Wednesday, May 22, 2013

Budget Blues Cured, 1,2,3

A Budget That Actually Works - Finally!

 For many, just hearing the word budget strikes fear in the hearts of men, and causes room women to fidget nervously. It seems like a simple process. You have a finite amount of money coming into the household, and you need to make sure that you are not spending above your means. So why is it that so few of us actually have a budget which works, and which we are comfortable with?

At PowerDownDebt, the first lifestyle changing tool we give our clients is our Budget Builder system.  People report to things. A sense of frustration that they've never been able to build an accurate budget, and a sense of relief that this budget system is so simple and effective.

Why is building a budget so frustrating? First, let's take a look at how we've been taught to create a budget. Most commonly, we undertake this task when push has come to shove financially. We gather our bills, and with pen in hand, we begin by adding up all of our monthly bills, and comparing them to our income. Next, we try and project other possible expenses such as gas, groceries, etc. Subconsciously, we trim down real expenses in order to make them fit our income. For instance, groceries might really cost $400 monthly, but since we only have $300 left after paying our scheduled monthly bills, we "give ourselves" a $300 budget for groceries. This is like trying to cram a size 12 foot into a size 9 shoe. At first it pinches, and it warned too long it will either be kicked off, or cause permanent damage. In any case, the feedback is negative.

A simple, more positive, and statistically more effective approach, is to build your budget based on real data. Surprisingly, this is the not only the easiest budget method, but the most accurate, because it is based on real-life expenses, not projections.

Here's How To Do It.
Gather your family together and agree that you will all participate, and you will be as honest and accurate as possible in gathering the data. This is not about pointing fingers and assigning blame, but rather about getting a true sense of where every dollar goes so that your family can pull together as a team, and begin planning properly for things like vacations, emergency expenses, retirement, education and such.

Step 1. Once everyone is in agreement the task is simple. Every expense is easily tracked by simply saving the receipt, or jotting down the expense. At the end of every day, each family member should take all of their receipts and put them in a single place. A jar or other container works nicely. The MOST important rule is to spend as you normally would for at least 30 days. Do not try and cut back (even subconsciously) to make the budget look better. This is about getting an honest look at your finances. If you buy scratch tickets, include it. Things like alcohol, cigarettes, charitable donations, birthday gifts, and one-time expenses all count. If you feel better about it, make a note on the receipt to differentiate between recurring and one-time expenses. Remember, those one-time expenses are real-life expenditures too, and may be replaced by other similar expenses next month. The "extra things" must be budgeted for too!

With all the data in it is time for step 2. Organize the receipts, and total them according to category. Health and beauty aides go in one column, dining out, another. Subtotal all categories. Prorate and add in things you don't pay monthly like insurance or taxes, and tally everything for the grand total. Then compare that number to your net income to discover whether you have a deficit or surplus.

Step 3. Now we really have something to work with. If your numbers show that you have a deficit, you need to solve the fact that you have more money going out than coming in. Begin to look at places you can cut back. One common example would be a telephone bill. I often discover that clients have both a cell phone, and landline, but have cell phone service at their home. There are a number of possibilities for trimming this expense ranging from canceling your landline, to replacing it with some sort of VoIP, and can trim upwards of $30 monthly. Although this is just one example, many options seem to pop off the page using this system. Alternatively, if you notice that you have surplus you can begin to rely on it more comfortably, and funnel it towards savings.

The goal in building a proper budget should be not only to live within your means, but to live BELOW your means, and uncover funds which could go to improve your lifestyle. After all, isn't quality of life what we're all after?

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