Budget Basics: Part 2

As I stated in Part 1 of this post, when you start your budget you want to over estimate on expenses, and under estimate on income. Of course, doing this will make your budget much smoother. If you end up spending just a little bit more than what your actual expenses are, then, it's not a big deal, and if you end up getting more income than you thought, well that is always a good thing, of course.

Step One: Figure Out Your Expenses

Make two columns, one titled "Expenses" and the other one "Income." Work with your expenses first. Make sure to include everything, including Christmas savings, car registration fees (both of these can be split into twelve months so you don't have to budget for everything right now), groceries, gas, car insurance, life insurance, etc. Sometimes you might forget about something and only know about it when it comes out of your checking account. Don't panic, just make sure you add it into your budget. Here are some tips:

• Over estimate on gas, groceries, electricity, and other things that can fluctuate. As the saying goes, "It's better to have too much than not enough."
• As stated in the first part of this post, the extra amounts will roll over in the YNAB categories each month to make a reserve for when expenses are a little more than previous months.
• Make a "blow fund" account for you and your spouse, if you are married. This account should be small (we only put $25 in each of our blow fund accounts every two weeks) if you are still in debt. I will discuss the function of this a little further down in this post.
• Don't forget maintenance/repairs! Make sure you allow for such expenses. It doesn't have to be too much at first, but make sure you do budget something for both categories. Some of the larger expenses (transmission goes out, furnace stops working) will be covered in your emergency fund (I will discuss this in another post), but the oil is going to need changed in the car, salt is going to need to be added to the softener, etc. You will have small repairs, so make sure you budget for these.

After all of your expenses are written down, move on to Step 2...

Step 2: Figure Out Your Income

This may be a little more difficult to figure out if you don't have a steady income. My husband gets paid a certain amount every two weeks, but he usually gets a bunch of overtime, so we aren't sure what his paychecks will be, but we make our expenses according to normal paychecks, not overtime paychecks (again, under estimate income). If he ends up getting overtime, we use the extra toward debt, savings, a nice meal out, etc. If he doesn't, our expenses are still covered.

If you work part-time and only get a few hours a week, try to figure out what the least amount of hours you will get will be (i.e., if you are supposed to get 15-25 hours a week, figure out your paycheck based on a 15 hour week). If you work full time, but your paychecks still fluctuate from month to month, take the least amount you would make.

Don't forget to add your spouses income, too. I will be honest here, I do not agree with spouses who separate their incomes (I will end it there). And if you do separate the incomes, it doesn't mean you can't have a decent budget. Just make sure you know what you have to cover and your spouse has to cover.

Once this is done, move on to Step 3...

Step 3: To Freak Out, Or Not Freak Out?

Take a deep breath. Let it out slowly! This is the part where many people start to freak out because they realize that their expenses are much more than their income per month, especially when you add in Christmas savings, heating savings, car registration, etc., stuff that isn't normally spent per month but now you are trying to save for so credit cards and savings accounts don't have to be drained later. How in the world are we living like this? you might be thinking. This is what is called living paycheck-to-paycheck, and a majority of Americans live like this, and the amount of income doesn't matter. There are people who make $30,000 a year who live like this, and people making $3,000,000 a year who do the same. One just has more stuff than the other. And you most likely realize this isn't healthy at all.... stress, lack of sleep, marital strain, etc., can all come from this life style, especially when an emergency happens, like an injury that might put you out of work, loss of a job, loss of a spouse, transmission or engine blowing, furnace breaking down, and several other scenarios. These things will happen, you can count on that.

The good news is you are taking a step in the right direction by planning out a budget. The budget is the most important step you will make for your financial future. Everything revolves around this... from how much you can give to charity to how much you can invest to how much you can spend tomorrow at Starbucks.

Take a few more deep breaths and move onto Step 4...

Step 4: Figuring Out How to Decrease Your Expenses and/or Increase Your Income

Decrease Expenses

The easiest part here would be to decrease your expenses, but it might take some sacrifice. Do you really need the cable/satellite? Or that expensive cell phone plan? Or that vehicle you may have just bought? Or the gas hog? You might be answering, "Yes," to all of these questions, but the truth is you really do not need any of those. They are wants, not needs. I'm going to give some examples of how to get your monthly expenses down in a later post because I don't want this one to get too long. I will say somethings are not pleasant to do, but cutting temporarily will allow you to be more comfortable when you can have it later.

I will make a separate post about this, but one thing I do want to stress is never go cheap on insurance. Always make sure your insurance is adequate. I'll name some of the things we've done to make sure we're adequately covered in a separate post.

Increase Income

This one may be a little more difficult. You can sell something, have a garage sale, work some overtime if your work offers it, get a temporary (yes, I will stress that) second job, change your withholding status, have your kids get summer jobs to pay for their own gas/insurance for those months, and I'm sure there are several other things you can do to increase your income, but again, the easiest thing to do is cut expenses. If you are unwilling to cut your expenses, then you'll most likely have to find a way to increase your income, so you can always brainstorm ideas. I will make a separate post that goes over this more in depth, too.

Hopefully after this step you will find your deficit (if you had one) much smaller or perhaps disappeared if you can just cut out a few things or increase your income. It is at this point that you can move onto the final step of setting up your budget.

Step 5: Using a Tool to Input and Maintain Your Budget

If you have been reading this blog, you know I am a strong supporter of a budget software called You Need A Budget (YNAB). It is, in my opinion, the best budgeting software out there. It doesn't mean there aren't others that are nice, too, but I still prefer YNAB. It combines the zero-based and envelope methods all into one program, and you can generate reports to track your progress. Here is a video... if you want to check out the 7 day free trial, click here.

The more you will learn about this program, the more you will love it. It teaches you real budgeting with the ultimate goal toward real financial freedom.

Of course, you can always make your own spreadsheets, but it is incredibly time consuming. It's also difficult to add and take away categories, especially factoring in all the calculations and things you need to add in every time. YNAB is easy. It's clean. It's, again in my opinion, the best resource out there.

You simply take the categories you don't need away, and enter the ones you do need in. Then you enter your account balances and start budgeting. And then congratulate yourself for taking such a big step toward financial independence: setting up your budget.

Of course, there will be more explanation in the next post specifically on maintaining your budget through YNAB.