If you are like most people, you hardly know where your last paycheck went.
You might be flabbergasted to see just where your money disappears—the wasted dollars, pounds or euros that could have been put to good work elsewhere.
Every successful business operates on a budget. Whether you are with or without debt, in a low-income bracket or high—if you would rather live on Boardwalk than the poorhouse on Baltic Avenue, you need to establish a budget.
Here is the basic rule for sensible budgeting: Never plan to spend more than you can afford.
The basic essentials are housing, food and clothing. (There is also another, biblically mandated claim on your income that you must factor into your budget. For more information on this, the most important and fundamental financial law of success, request a free copy of our booklet The Financial Law You Can’t Afford to Ignore.)
In the past, financial planners in the U.S. said to spend no more than 20 percent of your income on housing (rent or mortgage). During the housing bubble years of the late 2000s, many planners adjusted that estimate up to 40 or even 50 percent. In the post-bubble era of recession and contraction, it is prudent to spend no more than 25 percent. Figure in another 5 to 10 percent for utilities. (All the percentages given here are to be figured on your net income—after taxes have been taken from the gross amount of your check.)
Food and groceries will generally take up 10 to 15 percent of your net income. Add another 5 percent or so for miscellaneous items purchased at the grocery store such as toothpaste, hair products, soap and so on. Those with large incomes can apportion a smaller percentage here and a larger percentage to some other category. Larger families, on the other hand, may have to increase their food budget to be sure their budget allows for an adequate, wholesome diet.
Shoppers are often too hurried to notice prices. Many are unaware of the high cost of certain kinds of items. But it is also important not to skimp on food. Don’t let the price drive you to eat unhealthy foods. Instead, cut down your other expenses to allow enough money for a healthful diet.
To get the most healthful food for your money, be bargain conscious and watch for specials.
One easy way to save on the food bill is by not buying the most expensive cuts of meat. You can also extend or substitute higher-priced meat with plant proteins such as whole grains and legumes.
Practice proper food storage, plan for leftovers and eliminate waste. Try home cooking “from scratch” as opposed to using more expensive convenience foods (make your own bread, yogurt, granola, etc.). A bread machine can save you a lot of money over the course of a year—but if you buy one, make sure you follow through and use it.
Buy produce in season. Go to the local farmer when possible. Better yet, plant your own garden. A $1 tomato plant can produce many dollars’ worth of tomatoes.
Learn how to properly preserve food you have grown or picked yourself—by canning, freezing or drying.
Use coupons efficiently. Many websites explain how the “grocery store game” works and how to save money. SuperCouponing.com is an example.
By being careful and prudent, you can cut down your grocery budget considerably and still eat healthfully.
Your clothing budget may range from 4 to 8 percent of your net income, depending on regional climate, season and occupation. Buy only the type and quality of clothing that your budget will allow. Control your desires for expensive clothes if you cannot afford them. Be very careful about using that department store credit card; it can ruin you before you know it. Utilize thrift stores and learn to sew so that you can make your clothes last longer.
After the Necessities
Next after these three basic necessities comes transportation. Car payments, if any, gas and oil, insurance and repairs must be included. Don’t forget that cars need repairs and preventive maintenance to keep them in safe running condition. Be very careful about purchasing a car that you cannot pay for in cash. Find a carpool partner and explore the availability of public transportation. Endeavour to keep your transportation costs between 10 and 15 percent. Be sure you carry at least the minimum auto insurance required by your state.
You should also carry life insurance. God’s Word testifies that certain events will transpire and befall all men. It’s appointed to man once to die (Hebrews 9:27). And “time and chance happeneth to them all” (Ecclesiastes 9:11). Therefore, faith, wisdom, common sense and prudence alike dictate that we should be prepared for unforeseen eventualities. In fact, it is showing love toward your neighbor and family.
It is recommended that you purchase term life insurance for the breadwinner of the family that will pay out 10 times your yearly gross salary in the case of death. This type of insurance is inexpensive and may literally cost less than a dollar per day. If you have children and your spouse does not earn a salary, it is still prudent to take out a policy on her to cover expenses that would arise in the event of death. But don’t let the combined premiums for all insurance (excluding health insurance) to climb beyond 5 percent or so of your net income.
Other smaller items that you are apt to overlook are entertainment and pocket money. Don’t think that entertainment and recreation are luxuries you cannot afford; the truth is that some form of diversion is necessary to maintain a happy family. Plus, budgeting for these expenses keeps them from consuming more of your income than they should.
Pocket money for miscellaneous small expenses not included elsewhere in the budget—such as haircuts and newspapers—is also important. Without money in your pocket to buy what you need when you need it, you can feel like a pauper even though you have a comfortable balance in the bank.
Two Categories of Savings
It has been said that a good rule for wise financial management is to save something for a rainy day. A companion rule is to distinguish between light sprinkles and heavy showers.
Every family budget should provide for two kinds of savings. Though your initial amounts will be small, you need to develop this habit of saving.
One type of savings is for expected expenses. It is called operational savings. Special expenses like maternity bills, a major furnishing, new shingles for your roof, or preparing for winter should be paid for from such a fund. This savings fund is for things not regularly budgeted out of each check.
The other kind of savings is for totally unexpected, unpredictable emergencies. This is your emergency savings, a built-in safety valve for your budget. Authorities recommend you budget approximately 5 percent of your net earnings each pay period until you have accumulated six months’ worth of emergency savings. Then, when an emergency occurs that reduces your reserve, build it back up with the same diligence as before. An emergency fund reduces the stress resulting from any future financial problem. Anything we can do to prepare for tomorrow in a regular, consistent manner will help diminish some of the emotional impact that might result from an emergency.
If you are currently in debt, continue to make all your minimum payments, but put aside additional money to save up the first $1,000 of your emergency fund. Take an extra job if you need to. It is imperative to have some emergency money on hand. Once you have that $1,000 saved, then go back to paying off the debt before finishing your six-month emergency reserve. This is cash that should be placed in a savings account, or money market account. It is not to be invested.
These overall guidelines will help you establish a practical, balanced budget.
Here is how to begin setting up a budget. First, sit down and make a complete list of all ordinary monthly and yearly expenses, including any monthly debt payments you might have.
Next, apportion the correct amount from each check for each expense. If you are paid on average twice a month, simply divide monthly bills in half and double any weekly bills to arrive at the amount to be taken from each check. Divide yearly bills by 26 to determine how much money to set aside each 14-day pay period. Make a list.
If you are spending more than you are earning, cut out less important expenses until you balance your income and outgo.
Then compare the amounts you are setting aside from each paycheck for each expense to the percentages for each category outlined above (housing, food, clothing, debt, etc.). Consider any adjustments you might want to make.
There are two ways to handle the money itself. One is to turn it into cash and keep it in separate envelopes for each budget category. The other is to use a record book or computer program, and keep the money in the bank.
You may want to use a combination of these two methods. For those expenses most conveniently paid by check or automatic bill-pay, the bank method is probably safer and therefore recommended. You will have to keep detailed records, however, whereas no written records are necessary when you keep your cash in envelopes. The separate envelopes are their own record.
Since keeping large sums of money at home is rather risky, extreme care should be taken to keep any cash—and the knowledge of it—safe. And don’t take the whole envelope with you to the store, just the rough amount that you will need. The envelope system should be kept away from children and possible burglars and in a fireproof box if possible. If you are struggling to keep to your budget due to uncontrollable credit card spending, cutting those cards up and using envelopes might be your best option. The only things you can buy are the things you have cash for.
Plus, studies have shown that people who pay cash for everything (as opposed to credit cards) actually spend 12 to 18 percent less per year on average. There is psychological pain associated with paying cash. This makes cash buyers less prone to casually spend.
Once properly set up, your budget will be simple to maintain each time you receive your check. You will always know that you have not overlooked any items and where your money is coming from and going to. You will be able to spend your money with the reassuring knowledge that it was intended for that purpose, and that it was spent the wisest way possible within the bounds of your income. You will experience new joy and peace of mind, and you won’t feel guilty spending for extras and even luxuries—because those expenses will come out of the funds specifically prepared for that purpose.
Using a budget to guide our financial lives requires diligence, thorough accounting and fortitude. Society throws many materialistic temptations our way, and human weakness is hard to overcome. But we must be disciplined throughout the year to stick to our budget. A well-managed budget accounts for our needs and helps us fulfill some of our desires.
We should review and change our budget whenever circumstances change, such as a pay raise at work or an increase in insurance costs. At least once a year, we need to review its accuracy. Throughout the year, we should evaluate our position to make sure we are consistently living within our means.
Don’t view budgeting as restrictive. It is a practical, real way to ensure freedom from financial worry. As Jesus Christ said about God’s way of life, happy are we if we do it! If we live a balanced lifestyle and are financially responsible, then even the emergencies that might arise will be less troubling, and we will certainly have more financial freedom and peace of mind day to day.
Set yourself the goal now to establish a well-balanced budget! Determine to live according to it and to not let anything distract you! Doing so will prevent your tumbling from circumstance to circumstance and will lead you into financial freedom. It will eliminate needless worry and concern. Take charge of your financial future. That is what God desires for all of us!
Use these tools
Use the following tables to help you set up a budget and keep track of your financial progress.
Use the Income Planning table (Figure 1) to total up all sources of income. Remember to use after-tax amounts. The total will be the amount you use when creating your monthly budget.
Keep track of your spending for each month by using the Monthly Expense Plan (Figure 2, next page). Prior to each month, you should “spend” each month’s income on paper by assigning every dollar to a budget category. Then at the end of the month, go back and review your spending. Adjust categories as necessary. It may take three or four months to get your budget balanced.
The accompanying pie chart (Figure 3) suggests what percent of household income should be spent on various budget items. Remember, these are suggestions and may vary according to income, living location and other factors.
Use the Net Worth Statement sheet (Figure 4, next page) to keep track of your financial progress. Remember, that any money owed on an asset should be subtracted from the asset’s value. For example, if your house is worth $300,000, but you owe $240,000, your equity, or net value, is only $60,000.