. It gets hard to keep up with. For example, if you keep the savings for your next car purchase in the same savings account as the savings for your future furniture purchases, down the road--when you need a new couch--you will look at that account and not know for sure how much of the account you had intended to save away for a new car.

6) The third column is labeled "First Paycheck." Record how much money (net pay) will be in that check. If you are unsure, estimate low. Then in that third column allocate every dollar of that check. If you add up all the amounts in that column, it should total EXACTLY the amount of that first check.

Make sure you allocate money for "blow" in the "personal" category. This is money you can spend on a whim. Without money in this category, your budget will be a straightjacket binding and strangling you, and you won't live by it.

7) Repeat step 6) for each check you will have coming in next month.

8) The last step. Add up what you have budgeted for the whole month in each of the 10 budget categories (giving, savings, housing, etc.). Does anything look out of order? Are you happy with where your money is going? If not--and at first there is usually way too much money allocated for unsecured debts--you may have to live with this reality for the moment. But over time this number will go down and you will be able to get your budget looking more like you want it to look. Financial management is like steering one of those big cruise ships--it can't turn quickly.

When you look at your numbers for each category, you might also find that there are some changes you CAN make right away. Maybe it just doesn't make sense to you to spend $300 on eating out at restaurants and only $200 for groceries. You might decide to lower some numbers and raise some others. This is why I like doing the budget on a spreadsheet or with a pencil. Just make sure your column totals add up to the net pay at the top.

No two months ever have the same budgets. There is always something a little different from one month to the next. Weddings, short trips, kid's activities--in doing budgets for over 10 years, no two of our budgets have ever been identical. So as one month ends and you start to budget for the next month, you can use the outgoing month as a template, but plan on changing the numbers around a bit.

After budgeting for a few months, you will get lazy and backslide. You will wake up and it will be the fifth of the month and you will not have a budget. This is expected. Just pick yourself up, dust yourself off, and recommit yourself to the process.

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