Have you ever thought something was difficult so you didn’t even try to do it? A lot of folks think that about drawing up a budget. You don’t have to be a rocket scientist to draft a budget. Rob talks you through the basics.
You don’t have to be a rocket scientist to draft a budget. Like anything, there’s a bit of a learning curve, but it gets easier the more you try. We’ll talk you through the basics today on MoneyWise.
We talk a lot about the need for budgeting on this program, and we’ve developed the amazing MoneyWise app to help you do it. It has three different ways you can set up your budget and allot money to your various spending categories.
We also have trained volunteer coaches who can’t wait to help you draw up your budget. Connect with a coach at MoneyWise.org.
Before we get into the basics of budgeting, it’s important to understand that everyone needs to do it, no matter how much or how little money they have coming in. There’s no other way to stay on top of your spending, get out of debt, give to your maximum potential, and plan for the future.
HOW TO CREATE A BUDGET
1. List your monthly income. That means your “after tax” income. If you’re a W-2 employee and your employer withholds taxes, it’s the amount of your paycheck. If you have other income where taxes aren’t withheld, you should only count about 70% of that and put the rest in savings for tax time.
2. List all of your fixed expenses. These would include your rent or mortgage payment, auto loans and insurance, credit card minimum payments and student loans. And of course, include your giving in this step. Determine a percentage for your giving and do your best to stick to it.
3. List your variable expenses. These change from month to month. Your electric bill would be one example, if you’re not not on a budget billing plan. Other variable expenses would be groceries, household items, and gas for the car. Obviously, these are just estimates. If you find that difficult, you can go over your receipts and bank statements to ballpark those amounts, and you can adjust them in the months ahead. In fact, plan on adjusting them. Nobody gets estimated variable expenses right the first time. Now you can add up your variable expense estimates and subtract that from your remaining income.
4. Budget some money for your “wants.” We’ve already identified your needs. Now give yourself a little spending money for a few things that make life a little easier and more enjoyable. This could be an occasional dinner out or some other favorite activity. Use these as “rewards” for staying on budget. And here we’ll suggest a percentage. Try to keep your “wants” to 5% of your take-home pay, 10% at the very most. That’s because you’ll need every penny for what comes next.
5. Budget to pay off any consumer debt you have, especially credit cards. You need to determine the amount of your remaining discretionary income that you can put toward that debt, that is, above your minimum payments. Let’s shoot for another 5-10% of your income, and 10% would be better.
6. Budget something for savings. And if you have credit card debt, we’ll assume you don’t have an emergency fund. So start one. Put some amount from every paycheck into liquid savings so you can get to it easily when an unplanned expense arises. You may have to split your remaining available money between paying down debt and building your emergency fund. Try to get between five and 10 percent of your remaining income into each category.
ADDITIONAL TIPS
Those are the basics for setting up a budget, but there are two more things you should do to increase your chances of staying on it.
First, look for ways to cut spending. Can you raise or lower the thermostat to trim your utility bills? Can you cut something from the grocery budget? You may have run out of money before completing Step 6, and this is how you make sure you have enough money for all of them.
Second, set up a system for tracking your spending as you go forward. This is essential for knowing whether you’ve overspent in one or more areas.
Once more, the new MoneyWise app comes to the rescue. It’ll tell you in real time exactly what you’ve spent in which category of your budget, so you can make adjustments as needed to stay on track.
Living faithfully on a budget will enable you to stay on the right side of Proverbs 21:20, which reads, “Precious treasure and oil are in a wise man's dwelling, but a foolish man devours it.”
On this program, Rob also answers listener questions:
What is the best way to use additional income from a pay raise?
Does it make sense to sell your home to pay off other debt?
How much is too much money to keep in a savings account, and what is the best way to use funds beyond your emergency fund?
Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to Questions@MoneyWise.org. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app.
