A few weeks ago we looked at debt and banking. Last week we examined how to use the debt snowball system to reduce all your debts. This week we will explore the benefits and why you should have a budget. Now before you start to think I hate budgets, they restrict me too much. Let us look at the real benefits and reasons why a budget is so important. And no budgets are not meant to be a restrictive device used to suck the life out of you. They are merely a tool that will allow you to help pay off debts, save for an emergency fund or any other item that requires large sums of money, and finally, it will help you understand where your money is going. That last part is important because if you have no idea where your money is going, you will have no idea how to adjust your spending habits to achieve your new goals. And the best part of a budget is that I consider it a living document which means it can be changed and is not something that is set in stone.
I recently read a book by a fellow blogger that was pretty good overall and spoke highly of automating your financial world. While I tend to agree with a lot of what the author said in their book I did disagree with two aspects of his approach. The first we will examine next week, and that is in the area of investing and asset allocation, more on that later though. And the second was budgeting. His approach was unique and I am guessing it could work but basically at the heart of the matter is was still budgeting, even using the envelope system endorsed by Dave Ramsey. After I had read that particular section, I realized it was just budgeting under a different name. The reason I like the old fashion budget is that it is written and being written will make it more likely you will follow the budget to achieve your goals. And yes I am also a fan of the envelope system used in conjunction with a written budget.
So how do you start a budget with minimal effort? That is a good question and one we will look at now. First, you need to gather all your figures together. That means getting paystubs for all your income and recognizing the sources of where all your money comes from in any form. Then you need to get all of your debts together as well. That should be fairly easy if you did the exercise for debt snowball repayment I wrote about last week. You will also need to have a good idea about expenses that are not considered true debts such as giving gifts, replacing items in your house or wardrobe, and things such as your utilities that have to be paid on a monthly basis. Now that you have all of that gathered together you can now decide on how it is you will utilize this information and create a working budget you can use and live with.
If you want a simple budget that is effective, you can use the envelope system. That approach is very basic and goes something like this in how you utilize it. You have your income sources, and you separate that into your expenses on a monthly basis. Then you will create an envelope for each expense category. Once you have created the envelope you simply put the cash in that envelope for the month and spend as usual. Once the cash is spent out of a particular envelope, that means you are done spending that category for the month. If you need more money, you will have to take the excess funds from an existing envelope and transfer the money to the one that ran out of cash. This is a simple and effective method to budget but if not ideal if you are more of a visual person like I am. For you, the next method may be the answer and is the one I prefer.
The second method is to create a spreadsheet that will track your income and expenses. Spreadsheets are easy to set up and maintain with minimal effort. And if you do not want to set up a spreadsheet feel free to sign up for my free email newsletter and get the snowball debt and budget spreadsheet for free. And do not worry I will bombard your inbox with spam emails but the information I do provide is some that are not made available otherwise. And if you do not want to sign up for the periodic emails the spreadsheets are available for sale by clicking Financial Tools at the top of the blog. By using a spreadsheet, you are able to do basically the same as using the envelope system, but here you can see what is available in each category all in one easy to read spreadsheet. Otherwise, you will have to go through each envelope to get this information. And if you run out of funds in one category you can adjust the spreadsheet to shift funds from one category to another with minimal effort.
As long as you keep good records of your spending and use a system that works for you, that is the important thing. If you can manage cash and like separating your spending in envelopes, then use that system. If you are more visual, then I suggest a spreadsheet or something similar. Regardless of the system, you decide to use it is important to keep up with your spending and input the data into something. Otherwise, the whole point of budgeting is lost.
What are the benefits of using a budget system? Well, to save you must first know where you are spending your money. Most people say that they are not able to save for their future needs but if you asked them where they spent their money now most have no idea where it all goes. A budget will answer that question and show you in figures where your money is being spent each month. Only then can you state that you will spend less in this category and shift it to something else such as debt or savings. And after you do this for two or three months you will see that some categories can be trimmed, and others expanded. But your ultimate goal is to reduce debt and save for your future. And the only way to really do that is to plan and budget your money in the first place.
If you need assistance or help preparing your budget feel free to contact me directly. If you have a general question or comment, feel free to leave a comment on the post for others to learn from as well. For more information on budgets feel free to get my ebooklet on Amazon at http://amzn.to/25rXIOm.
