Budgeting 101 Setting up your Budget

To most, the word budget conjures up images of financial distress. People who put themselves on a budget are inevitably in trouble. Despite the fact that most people would never consider the notion of budgeting until it was too late, the word budget is not synonymous with disaster. Nor does it mean that you have to suffer or go without. A budget can be a good thing. It is all about having the right attitude.

Financial control is a numbers game, but it also has a mind set factor. You have to manage the income and the expenses, but you have to approach it with the right thought process. The first step is to rethink the reason for a budget. A budget is not just a tool used to get out of trouble. If you implement a budget as a preventative measure, you will find that it will improve your life. Not instantly, but over time you will start to feel like you have more, even though you are spending less.

A few years back my co-workers and I got a cost of living raise of $3,000. At the time it was quite substantial. I was already on my budget so I implemented what I call my 10/10 plan on the added income while my co-workers just added the new income into their expense habits. The pay hike gave us all some added joy in our lives, but by the next year, most of them no longer realized the increase in their paychecks. They had absorbed the increase and had become accustomed to the higher income. I call this “living within your means”. Those who live within their means are always on the edge of financial ruin. They live paycheck to paycheck. They do not anticipate or budget for life’s surprises. And the one thing you can always count on is that when you least expect it and can’t afford it, disaster strikes. Your spending has to begin below the level of your income and so does your budget.

Now that I have spent half of this article trying to convince you that you need a budget, lets get into setting one up. To begin a budget plan, you need to know the amount of income and the amount needed for necessities. Despite the number of things most people consider necessary, the list of necessities is limited to only three items. They are mortgage, food and utilities. These are the things that you need too survive. Everything else is extra and are candidates to be incorporated into your allowance. The extras are considered candidates because not all items you want in your budget will make the budget. I know that earlier I said that having a budget didn’t mean going without, but you need to realize that a budget is a long term plan. At first, there are things you will have to do without. Eventually the excluded items can be added to your budget, in addition to items you thought you could never afford.

Most budgets just subtract the necessities from the income and the rest is your allowance, but to make your budget work harder for you, you need to include a cushion. My suggestion is a 10/10 cushion. Take the actual amount you make and subtract 10 percent. That might sound like a portion for a savings account, but it needs to be considered unrealized income. Think of it as money you never made. You now have a new starting number (90% of your income). Then take 10 more percent and that goes into a savings account. You begin your budget at 80% of your income. I realize that most people think they can’t survive on what they make now, so how can they possibly make it on only 80%? The answer lies with your spending habits.

The biggest mistake that is made by people living without a budget is the idea that they can live within their means. The truth is, if you spend what you make, you will never gain financial security. Your spending has to begin below the level of your income and so does your budget. You have to approach this with the right mind set. In the beginning if you can adjust your spending to cover the necessities and reduce the amount of extra expenses, after a short amount of time you will actually consider yourself rich. What is a short amount of time? If you stick to the plan, in just 6 years you will have accumulated an entire year’s pay. Should a disaster occur, you could survive a year without an income. That is not the intent of my plan. The idea is to have enough set aside so you can start to spend it. You make money to enjoy life. Six months worth of income (3 years on the budget) is a good enough cushion. At that point you are no longer living paycheck to paycheck and can afford to go on vacations or upgrade to a newer car. At that point you will begin to feel rich. A budget really can be a good thing.