A budget is the tool in your money tool kit that actually helps you manage all the other tools. When you have a budget, you can handle your checking and savings accounts better; pay all your bills on time more easily; be more responsible with your credit, debit and ATM cards; and build a better credit score.
A budget tells us what we can’t afford, but it doesn’t keep us from buying it.
Benefits of a budget
A budget helps you develop a healthy relationship with money and is the best way to see Your Whole Money Picture.
When you write out a budget, in fact, all of the principles you’ve learned for developing a healthy relationship with money just fall into place:
- You can see Your Whole Money Picture.
- You can Protect Monday Me.
- You can Avoid the Spending Rip Current.
- You’re much less likely to buy Tomorrow’s Junk.
- You’ll be able to Dodge the Ad Barrage.
- You’ll be much more likely to Stay in Your Money Stance.
Budget: a mathematical confirmation of your suspicions. -A.A. Latimer
Knowing your whole money picture
Before you can actually prepare a budget, you’ve got to get a good idea of how much money you actually have coming in and where you’re spending it—in other words, your Whole Money Picture.
So it’s time to start tracking your money. For one week, write down everything you spend—everything—along with how much money (if any) you receive as income. You can use this sample form.
Setting targets for variable expenses
Notice that in the sample budget form, your variable expenses are listed as targets. That’s because when you’re operating on a budget, your variable expenses are where you can control how much you spend. Both your income and your fixed payments, like rent, will stay pretty much the same each month. But with your variable expenses, like meals out, you really have the opportunity to gain control of your financial life—and to get ahead.
On your monthly budget form, you should write down the maximum you want to spend on each category of variable expense. You might write down $100 for entertainment for the month, for example.
That’s your target. Every time you spend money on an entertainment expense (like a DVD), you can record that and mark it against your $100 entertainment target for the month.
Your budget is most closely associated with which financial principle?
Needs vs. wants
A great strategy when preparing a budget is to sit down and write out all the things you spend your money on (or want to spend your money on). If you’ve done the one-week tracking of all your expenses, then you can use that as the basis of the list.
Now, take an honest look at these items and ask yourself if each is a need (which you can mark with an “N”) or a want (mark with a “W”). You might be surprised at how much you spend on things you assume you need, but that are really just wants. You might also be surprised, when you see all your purchases on paper, just how many of them you didn’t even really want that much.
This is also the power of budgeting. It can save you from all sorts of purchases you probably wouldn’t be happy with anyway.
The envelope method
Once you have a budget in place and have decided how much you want to spend on variable expenses, one clever way to budget is to write out each type of expense on different envelopes, and then place in them the amount of cash you’ve allotted for that category for the month.
It’s a great way to keep yourself from cheating by spending more on a type of expense than you wanted to. If you check your envelope marked “Clothes” and there’s no more cash in it, then you’re not buying anymore clothes until next month.
PRINCIPLE IN PRACTICE
A budget is one of the best ways to protect Monday Me.