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You Need a plan

by Keith Rawlinson
Volunteer Budget Counselor

In finances, plan = budget

In order to get ahead, you've got to have a plan.  There is absolutely no way that I know of that you can get ahead, get out of debt and become, and stay, wealthy without a plan.  In the financial world, that plan is called a budget.  Yes, I know, everyone hates the word budget.  It sounds like a lot of work.  Well guess what, it is a lot of work!  Getting out of debt is a lot of work.  Becoming wealthy is a lot of work.  If it were easy, everyone would be wealthy!  Most Americans today are in debt and broke.  If you don't want to be like most Americans, you have to be willing to put in the effort that they aren't.  You have to be willing to put in the work it is going to take to create a budget and then follow it.  If you are not willing to put in the effort to devise a plan (budget), then you will be in debt and broke like most other Americans.  The choice, as always, is yours.  But here's the good news:  the work it takes to devise a budget is the hardest on the first budget you create.  If you ever have to rework your budget in the future, or create a totally new budget, it is much, much easier since you've already done one.  So, no matter how much trouble creating your budget seems at first, remember that it gets easier with time.

Why you need a budget

Without a budget, you have no way of knowing  where you are financially.  Do you know how much you spent on groceries last month?  Do you have the receipts so you can add it up and find out?  Most people don't.  And if you do know how much you spent on groceries last month, was it too much?  Was it just right?  Could you have spent more without causing future financial difficulty?  Without a budget, you have no way of knowing.  This same concept also applies to eating out, going on vacations, clothing, transportation, housing, etc.  If you are lucky, you might have a pretty good idea of where you are in one or two of these categories, but there's no way, without a budget, that you can know where you are in all of them.  That is why you need a budget.  A budget allows us to know how much we have spent, and how much more we can or cannot spend.  It tells us where our money has gone.  It makes sure we have money to meet future bills and expenses.  It shows us where we can free up money to pay off debt and then save to become wealthy.  I don't know of any people who became wealthy, and stayed that way, without a plan.  I do know of many people who became broke and stayed that way without a plan.  Want to be out of debt and wealthy?  Then you need a budget.

How do you create a budget?

I use three different methods of creating a budget:  a difficult way, an easier way, and the easiest way.  The more difficult of these methods you are willing to use, the more complete, efficient and effective your budget will be.

Creating a simple, basic budget isn't really all that difficult.  It is a lot of work and is a bit time-consuming, but not difficult.  In this article I'm going to show you exactly how to create a very basic budget, and I'll talk about how to use it to become debt free and wealthy.  Keep in mind that most people won't do the things I'm teaching you about creating a budget.  Only about 8% of Americans even have an actual plan for their family finances and only 3% have a plan and have put it in writing.  Most people do not have a plan and that is why most people are broke and financially stressed.  I want you to be different.  I want you to be debt free and wealthy.  So, let's start with the most difficult method of calculating a budget:

The Difficult (and most effective) Way.

Step 1:  Figure out exactly what your monthly take-home pay is.  Take-home pay means what you have left after all deductions such as taxes, social security, retirement contributions, union dues, etc.  You calculate your monthly pay based upon the amount that is actually written on your paycheck.  If you are paid once per month, and few of us are, your monthly take-home pay is the same as your paycheck.  But what if you are not paid once per month?  

If you are paid once per week, and your paycheck amounts are always about the same,  then just multiply your paycheck amount by four to get your monthly take-home amount.

If you are paid twice per month, then of course you would multiply your paycheck amount by two.

If you are paid every two weeks, then it gets a little bit trickier.  Take your paycheck amount and multiply it by 26.  Then, divide that answer by 12.

If your paychecks are never the same amount and are usually quite different, then add up what you brought home for the entire year last year and divide by 12.  Remember to use your actual take-home pay after deductions and expenses.

If your pay is really irregular, such as with commission sales, then you have to do a bit more figuring than in these other cases.  The best way is to add up what you brought home for the entire last year and divide it by 12.  Or, you can budget on what your paycheck usually is.  Or, you can ignore your highest income month for the past year and ignore your lowest income month for the past year, then do your budget on the average of the rest of them.  Add them all up, and divide by how many there were.  In other words, if you received irregular pay throughout the entire year, ignore the month you made the most money, ignore the month you made the least money, add up the other 10 months, then divide that total by 10.

Step 2:  Figure out how much is a reasonable amount to be spending in each category of your budget.  Let's talk about those categories for a moment.  Budget categories are simply the areas of your life that require you to spend money.  A simple, basic budget consists of the following budget categories:

Any and all amounts spent on anything housing-related.  Your mortgage/rent payment, your utilities, your taxes, home owner's insurance, home repairs, maintenance, etc.

Everything you spend on getting around.  Car payment, bus fare, taxicab expenses, car insurance, oil changes, taxes, licenses, gasoline, tolls, repairs, and eventual replacement of a car.

Everything you spend at the grocery store and for pet food.  Note that this does not include money spent eating out.

Money you spend on fun.  Vacations, eating out, gift-giving (including Christmas), hobby supplies, sporting activities, cable TV, subscriptions, etc.

Money you spend on any kind of clothing other than gifts.

Health insurance payments, co-pay, prescriptions, over-the-counter medications, doctor visits, emergency room visits, eye care, glasses/contacts, medical supplies, testing supplies, etc.

Any money spent that just does not fit into any of the other categories.

Any insurance other than health, home or auto.  Life insurance, cancer insurance, disability insurance, umbrella liability, etc.

Education/Child Care
Any money spent on Child Care along with any money spent on tuition, books, education-related expenses for adults or children whether for public, private, college, or trade schools.

Debt payments
Any debt payment other than car payment or mortgage.  This includes student loans, credit card payments, cash advance payments, equity loans, past-due medical bills, signature loans, same-as-cash payments, back taxes, etc.

Money you put into the bank regularly for future emergencies.

Money you invest in stocks, bonds, bank CD's, mutual funds, etc. in order to make the money grow to meet future wants and needs.  Putting money into this category is how one becomes wealthy.

So how do you figure out how much is reasonable to be spending in each category?  Simple, each category is just a percentage (or portion) of your take-home pay.  Not so simple is doing the actual calculations.  Not terribly difficult, but a bit time-consuming.  The first thing you have to do is use the percentage guideline form to figure out what percentage you should use for your level of take-home pay.  Look along the top of the chart where it says "Monthly Take-home Pay" and find the one into which your income falls.  Remember, this is take-home pay.  We only care about the amount of money you actually bring home.  We don't care about how much you earn per year or what your gross income is.  All that matters is the amount of money you actually bring home in a month's time.

As you look down the column for your take-home pay amount, you will see percentages for each of the budget categories I described above.  One number is in percent and has the % symbol.  The second number, the one in parentheses, is the decimal equivalent of that percentage.  The number inside the parentheses is the one we'll be using here--in each case, it is point something (.##).  Now go on to the Budget Totals worksheet and print out a copy.  You will most likely be making changes on this form as we go along, so make sure that  you fill out this form in pencil.  Trust me, if you try to do this in pen, you will probably either make a big mess of the form, or be printing out another one and starting over.  Please, fill this form out in pencil.

Start by writing in your monthly take-home pay amount all the way down in column 2, except for the "other" category.  When you do this, column 2 should have the same take-home pay amount written all the way down for each budget category shown in column 1.

On the Budget Totals worksheet, you will  be filling in the percentage guideline (the number in parentheses) for each of the budget categories in column 1.  Go back to the percentage guideline form and go down the column for your take-home pay level.  Take each of those decimal numbers in the parentheses and write them into column 3 of the Budget Totals worksheet for each category.  At this point, don't worry about any categories that don't apply to you, every category should have a number written into column 3 except for the "other" category.

Now, just do the math for each row (budget category).  Multiply the monthly take-home pay amount in column 2 by the percentage guideline in column 3, and write the answer into column 4 for each budget category except the "other" category.

If you have a budget category in your life that just doesn't fit into any of the other categories (most people do not), write the amount of money you spend on this additional category for "other" in column 4.  If you don't have one of these "other" categories in your budget (most people don't) just leave "other" blank.

Now, if you have an amount written in for "other," you must subtract enough from all of the various categories to equal the amount you wrote in for "other."  In other words, if you have an "other" category with $100 in it, then you must take away small amounts of money form the various categories to add up to $100.  As you subtract small amounts from each of the categories to make up for the amount in "other," be sure to erase the amount in column 4 for the category you are subtracting from and write the new amount back into column 4. This is why we do this form in pencil. If you have no amount in the "other" category, don't change anything at this point.

Next, add up column 4 all the way down and write the amount on the line labeled "Total of all Category Spending amounts" at the bottom of the form.  If everything is balanced, the amount written on that line should be equal to, or very close to, your monthly take-home pay amount.  "Very close" means within a couple of dollars.  If they are not equal or very close, add up column 4 again to make sure there wasn't a math error.  If the amount still doesn't come out right, then go back and multiply out each row again to make sure column 4 is correct for each individual category.  Still not right?  Then add or subtract bits of money in the various categories to make up the difference.  Keep adding, subtracting and totaling up column 4 until the total is equal to, or very close to, your monthly take-home pay amount. 

Now, if you have no debt payments other than a mortgage on a home, take the amount in column 4 for the "debt" category and spread that amount over any other categories you think might need more money by adding a little here and a little there to each of the categories you wish to increase, then reduce the debt category to zero.  Be sure to write in the new spending amount in column 4 for any budget categories you are adding to.  Next, total up column 4 again to make sure everything is still balanced.  It should be equal to, or very close to, your take-home pay amount.  "Very close" means within a dollar or two.

All of the amounts you now have written in column 4 represent the ideal amount you should be spending in each of the categories.  Since almost no one lives by an ideal budget, you have to keep in mind that these amounts in column 4 are just a starting point.  We use this starting point to compare what you are actually spending to what you should be spending in each budget category.  For this, you will need to take a look at the financial survey.

On this survey are listed all of the budget categories along with the sorts of things that go into each category.  What you need to do is go through the survey and write in what you spend on a monthly basis for each of the items listed.  Not all of your expenses will be monthly, so if you have something like taxes or insurance that is paid twice per year, just divide it by six months to get the amount per month that you would have to save to meet that expense when it comes due.  If you have expenses that come up once per year, just divide them by twelve to get the monthly amount.  Any other non-monthly expenses; just take the amount, and divide it by how many months it covers.  For example if you had a tuition payment that was due four times per year, that would mean you were paying it every three months.  So, you would divide the tuition payment by three to figure out what you would need to put away each month to meet the tuition expense.  For gift-giving, figure out what you spend in a year on all gift-giving (birthdays, Christmas, special occasions, etc.) and divide that amount by 12 to get the monthly amount needed to cover the whole year's worth of gifts.  If there are expenses listed on the survey that you do not have, just put down zero.  Keep in mind that this survey is a 'snapshot' of what you are spending right now.  Put down what you are actually spending; not what you hope to spend or think you should spend.  You need to be honest with yourself for this to work.  If you have any expenses that are not on the survey, figure out which category you think they should go into and write them in.  This survey needs to show everything you spend--everything!  Figuring out and writing down all of your amounts for this survey might take quite a while.  It is not uncommon for this step to take one to two hours.  But, it is also not uncommon for people to be broke.  If you don't want to be broke and financially stressed for the rest of your life, take whatever time is necessary to complete this survey so that you can create your budget (your plan.)

Once the survey is completed, add up all of the monthly amounts you have for each category, write them in next to the name of the category right on the survey, then circle it so it is easier to keep it separate from all the other amounts written on the survey.

Now go to the spending analysis worksheet and under "Total Monthly Spending,"  write in the circled amounts from your survey for each category.  In other words, fill in the spending analysis with the totals from your spending survey.

Now, total up all of the amounts on the spending analysis and write the answer on  line 1 labeled "Total of all categories."

Next, write your monthly take-home pay on line 2.

Finally, take the amount on line 2 and subtract from it the amount on line 1  (line 2 - line 1)  and write the answer in on line 3 labeled "total take-home pay - total of all categories."  Write in exactly the number you got whether it is a positive or a negative number.  Look closely to see if your answer is a positive or negative number.

If the number on line 3 is negative, then this number represents how much more you are spending than you actually bring home.  If this number is positive, it represents extra money you have available for debt elimination or saving.  For most people in America, this number will be negative.  That's what causes all the financial stress--spending more than we bring home and having no savings.  If the amount you have on line 1 is larger than the amount on line 2 then your answer should be a negative number.

Your goal now is to balance things out so that  the number on line 3 is zero.  You need to subtract small amounts from the various categories on the spending analysis worksheet and add those amounts to line 3 in order to make a negative number zero.  This is what most of you will have to do.  If the number on line 3 is positive, then divide that money up into the various categories to bring it to zero. In either case, work in pencil, and make the changes right on the spending survey, erasing as necessary.

The Easier (but less effective) Way.

In this method, you first figure out your monthly take-home pay just as you did in step 1 above.  Now, instead of using all of the different worksheets that were used in the difficult method, you are only going to use the Spending Analysis worksheet.  Make sure that you fill out this sheet in pencil.  This will not work out very well if you do not use pencil.

First, write your monthly take-home pay amount on line 2 of the Spending Analysis worksheet.

Next, fill in what you spend per month in each of the categories listed on the form.  For example, figure out what you spend each month on housing.  Include anything and everything that is related to housing such as mortgage/rent, utilities, insurance, taxes, repairs, maintenance, etc.  Then write that amount in for the Housing category.  The amount doesn't have to be to the penny, but try your best to include all expenses.  Then, do the same for each of the remaining categories.  Just figure out about what you spend per month in each of those categories and write it in.  Make sure you include any and every expense related to each category.  If there are any categories in which you spend nothing, then write in zero for now.

Be sure to include any expenses which don't come up every month but will be due periodically.  In other words, take any non-monthly expenses and divide them by the number of months before that expense is due again.  For example:  you pay $600 every six months for property taxes on your house.  $600 divided by 6 months = $100 per month that needs to be saved toward the property taxes.  So, that $100 per month would be added to your monthly expenses for housing.  Another area this happens frequently is insurance.  If you pay $225 every three months (quarterly) for auto insurance, you would divide that $225 by 3 months = $75 per month.  You would then add $75 per month to your transportation category to make sure that enough is being saved for the next insurance payment that comes due.

Now, add together all of the "Total Monthly Spending" amounts for all of the categories, and write that amount on line 1 at the bottom of the form.  Then,  subtract that total from the total take-home amount on line 2.  In other words, enter the amount from line 2 into a calculator, press the minus button, then enter the amount from line 1 and press the equals button.  Then, write this amount on line 3.  Look very carefully since this number might be a negative number (a minus sign in front of it.)  If it is, be sure to include the minus sign when you write it on line 3.  For most people, it will be a negative number.

Finally, the hard part.  You now have to get this budget to balance.  In other words, you have to rework the numbers to get line 3 to be zero.  If the number on line 3 is a positive number, then for now, just write that amount into the Savings category and add everything again in the same way you just did.  

If the number on line 3 is negative, you are spending more than you take home and your budget is not balanced.  This is what most commonly happens.  It's nothing to be ashamed of, it is just a tool to help you find, and deal with, any overspending.  If the number on line 3 is negative, you have to start making spending cuts in the categories to get the budget to balance.  This is not easy and is not fun.  That's why most people won't do it, and that is why most people are financially stressed and unable to get ahead.

Look for anything you currently spend money on that you could do without.  Find ways to reduce what you spend in the various categories.  You generally won't have to reduce every category, but you want to reduce every category that you realistically can.  I say 'realistically' because you have to have food, clothing, housing, medical care, etc.  You can't just reduce categories to an unrealistic amount just to get the budget to balance.  This is part of what the 'Difficult' method does.  All of those extra steps make it easier to see where you might be overspending.  All of those extra steps are why the 'Difficult' method is better and more efficient; but they are also why it is more difficult and time-consuming.

As you find things you can cut out of your budget, erase the amount for that category and write in the new, reduced, amount.  Then add all of the categories again, enter the amount on line 1, then do the subtraction and fill out line 3.  If line 3 is not zero, then go back and make more changes until it is zero.  Once line 3 is zero, your budget is balanced.  It may not be practical yet, but it is balanced.

Some notes on the 'Easier' method.

Once your budget is balanced, it still may not be practical; that is to say, it will probably still not work perfectly.  There are always going to be expenses you forgot, new ones that come up, changes in pay, etc.  As those things come up, just go back through and re-work the budget exactly as you just did.  Keeping the budget balanced will be an ongoing project.  Just keep in mind that it gets easier and better over time.  It may take several months, but it will start to work itself out and become practical as long as you are willing to stay at it; but, if you don't stay at it, I can guarantee that it will not work out.  If you want to get ahead financially, then you have to be willing to make the effort.  That effort is what will eventually put you ahead of the 70% of Americans living paycheck to paycheck.

Make sure that something is going into the Savings category.  Being able to save at least a little bit each and every month is what gives you the ability to eventually get out of debt and get ahead.  I don't care if it's just a dollar per week for now--make sure you are regularly putting something into savings.

The Easiest Way

The easiest way to create a budget is using computer software.  You enter your income information, and the software calculates a very basic budget for you.  This method is the easiest, but also the least effective.  That is because using software has the effect of separating you from the process of creating a budget.  You get the final numbers for each spending category, but you may not fully understand how they were calculated; thus, you have less understanding of your spending habits and how to balance your budget.  Still, using software to calculate a budget is nonetheless very helpful and is most certainly better than having no budget at all.  Besides, calculating a budget using software is easy enough that more people would be willing to do it that way who would not be willing to spend hours filling out worksheets.  

It is oftentimes a good idea to do your worksheet budget, then do a software budget to see how they compare.  In so doing, you may gain some insights or discover mistakes.

Some software is more complicated than others.  I have seen some that is so confusing that I wouldn't even want to use it; so, I'm sure not going to recommend it.  On the other hand, I have seen some that is very basic and, although not very detailed, does give you the information you need to get started on creating a practical, workable budget.  Use this very simple, online budget calculator to get you started.

This is very important

Not every budget category will apply to everyone.  There may be spending categories that don't apply to your situation, or there may be categories you need which are not included.  Just eliminate categories you don't need, add categories you do need, and add/subtract from the various categories until your budget balances.
Regardless of how you calculate your budget, it is critical that you not have zero in the saving category.  There is no way a budget can work if you are saving nothing on a regular basis.  If you have no savings, any unexpected expense that comes along will make it impossible for your budget to work.  Even if it is not a large amount at this time, make sure that the most you can manage is going into savings each and every pay.  Saving is the tool you will need in order to get rid of debt and start building wealth.  Keep in mind that, however you create your budget (spending plan), it is just a starting point and will need to be adjusted and tweaked as you go along.  It is not only possible, but likely, that your budget will not work out very well for the first few months.  Just stay with it, re-balance and adjust your budget as needed, and after a few months it will start to work.

If you haven't done so yet, make sure when you are finished with this article, you read the article entitled You Need Savings.  Also, if you have debt to get rid of, try to put as much money as you can into the 'Debt' category.  Be realistic about it though.  Don't try to put so much into the 'Debt' category that you do not have enough to live on.  Putting as much money as you can toward your debt may make the budget a bit tight for now, but once the debt is all paid off, this will be extra money you can use to have fun and to build wealth.  Putting as much as possible toward your debt each month is what allows you to get it paid off.  The more money going into your debts, the faster the debt is gone.

Also, especially if you are just getting started, and/or things are very tight, do not worry about putting any money into the 'Investment' category.  As long as you are putting something into savings every month, the 'Investment' category can be zero.

So what now?

Once you have your budget balanced, and have at least a small amount going into the 'Savings' category, the amounts for each category represent your balanced budget.  If you spend no more in each of the categories than what you have written down, you will not be going any deeper into debt.  To keep track of your spending, you can use a small notebook to write down what you spend every month and keep a running total to make sure you don't go over the amount you've budgeted for the various categories. In your notebook, have a page for each category and make sure that as you spend money, you write it down on the page for the category that money would come out of.  I know that following all of the steps needed to create a budget can be tedious and confusing for a lot of people.  If you truly are not able figure this out for yourself, there is help available at no charge.  Just go to the Crown Financial website and click on Find Help.

A budget will allow you to get control of your money, freeing up the money you will need to save for emergencies, pay off debt, and ultimately invest to build wealth.  It is important to understand that a budget usually takes some time to build up the money you will need for upcoming, regular expenses.  Most budgets, however, will start to balance and function fairly well within six month or so.  In the next numbered article, we are going to talk about having savings for emergencies.  It is this emergency savings that will pick up some of the financial slack while you are waiting for the budget to start to operate smoothly.

Is creating and using a budget easy?  No.  Is it a lot of work?  Yes.  Is it fun?  No.  Is it worth it?  Absolutely!  Remember that most people would never make the effort to do all of this.  That is why most people are in debt, broke, financially stressed and will never be wealthy.  If you don't want to be like most people, you have to be willing to do things that most people wouldn't.  Having a written budget and following it is very unusual.  Getting out of debt is very unusual.  Building and keeping wealth is very unusual.  Living without financial stress is very unusual.  You need to be very unusual if you want these things!  Be unusual!  Be better off!  Build wealth!  Create a budget!

The plans of the diligent lead surely to having much.  

Proverbs 21:5

To learn a lot more about saving, investing, eliminating debt and becoming wealthy, please read the articles on the Financial Page.  There, you will find a veritable treasure of what to do and how to do it.
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This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.
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