Put simply, a budget is “a plan for the coordination of resources and expenditures” (“Definition of BUDGET”, 2021). Your resource is your income and your expenditures are the purchases you make. More specifically, it is the “amount of money that is available for, required for, or assigned to a particular purpose” (“Definition of BUDGET”, 2021). Basically, a budget is a spending plan that maps out the amount of income versus the amount of expenses during a specific period of time. Many bills such as housing costs, utilities, subscriptions, and more are due on a monthly basis so the typical budget is prepared for an entire month.
Budgets can come in all shapes and sizes, but it is important that all budgets are written. For some, writing may mean keeping a digital copy or using an app, for others this looks like physically writing down budget with pen and paper.
“A written spending plan for your money that includes giving, saving, and spending is essential to achieving financial freedom.” – C. Pete Benson
Preparing a Budget
Before you write out your budget you need to write down your goals. Short term and long term goals are important and will play a part in how you create your budget. Think about the goals you have. Common goals include purchasing a home and/or car, earning a degree, owning a business, writing a book, vacationing, traveling the world, and many more. Some of these goals should be saved for (education and travel) while others need to be paid for (home and cars). If you implement your goals into your budget, you maximize the potential of accomplishing them when and how you want. That’s really what budgeting is all about; creating a plan to accomplish your goals, hopes, and dreams.
A key element to preparing a budget is to do so before you actually receive any income, so before your next paycheck and before the month begins. This is crucial because you are not tempted to spend your earnings before creating a plan for how you really want to spend them. Determine all types of income you will receive such as wages, gifts, refunds, etc. (Dalton et al). All that money that comes to you should be considered income. This includes $5 you find on the sidewalk. This should be treated as income, not random money that comes into your wallet and right back out.
A common technical issue is that some individuals do not know what their income will be before they receive it. This can occur when a person is paid by the hour, by the contract, or by commission. An easy way to work through this bump in the road is to look at previous income for pay periods and take the average of those to estimate what your income will be this coming payday. Another way is to track your hours and multiply it by your hourly rate to determine an estimation for your upcoming income.
TITHES & GIFTS
Once you have determined your budgeted income, you can move on to tithes and giving. Tithing is a command brought to us in the Old Testament and mentioned again as a something Christians should do in the New Testament. Deuteronomy 14:22 states: “Be sure to set aside a tenth of all that your fields produce each year.” Again in Proverbs 3:9 it says: “Honor the Lord with your wealth, with the first fruits of all your crops.” While Christians no longer set aside produce anymore as an offering to the Lord, we set aside the first 10% of our income to give back to the Lord through our local church as a tithe. This is why tithes are recorded just below income on the budget. Additional gifts after tithes such as donations, sponsorships, etc. can be recorded below the tithes.
By including a section to save a portion of your money, you are able to visually and physically allocate funds for the future. Savings can be on a pre-tax basis from your payroll deductions like retirement. It can also be a post-tax basis from your net income by putting it aside for an emergency fund, your next car, your next house, or a vacation. These post-tax savings goals are known and unknown upcoming expenses. Known expenses such as a house down payment are simple to save for as you know how much money will be needed for the expenses. It is crucial to prepare for the unknown through an emergency fund although it is slightly more difficult to plan for emergencies that may occur. An emergency fund is meant to cover unforeseen financial expenses such as medical bills, plumbing problems, a car breakdown, and so forth. Financial planners recommend creating an emergency fund that covers at least 3 months of month non-discretionary expenses. Read emergency funds for more information.
Debt payments include mortgage payments, auto loans, student loans, credit cards, and any other outstanding account balances. For more information check out debt management for strategies and tips on how to control debt instead of letting it control you.
After debt payments, you’ll list out all of the insurance payments you have for one month. Insurance payments typically include renter’s or homeowner’s insurance (unless it’s added in to the monthly cost), auto insurance, life insurance, and health insurance. There may be more in your life, so if there are be sure to add them to your budget!
Bills and living expenses can often be the main focus of a budget as they consist of the primary expenses that individuals (young and old) experience. Some financial planners do not separate bills from expenses, however for the purpose of this article they have been separated. The distinguished items allow individuals to prioritize their expenses and clearly see what expenses are discretionary (non-essential) and non-discretionary (essential). All bills are non-discretionary which basically means they are nonnegotiable. No matter what, these expenses must be paid each month.
These expenses are purchases you make in relation to your lifestyle. How many times you eat out and what grocery stores you shop at determine the amount of money you spend on food. Same with the type of car you drive and the commute to work also contributes to how much you spend on gasoline in a month. Food and transportation specifically are month non-discretionary expenses while the rest shown are discretionary. This means that other than food and transportation the remaining items could be eliminated from the budget because they are not essential.
- Food (smart to separate groceries from eating out)
- Transportation (gasoline and maintenance for vehicles)
- Gym memberships
Understanding the difference between essential (non-discretionary) and nonessential (discretionary) expenses will help you in the event of loss of income when you no longer can afford all the usual items in your budget. Read emergency funds for more information.
“Planned money accomplishes more than unplanned money.” – Joseph Sangl
Evaluate, Monitor, and Adjust
Professional financial planners recommend sticking to budget benchmarks for each category in your budget. These benchmarks are designed to help individuals from over or under spending in a category (Dalton et al). For example, if a person was spending 20% on food a month, that would be over the recommended amount to spend for food. Likewise, if you are spending 15% of your income on housing, you are under the benchmark! This means that you could be spending more on housing and therefore own a better or bigger house that fits your needs. Read through the benchmark percentages for each category and evaluate your current written budget. What places are you over or under spending? Adjust as you need to better fit within the recommendations. Also, monitor your actual spending during the month compared to your projected amounts. Adjust as needed here too. It is important to be realistic with yourself and understand that you may need to make changes that best match your lifestyle. That does not mean you make poor financial decisions though, it just means maybe you do not have a house payment so you can afford to save or give more as one example.
Professionally Recommended Budget Benchmarks:
- 10% Giving
- 10% Saving
- 25 – 35% Housing
- 5 – 10% Utilities
- 10 – 15% Transportation
- 5 – 10% Health
- 10 – 25% Insurance
- 5 – 10% Debt
- 10 – 15% Food
- 5 – 10% Personal
- 5 – 10% Entertainment
- 5 – 10% Miscellaneous
You may be new to budgeting or you may be looking to try a new way to budget. Either way, remember that it takes practice and self-control to make a budget work properly. In this case, practice does not make perfect. With practice, your budget will get better and better each time you write and follow one, but it will never be “perfect” per say. That is because life throws you surprises and sometimes it is not easy to face these surprises even with all the planning in the world. Experts state that it takes 3 months to become use to a budget (Dalton et al). This means that if you are rocking with your budget and you get a raise, it will likely take you 3 months to get use to your new budget. Same with if you buy a car and now have a car loan payment, it will take you about 3 months to get use to making those payments and making it a part of your budget. Practice, practice, practice, and do not give up! The results are well worth the time you put in to planning your money.
Hint: It’s super easy to link your bank account and the app tracks spending in the proper category to tell you how you’re doing.
Local financial educator, Joseph Sangl, has many helpful tools on his website that can help you get started with a budget template (https://www.iwasbrokenowimnot.com/tools-budgeting).
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Benson, P. (2017). From Failure to Financial Fitness.
Dalton, Michael A et al. Fundamentals Of Financial Planning. 4th ed., Money Education.
Definition of BUDGET. Merriam-webster.com. (2021). Retrieved 16 March 2021, from https://www.merriam-webster.com/dictionary/budget.
Sangl, J. (2009). What everyone should know about money before they enter the real world. NIN Publishing.