Context Is Key!
Let’s be honest – no two budgets are exactly the same. Everyone’ situation is different, from your income to expenses, from goals to priorities, there is no “one size fits all” answer.
That’s why understanding HOW to budget is vital. It’s puts you in control of your own wallet and your own life, allowing you to create the exact spending plan that’s right for you.
The first step, of course, is understanding what you have. That’s not just about how much money you make, but also what you need to spend every month and what’s left over as discretionary income. This is a great introduction to finding those numbers, if you haven’t already.
Using the spending plan model is quite simple, although it does require some effort on the front end and throughout the month (just like any personal financial system).
To get started, determine your monthly take-home pay (not your gross income before taxes, but your net income—the actual amount on your check or direct deposit).
Second, sit down and determine your fixed monthly costs. These are the expenses you currently have in your life that require some of your income every month—no questions asked. The actual monthly expense may vary (within reason) from month to month, but you know it is going to be there. It is fixed. For my family, we include the following list:
Utilities: Gas, Electricity, Water, Garbage
College loan repayment
Home Owner fees
After you have determined your monthly income and your monthly fixed costs, you can easily recognize your monthly discretionary income (the money that you have left over to spend as you desire). Simply subtract your monthly fixed costs (Step 2) from your monthly net income (Step 1). For example, if you have $500 per month left over after paying your fixed costs, you have $500 in discretionary income. The spending plan now allows you the opportunity to spend that $500 as you desire: golf clubs, cinnamon rolls, travel, entertainment, extra savings, or an 8.0 MP Underwater Video Camera. The choice is yours.
– via Becoming Minimalist
Now The Fun Part
Knowing how much you have to work with is the first step. After that comes making decisions about where your priorities lie and if/how you will spend the remaining dollars. Remember that not all purchases are created equal – for every new movie you want to see or vacation you want to take, there will also be unexpected necessities, like the new suit mentioned in this excerpt.
Having a spending plan in place helps put you in the driver’s seat so you not only can handle those unexpected necessities, but you can splurge on the fun stuff, too, without being worried that you’ll break the bank.
The goal of successful budgeting is learning to live within the bounds of your discretionary income.
Once you know exactly how much money you can spend, then you can go about the process of determining how you want to spend it.
As each month approaches – say, on the 20th of the previous month – make a list of your spending desires. Some of these will be “needs,” some will be “wants.” A new suit for an interview that could increase your salary clearly fits the needs category and should be high on your list of costs that you cannot cut. The new video-game system is a want and should clearly fall to the bottom of the list, the items you consider only after your needs have been fulfilled.
Fund the needs first. If you run out of discretionary income before all your needs are met, then you must prioritize. Which needs can you push into next month? Can you borrow a suit from a friend for that interview so that you can allocate that money to another need?
If your needs are paid, and you still have cash to afford some wants, you must still prioritize. Is that video-game system more important than the vacation you hope to take with the family in six months? Would it make more sense financially to allocate some or all the cost of the game system to the vacation? Maybe you put half the money toward the vacation and half toward the game system and wait a month before buying.
This is what budgeting is really about: prioritizing your discretionary spending. You choose how you spend your money, and you do so, but only to the point that you have the money to afford your choices.
One of the great benefits of the monthly spending plan is that you can change it on the fly without throwing your finances into a tizzy. Friends phone and want you to share the cost of beach house over a long weekend. Look at your spending plan for the month, determine what discretionary costs you haven’t yet incurred and where you can cut or scale them back, and you’ll have the necessary funds for your beachside getaway – without tossing the expense onto your credit card.
– via WSJ
Do you have a spending plan in place?