Finance Roll

THE NEED FOR A GOOD BUDGET

One of the major causes of divorce is bad money habits. Finances are a difficult thing for many people to manage properly. Mismanagement has caused communication difficulties, tension, frustration, anger, resentment, and suspicion. Money has ruined friendships and debt has slain dreams and mired people in desperation.

For most of these people a simple understanding of the basics of budgeting would have saved them much anguish and grief. This article is meant to help you understand the practical theory behind having a good budget.

Most digital budget programs on the market today are actually nothing more than glorified check registers. They don't actually focus on the budgeting aspect properly.

To have a good budget you need these things:

1. The ability to pay for all your expenses with what you make. In other words, your expenses cannot exceed your income.
2. The character to let the budget be your boss. You must obey the budget!
3. Knowledge of the monthly average of every bill and every expense within a normal calendar year.
4. Common sense in regards to money.
5. And a strong desire to get your finances on the right track.

THE THEORY

This is not by any means the only way to do a budget. It is however, the simplest and, in my opinion, the most effective. Here is the basic theory of budgeting.

Imagine having a separate bank account for every bill you had. And for the sake of argument, let's say you get paid weekly at $400.00 a week. Each time you get paid, you would deposit a portion of that paycheck throughout ALL your bank accounts. You would put, perhaps, a $100.00 in rent, $100.00 in Groceries, $50.00 in gasoline, $25.00 in natural gas, $25.00 in electricity, $40.00 in tithe, and $60.00 in phone and internet bills.

Your entire weekly check is now distributed throughout the accounts. This assumes that you are getting paid weekly. If you get paid every other week, twice a month, or even monthly, you'll need to taylor this to fit. The concepts are the same.

Your budget needs to be set up on a 4 week month. Only three months out of the year will there actually be an extra paycheck (only for those paid weekly or every other week). The budget works best when you base it off of 4 weeks.

The theory is that you set aside a portion of your paycheck for each account or expense. When the bill comes due, the money has grown to pay off the expense. It'll be there when you need it. You won't have to scrounge around, try to stall until the next paycheck, beg, borrow, or steal. You always have the money set aside for the expense.

When Rent reaches $400, in the above example, you would then pay the landlord $400 and subtract that amount from your rent account. Some accounts, like groceries, are debited every week and often more than once a week. But it doesn't matter. You credit each account or expense with money every time you are paid.

When you go to buy groceries you simply look at your grocery account and see how much you can spend. In the above example there is $102. The $2 is left over from the previous week that was never spent. You can spend some or all of that $102 on groceries. What you don't spend this week, you simply allow it to roll over into the next week. As long as you don't spend more than $102 you won't be taking money that is set aside for rent or electricity!

Doing your budget this way tells you how much money you can spend in that category or expense. This keeps you from overspending and from taking money that needs to be set aside for another use in the future.

Step 1 - List every expense and debt you have.

Step 2 - Break them into categories, like Home and Household, Utilities, Vehicle, and so on.

Step 3 - Determine how much money you need for that expense on a monthly, 4 week, average. Some expenses, like natural gas, vary depending on the season. Take the average of an entire year and use that amount for your monthly budget.

Step 4 - Determine how much of your weekly paycheck needs to go into each account so that by the time the bill is due, you can pay it off (usually 1/4 of the amount due).

Step 5 - Every time you get paid, take 1/4 of the monthly amount needed and add it to each account.

Step 6 - Never spend more than is actually in the account. Always look at your budget to know how much you can spend in each area.

Step 7 - Subtract any payments or receipts from the appropriate categories.

Step 8 - Repeat steps 5-7.

A budget isn't a complex thing, but it does take discipline. You must let that budget become your boss. You must let it tell you if you can or cannot spend a certain amount of money.

You see, you don't actually open up a separate checking account for each bill. Instead you keep track of it either on paper or digitally. When you add up all the money in all of your accounts the total should equal what you have in your checking account.

There are 4 ways you can keep track of your budget accounts.

1. In envelopes. Use 1 envelope for every expense or account. Each week cash your check and divide the money up into your various envelopes. When you need money for, say gasoline, you open that envelope and see how much you can spend.

2. On paper, like a spreadsheet. You designate a page for each account, bill, or expense. You then draw columns. Start with how much you have in that account and add or subtract as necessary. Your money stays in the bank this way, but you are able to clearly see how much you can spend in each account.

3. On a computer via a spreadsheet. You follow a similar method as number 2. But here, you can use calculations of the spreadsheet to do the adding and subtracting for you.

4. Use a good budget program for your computer. A good budget program automates most of this process explained above.