By Russ Gaiser
Ah, the budget. Some people who hear that word get angry, stressed, agitated, and even scared. To some, the term has become somewhat of a curse word. Unfortunately, the term budget has a stigma to it and is often seen as something negative. If the truth of what being on a budget means led the conversation, we would likely have a population more in control of their finances, rather than a culture of indebtedness, bankruptcy, and just plain ignorance about where their hard-earned dollars are going.
What is a Budget?
First things first, let’s expose the truth on what a household budget actually is. The budget is a written plan, completed monthly, for what money is coming in and where it is going. That’s it, plain and simple. More specifically, a zero-based budget gives every dollar an assignment, even if there is more money left over at the end of the month (which is hopefully the case). The excess dollars should be applied to other financial goals such as saving for a big purchase, investing, vacations, etc. If you find that there is no surplus, then there is either an income issue or a spending issue, which can be determined by reviewing needs and wants.
Needs versus Wants
In America, companies are doing everything they can to persuade you to use their goods and services, and convince you to spend money on things you don’t need to impress people you don’t even like. They are very successful in doing so, and many times know more about your spending habits than you do (hopefully not after you have read this article, however!). That brings me to the needs versus wants discussion. If you do, in fact, find yourself overspending, the first thing to do is determine what budget items are true needs. There are four that apply to most, which include shelter, utilities, food, and transportation. If a shortfall exists after accounting for these items, then the issue likely lies on the income side of the equation.
What Does the Budgeting Process Look Like?
The household budgeting process is a monthly activity that involves you and your spouse (or an accountability partner for singles). It is a forecast for income and spending for the next month, and begins with listing all sources of household income. From there, make a detailed list of expenses, and project the cost of each. Fixed expenses should be relatively easy to predict (think mortgage, auto insurance, streaming subscription), while variable expenses might be less so (gas, electric, birthday gifts). Then, subtract your expenses from your household income to determine the surplus (or shortfall). Any surplus dollars should be budgeted for other financial goals such as debt elimination, big purchases, vacations, or additional investing. It is important to keep in mind the dates that your income will be in hand, in relation to when the expenses are due. This process will seem a bit unnatural and clunky in the beginning but stay with it. It usually takes 60-90 days to become efficient with the process.
What if I have an Irregular Income?
Those of you who earn irregular incomes (sales, self-employed) might be wondering how the budgeting process can be accomplished. You will want to start by projecting what you will reasonably expect to earn in the following month. If you don’t know, look at the previous year’s lowest income month and use that number as a baseline. Then, list all the needs in your budget and then prioritize a list of nice-to haves and wants, and assign the excess dollars one by one to each of those categories as they come in.
While there is no right or wrong budget, due to the variability of a household’s wants and needs, there are some basic guidelines to follow when determining if the weighting of certain categories is in line. Too much of any one thing usually isn’t wise, especially if that one thing is a mortgage payment! That said, here are some category guidelines to help determine your weighting: housing (25-35%), saving (10-15%), charity (10-15%), utilities (5-10%), food (5-15%), clothing (2-7%), transportation (10-15%), medical/health (5-10%), insurance (10-25%), personal (5-10%), recreation (5-10%), debts (0-10%).
Ways to Free Up Cash
So, you’ve completed your budget and you’ve realized that you are very near break-even, with very little surplus. Aside from increasing your pay, there are a couple of things to look at to increase cash flow. First, if you typically received a large tax refund, you might be having too much of your money held back for taxes. Adjusting your W-4 withholdings can help free up hundreds of dollars of your own money every month, and stop you from giving the government an interest free loan! Next, if you have student loans, car loans, or credit card debt, you might be able to refinance and free up some monthly cash as a result. Just be careful that you don’t end up refinancing to a loan with a longer term! Last, take advantage of coupons and sales, but be particularly careful of overbuying, even if it is a good deal.
Hopefully by now hearing the word budget isn’t so bad and that you see it as an empowering tool. Instead of feeling guilty about impulse purchases, you can feel free knowing that you budgeted for those sunglasses, those football tickets, or that night on the town! This foundational tool gives you permission and freedom to spend, and if used correctly, will give you total control over your money and how it is spent. So, get out your excel spreadsheet, notepad, or a budgeting app such as Every Dollar or Mint, and give it a try.
About the author: Russ Gaiser III, MBA
Russ Gaiser III is a financial advisor at The Financial Guys in Buffalo, NY, where he focuses his practice on wealth building and retirement planning. He is also a Dave Ramsey Master Financial Coach, helping clients to improve their budgets, maximize cash flow, eliminate debt, and build wealth for the future.