Say the words "budget" and people tend to groan, flinch and attempt to flee. It's a word that's been unfairly saddled with a number of negative connotations, including the idea that it's a tedious, complicated procedure only a math whiz can handle and only poor people have to attempt.
But budgeting is actually only another financial skill, one that helps you have control of your money. Far from being the last resort of the financially feeble, it's a skill that helps the largest companies in the world be successful. I guarantee you, Wal-Mart budgets. Microsoft budgets. Exxon/Mobil budgets. And most of the billionaires out there attained that status at least in part by knowing exactly how and where they spend their money. For those who are struggling financially, budgeting may take a little time and effort, but it's the best way possible to find out why you're always short on cash.
Still don't like the term budget? Don't want to tell friends and family that you're working on one? Then use the term "financial planning" with my blessing, because they're essentially the same thing. I'm going to use the word "budget" in this article because it's easier to type. (I'm not lazy, I'm just busy!)
So how does a person budget?
One thing you don't need is budgeting software. ( In fact, you don't even need a computer.) Budgeting is nothing you can't handle with a yellow pad, a few sharpened pencils, a highlighter and a $3 calculator. If later you want to load everything into a software program, feel free....but don't be like some people and use "no time to learn a software program" or "can't afford a software program" as an excuse to not budget.
(And by the way, the initial "figure out income and expenses" job described below isn't something you have to do in one session. Spread it out over a number of days if you need to.)
So...you have your calculator, a highlighter, some ruled paper and pencils. The first job? Determine your income. You want to collect your paycheck stubs, past-year income statements if you're self-employed, plus information on any bonuses or commissions you receive on a regular, predictable basis. Why the emphasis on regular and predictable? Because you don't want to base your budget on income that may not show up, or may be significantly less than your estimate. Also add in income from such sources as Social Security, fixed-amount annuities or rental income....anything you get on a regular, steady, you-can-count-on-it basis.
Now, because your main living costs are monthly--specifically rental or mortgage payments, loan payments and utilities--convert all these sources of income to a monthly basis. For example, if you get a biweekly paycheck, multiply that amount by 26 weeks (the number of paychecks you get per year) then divide by 12. Income that you get quarterly should be multiplied by 4 to get a yearly figure, then divided by 12 and so forth.
When you're calculating all these figures, make things a little easier on yourself by rounding the figures down slightly. (Always round income down and expenses up.) For example, if your biweekly paycheck is $1,379, multiply it by 26 to get $35,854, then divide that by 12 to get a monthly figure of $2987.33, which you round down to $2980.
Another example: If you have a rental property that nets you $6,820 yearly, divide by 12 to get a monthly figure of $568.33, then round that down to $560. If you always get a yearly bonus, calculate an average for the last five years, divide by 12, round down and add that. Do the same for your spouse's income.
When you're finished, add up all your monthly figures and, again, round down. I suggest you double-check this figure, especially if its either significantly higher or lower than you expected. (Especially if its higher!)
Next, comes expenses, a figure that usually takes a bit more effort to compile. We'll talk about that in Part II.
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