Some of the most frequently asked personal finance questions during this difficult economy revolve around “how to budget”, “how to make a budget” and “how to live on a tight budget”. Budgeting your money successfully is crucial to flourishing in any type of economy, much less a tough one. There is a common misconception that good budgeting depends upon fancy forms, financial expertise, software programs and solely on one’s income. All of these false notions completely circumvent the only true goal of any personal budget: Getting the most value for each of your hard-earned dollars.
Those misguided beliefs above are the key reasons why many people are much worse off than they should be, regardless of income levels or familiarity with financial software. There are many people who are much “better off” with a lower income and a simple budget form than those with great salaries and top-notch computer programs. These successful folks are the ones who have learned the secret: Keenly stretch your dollars without sacrificing quality or “good living”. This is the foundation for our budgeting method and it is the best method. It is the most effective method because it combines the three critical budgeting elements: Cost-cutting without sacrifice, timing your income/expenses and simple, accurate recordkeeping.
We have been successfully managing a household budget for nearly 30 years and have survived many unforeseen “bumps and bruises” along the way. During that time, we paid off our mortgage eight years early, sent two children through college, managed to save a good deal of money and maintained a nice standard of living. There were no magic tricks involved, just common sense, a few simple forms that we developed (see below) and a little effort. We have read countless “How to Budget” books and articles over the years and while a select few were beneficial, the majority we simply dismissed out of hand.
Unfortunately, most budget or personal finance “experts” approach cost-cutting from the standpoint of scaling back on items and niceties as a first choice, as opposed to a last resort, as it should be. One author for a popular financial web site even suggested eating a sandwich or a snack before going out to dinner because you would be less hungry and therefore saving some dollars. Taking this “logic” just a step further, why not just stay home and save even more? It is this type of lazy journalism and advice that keeps people meandering on the path to mediocrity. We had a good chuckle and moved on.
There is a Better Way…
The Dining Out Example:
The basic idea behind going out to dinner is to escape your stresses for a bit, have fun, relax, enjoy a change of scenery and forget about cooking and doing dishes for the evening. If you are going into it overly concerned about the financial aspect, you are nullifying the underlying relaxation intent. Our approach for “cutting back” on dining out expenses is quite the opposite: Cut only the bill, not the quality or quantity of dinner items. How so? By using Restaurant.com, anyone can cut their dining bill by 60% every day and up to 92% on special days. That is paying 8 cents on the dollar. This is a much more effective approach and no one needs to worry about filling up on pretzels on the way to the restaurant.
While well-intentioned, it is this narrow, defeatist assertion of the author and many like-minded peers that we reject. Cutting back on products, services and enjoyment to save money is not getting ahead, it is trading off. And trading off is not the path to living better. We fully support frugality, with the added feature that you can be frugal AND attain a higher quality of living simultaneously. Certainly you shouldn’t waste money on items which return little value but nor should you unnecessarily deprive yourself of the fruits of your labor. Break free from the antiquated “You can’t have your cake and eat it too” crowd. A cake has only one purpose and the trick is to find the cheapest high-quality “baker”.
It is this simple dining out example upon which our entire budgeting principle is based: Why spend more for something when you don’t have to? We take it to an extreme however and raise the question to: Why spend MUCH more for something when you don’t have to?
Much like visiting the local market and discovering that Joe is selling a bag of apples for 10 dollars while John is selling the same bag for 3 dollars, the choice is simple. This “supplier-replacement cost-cutting technique” is the backbone of our budget plan. Accordingly, we highlight similarly discounted deals in many areas of consumer spending. That is our philosophy and this is reflected throughout our site and specifically in our Budget Cutters section. The prices are 50%-90% off of retail on many purchases, bills and expenses that people deal with every day. Furthermore, in many cases, the “3 dollar apples” are of higher quality than those in the 10 dollar bag. This is the “secret” to getting ahead.
Our mindset and methodology on how to budget are clear:
1) Slash costs.
2) Maintain quality.
3) Pocket the difference.
The old adage is true: “A penny saved is a penny earned”. The real goal though is to multiply the benefits of that adage over the course of time into “Thousands of dollars saved are thousands of dollars earned”, while increasing your standard of living and net worth.
How to Budget: Step by Step Instructions:
Note: All of the forms referenced are freely available on our web site, along with sample completed forms.
Step 1: Find a quiet spot, relax, clear your mind and rid yourself of all of the over-complicated, force-fed convoluted advice that you have received over the years. Successful personal budgeting is easy and enjoyable, particularly the end result.
Gather all of your current information regarding income, debts, recurring expenses and discretionary (fun, entertainment) spending. This can be handwritten on a piece of scrap paper or with a collection of paystubs, bills, bank and credit card statements. To keep matters simple, use your after tax (net) income for purposes of using our forms. If you have savings, insurance or other expenses deducted from your paycheck, add those amounts back in to figure your net income. This will be your true net income, those “deducted” expenses will be listed in another area of your worksheet. Enter all of your data in the appropriate area of the Budget column on your Budget Form. This is a simple 3 column form with the headings: “Actual”, “Budget” and “Variance”. Do not be disheartened or discouraged if the results appear pessimistic at this point. Your only goal at this stage is to be certain that you have all of your items listed.
Note: Steps 2 and 3 are performed only when using our budget plan for the first time. Thereafter, it is simply a 3-step process.
Step 2: This is the most critical and the most overlooked step by many people. It is the step which differentiates our plan from the majority of others which emphasize cutting your quality of life to save a buck. Remember the theme: “Cut only your costs, not your enjoyment”. This crucial area requires some upfront effort and will be well worth the time. Our Budget Cutters section will be an enormous help. In this step you will permanently cut the “fat” (overpaying) and this is the foundation upon which all of your future budgeting success depends. As you discover big savings on the payouts that you have already been making, this money will fall to the “bottom line”, your pocket…where it belongs. Take your time and review the deals that we have listed, as well as any deals that you may find on your own.
When you have good estimates for your cost-reduced budget figures, enter these figures in the New Budget column on the Comparison Shop Form. This is a simple 3 column form with the headings: “New Budget”, “Original Budget” and “Variance”. Enter the information from Step 1 in the Original Budget column and figure the variances. This will illustrate your newfound savings by category.
Note: This step may take some time before you have whittled down every one of your expense categories. Do not fret, use your best estimate at this point and adjust your figures as you move through later months. If you are in a dire hurry to get your budget done immediately, skip Steps 2 and 3 for now and revisit them later. Bear in mind the importance however, as this is the step which puts money back into your pocket.
Step 3: Adjust your budget and re-apply your newfound savings to some of your critical categories: Debt (particularly credit card debt), savings accounts and “fun” spending. These figures are entered in the New Budget column of the Budget Readjustment Form. This is a simple 3 column form with the headings: “New Budget”, “Original Budget” and “Variance”. Example: If you have been making only the minimum payments on your credit cards, increase these payments immediately for the sake of your long term financial health. Credit card interest is a killer and the longer these debts exist, the more damage it will do to your cash flow. Equally as important, comparison shop your current cards for better deals concerning interest rates and cash-back options. Enter your changes in the New Budget column. The goal here is to maintain virtually the same bottom line after you have readjusted your categories. These are now your official budget figures.
Step 4: At the conclusion of the first month, enter your actual spending in the Actual column of the Actual vs Budget Form and your newly budgeted figures in the Budget column of the form and figure your variances. This form is identical to the one in Step 1. This is your report of how well you performed for the month. Use this first month as your stepping stone for the future, with steady progress as your goal.
Step 5: This is the step that ties it all together: The Weekly Budget Form. This is a simple 3 column form with the headings: “Actual”, “Budget” and “Variance”, broken down by week. This form will be an immeasurable help in planning the timing of your bills and income. This form is completed much in the same manner as the others but is organized by week and due dates to ensure that your budgeting process will flow without any shortfalls in funds. Before the month begins, fill in all of your Budget data (according to your due dates) in the Budget column of the Weekly Budget Form.
The key here is to make certain that the figure labeled Gain or (Loss) for the month (at the bottom of the form) in the budget matches the figure labeled Balance in the budget column of your monthly Budget Form. It is imperative that these two figures are in sync before the month begins. At the completion of each week, fill in your actual data in the Actual column. When the month is complete, the actual and budget figures on the last line of the Weekly Budget Form should match the actual and budget figures on the last line of the Monthly Budget vs Actual Form. You will now have completed reports on a weekly and monthly basis for the month just ended.
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Michael Wein is the webmaster and chief writer for [http://www.betterwaystoday.com], a consumer-oriented web site dedicated to helping every day people. The web site features articles, tips, tools and information designed to improve one’s financial life immediately.
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