Do you have a budget?  Perhaps you’ve tried setting a budget only to find that you are not really following it.  Having a budget is the first step towards improving your financial situation and moving towards financial freedom.  By establishing a budget, you are able to have a clear understanding of how much money you have coming in, how much you have going out, and where that money is going.  A budget allows you to follow the primary rule of a debt free life – spend less than you make.

Unfortunately most budget systems are very complex. They require you to itemize every category of spending and keep track of where every item you spend goes.  While this system make work for people with strong organizational skills or those who have the time to track every cent, most people just end up frustrated.

Traditional budget systems are also very restrictive. Having every category scheduled to the precise amount you will spend doesn’t allow for the fluctuations that naturally occur in life.  Life doesn’t always flow on an exact monthly basis.  Perhaps during one month you purchase more groceries; the next month you may need less.  One month you may not have time or desire to spend much on entertainment, but the next month your favorite band may be in concert in your area.  When this sort of situations come up you may feel handcuffed by your budget.  It is often when this happens that people will start making exceptions and eventually abandon their budget.

Another reason that many budget systems do not work is because they are not prepared for the unexpected.    Let’s face it, life brings many unexpected events our way, and they often cost money.  An emergency fund is the ideal way to protect you from most of these; however what do you do while you are working to establish your emergency fund?  Also, many unexpected expenditures are small and hardly worth breaking into an emergency fund.  It may be an unexpected $30 because your good pair of pants developed a rip in them, or an unexpected tank of gas you need because you had to pick up your son or daughter from a friend across town.  These expenses may not be planned and in fact they may occur after you’ve already spent your budget for these areas.  It is hardly worth breaking into the emergency fund, but you also don’t have any budgeted space for them.

The end result of traditional budget systems is that most people don’t follow them for long.  Because the budget is so complex, feels restrictive, and does not allow for the unexpected, it is very easy for people to get off budget.  Once someone is off budget it is often easier for them to stay off than to start over.  And so people quit.  People start with good intentions but then end up leaving their budget behind and get back into the same financial traps they were in before.

That is why people need a simple budget system.  You need a system that will be easy to use, give you some freedom in your monthly spending, and has an allowance for the unexpected.

Steps in Developing a Simple Budget

1. Start a spreadsheet – at the top, write down your forms of income.

Write down all of your family’s forms of income (net take home pay).  For example, on our budget we have my paycheck, my wife’s paycheck, and our expected business income.  If you get paid monthly you will have one column in your spreadsheet.  If you get paid twice monthly you will have two columns.

2. Record all of your bills payments and anything you need to pay on a monthly basis.

In this step you should simply list everything that is a MUST pay each month.  These would primarily be your bills and debt payments, not variable expenses like groceries.  Call these your fixed expenditures. On this list you should include:

• mortgage or rent
• all utility bills
• phone bill and cell phone bill
• cable or satellite bill
• car payments
• student loan payments
• minimum credit card payments
• house and car insurance
• monthly giving
• any other debt payments

This list should include everything you are committed to.  If there is something on this list that you don’t want to be committed to cancel that service, or pay off that debt.  If you have two columns after step 1 because you get paid twice monthly, you should place these bills and payments in the proper column based on when they become due.  Assuming you are paid an equal during each part of the month you should try to balance out the payments.

You should also look to automate as many of these payments as possible.  Use your bank account to set up automatic bill payments so that the fixed expenses are paid without any conscious effort on your part.

3.  Total your fixed expenditures and calculate your income minus your fixed expenditures so you have your amount remaining.

After step 3, your budget should look something like this:

Simple Budget		1st of month	15th of month
Your paycheck		1200	1200
Spouse’s paycheck		800	800
Business income		600
MONTHLY INCOME		2600	2000
Fixed Expenditures
Mortgage		600	600
Car Payment		350
Student Loan			300
Car Insurance		70
House Insurance			60
Phone Bill		60
Internet Access			50
Cell Phone			50
Electricity			90
Cable Bill			50
Credit Card Minimum		110
Donations		320	260
Total Expenditures		1510	1460
Income less fixed expenditures		1090	540

4.  Set a budget for your variable expenses.

Your variable expenses will be all of the other types of expenditures that you may make in a budget period (ie. a month if you are paid monthly, or ½ month if you are paid twice monthly).  This will include your groceries, clothing, gas, entertainment and any unexpected surprises that may come up.  Your goal is to estimate a reasonable amount for these variable expenses, but to keep it as low as possible.

The process of finalizing your variable expense section of the budget will take time.  You will have to play with it over the first few months of using the simple budget system.  But once it’s complete it will give you flexibility and freedom in your spending.

5. Withdraw cash each budget period equal to your variable expenses.

Studies have shown that people who spend cash instead of debit or credit cards on average spend 18-28% less.  That is true of every category of spending, even clothes and groceries.  By spending cash you have to think about making each purchase, and have the emotional response of giving up cash.
Because of this fact, you should withdraw your variable expense budget at the start of each period.  This is what you will use for every variable expense.  The important thing to remember is that once the cash is gone – it’s gone.  You need to make it last for the entire budget period.

Because the variable budget is grouped together, you have a new found sense of flexibility.  You can spend more on groceries if there is a fantastic sale.  You can spend less on entertainment if there is nothing of interest to you this month.  You can easily flex between one type of variable expense and another.  It also gives you some leeway for unexpected events.  Certainly you have to keep within your overall variable budget but you can easily flex from one area of spending to another.

6. Use the remainder to accelerate debt payments and/or to save for the future.

The money you have left by this point in your process should be used to payoff debts or save for the future.  For most people, the best first step is to pay off debts as quickly as possible.

To do this, pick one of your debts and put all of the remaining money directly on to that debt.  This is known as a debt snowball and is recommended by financial experts such as Dave Ramsey.  Some experts suggest that you start with the debt with the lowest balance (in order to create some quick success), while others argue to attack the debt with the highest interest rate (in order to save more money in the long-term).  Either option can be successful, just make sure you start paying down debts right away.

The snowball effect occurs because once you pay off the first debt you add the original payment of that first debt to your extra debt payments and start attacking the second debt.

Now your completed simple budget should look something like this:

Simple Budget		1st of month	15th of month
Your paycheck		1200	1200
Spouse’s paycheck		800	800
Business income		600
MONTHLY INCOME		2600	2000
Fixed Expenditures
Mortgage		600	600
Car Payment		350
Student Loan			300
Car Insurance		70
House Insurance			60
Phone Bill		60
Internet Access			50
Cell Phone			50
Electricity			90
Cable Bill			50
Credit Card Minimum		110
Donations		320	260
Total Expenditures		1510	1460
Income less fixed expenditures		1090	540
Variable Expenses		450	450
Remaining Budget: APPLY TO DEBT		640	90

This budget system will simplify your financial life.  It sets all of your fixed payments on some form of automatic payment schedule so that you don’t worry about them.  It groups your variable expenses together to give you flexibility in how you spend them.  It can lower the stress that comes from trying to fit make every budget category equal and trying to keep track of every purchase.  By using cash you will spend less, and by following the debt snowball you will pay off your debt more quickly.

The Success Professor – Danny Gamache