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You Need a plan
by Keith Rawlinson
Volunteer Budget Counselor
plan = budget
In order to get ahead, you've got to have a plan.
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
that plan is called a budget. Yes, I know, everyone hates the
word budget. It sounds like a lot of work. Well
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
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
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
to devise a plan (budget), then you will be in debt and broke like most
other Americans. The choice, as always, is yours.
here's the good news: the work it takes to devise a budget is
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,
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
financially. Do you know how much you spent on
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
you spent on groceries last month, was it too much? Was it
right? Could you have spent more without causing future
difficulty? Without a budget, you have no way of knowing.
This same concept also applies to eating out, going on
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
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
and then save to become wealthy. I don't know of any people
became wealthy, and stayed that way, without a plan. I do know
many people who became broke and stayed that way without a plan.
Want to be out of debt and wealthy? Then you need a
How do you create a
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
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
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
things I'm teaching you about creating a budget. Only
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
not have a plan and that is why
most people are broke and financially stressed. I want you to
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.
exactly what your monthly take-home pay is. Take-home pay
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,
monthly take-home pay is the same as your paycheck. But what
you are not paid once per month?
If you are paid once per week, and your paycheck amounts are
about the same, then just multiply your paycheck amount by
to get your monthly take-home amount.
If you are paid twice per month, then of course you would
paycheck amount by two.
If you are paid every two weeks, then it gets a little bit
Take your paycheck amount and multiply it by 26.
divide that answer by 12.
If your paychecks are never the same amount and are usually
different, then add up what you brought home for the entire year last
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
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
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
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.
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
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
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,
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, disability insurance, umbrella liability, etc.
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.
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
of your take-home pay. Not so simple is doing the actual
calculations. Not terribly difficult, but a bit
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
amount of money you actually bring home. We don't care about
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
As you look down the column for your take-home pay amount,
see percentages for each of the budget categories I described above.
number is in percent and has the % symbol. The second number,
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
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
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
in column 2, except for the "other" category. When you do
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
percentage guideline (the number in parentheses) for each of the budget
categories in column 1. Go back to the percentage guideline
and go down the column for your take-home pay level. Take
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
Now, just do the math for each row (budget category).
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
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
don't) just leave "other" blank.
Now, if you have an amount written in for "other," you must
enough from all of the various categories to equal the amount you wrote
in for "other." In other words, if you have an "other"
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
the "other" category, don't change
anything at this point.
Next, add up column 4 all the way down and write the
the line labeled "Total of all Category Spending amounts" at the bottom
form. If everything is balanced, the amount written on that
should be equal to, or very close to, your monthly take-home pay
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
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
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
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
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
is still balanced. It should be equal to, or very close to,
take-home pay amount. "Very close" means within a dollar or
All of the amounts you now have written in column 4 represent
ideal amount you should be spending in each of the categories.
Since almost no one lives by an ideal budget, you have to
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
On this survey are listed all of the budget categories along
sorts of things that go into each category. What you need to
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
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
them by twelve to get the monthly amount. Any other
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
you do not have, just put down zero. Keep in mind that this
survey is a 'snapshot' of what you are spending right now.
down what you are actually spending; not what you hope to spend or
think you should spend. You need to be honest with yourself
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
Figuring out and writing down all of your amounts for this
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
be broke. If you don't want to be broke and financially
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
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
and under "Total Monthly Spending," write in the circled
from your survey for each category. In other words, fill in
spending analysis with the totals from your spending survey.
Now, total up all of the amounts on the spending analysis and
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
line 1 (line 2 -
write the answer in on line 3 labeled "total take-home pay - total
categories." Write in exactly the number you got whether it
positive or a negative number. Look closely to see if your
is a positive or negative number.
If the number on line 3 is negative, then this number
much more you are spending than you actually bring home. If
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
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
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.
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.
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
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.
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.
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.
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
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.
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
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
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
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.
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.
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.
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
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
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
Also, if you have debt to get rid of, try to put as much
you can into the 'Debt' category. Be realistic about it
Don't try to put so much into the 'Debt' category that you do
have enough to live on. Putting as much money as you can toward your debt may make the budget a bit
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
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
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.
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
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
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.
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
work? Yes. Is it fun? No. Is it
Absolutely! Remember that most people would never
effort to do all of this. That is why most people are
in debt, broke, financially stressed and will never be
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
wealth is very unusual. Living without financial
very unusual. You need to be very unusual if you want these
things! Be unusual! Be better off! Build
Create a budget!
The plans of the diligent lead
surely to having much.
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This article copyright
© 2007 by Keith C. Rawlinson
(Eclecticsite.com). All rights reserved.
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