The Big Bad Budget Basics

Okay it really isn't bad, and certainly isn't scary, but it can seem that way in the beginning.  Budgeting is an important part of everyone's life if you are living off food stamps or running a multi million dollar corporation.  This should be one of those basic skills that everyone learns. But it is personal money and no one likes to talk about their personal money habits.  It is one of the last taboo subject left.  It is easier to discuss our sex lives with our friends than our money habits or what our budgets are like.

Budgets are the foundation of how we plan our lives.  How we plan our vacations, our education, our home decorating, our wardrobes ect.  We need to get a handle on these things.  They are just a part of life and not something to be ashamed of.    I know some people want to a life so wealthy that they don't have to worry about budgets.  Well the reason the wealthy are wealthy is that they budget.  So if you really want to be like the rich - have a budget.  The wealthy that don't have a budget are not wealthy very long.

If you read Crisis Day 1 you will note that I had you go through every single expense and categorize them into 3 areas - Need, Want and Frivolous.

Need is those things that you just can not survive without or are obligated to do by a promise or to keep working.  This would be things like:

• food
• shelter
• travel to and from work
• minimum payments on debts
• dry cleaning for work clothes
• school expenses
• school supplies

Want is something that enriches your life but you might be able to cut back on or could go without during a crisis, but do not want to go without long term in your life.  This would be things like

• Date night with your partner
• special activities with the kids
• new clothes
• new car

Frivolous is those things that don't really enrich your life but you seem to spend money on anyway.  This might be:

• eating out often
• shopping to feel better
• junk food

When in Crisis Mode the Frivolous category is eliminated from the budget. for the most part.  But for long term planning there is a place for it, but at healthier levels than you might have been doing before.

First thing is to record how much money is coming in each month.  Then subtract everything you spend in a month from the need category.

Step 2 is to start building your savings.  If you have debt that is something other than a primary mortgage and a single car payment, save up enough to cover 1 full month of expenses (that is everything in that need category).    So you will assign the bulk of the money left towards the savings section at this point.

Step 3 is debt repayment. Now is time to tackle the excess debt.  Start putting extra money towards paying down your debts.  Even before you have finished step 2, put an extra $10 a month beyond the minimum payment towards the smallest debt just so you can see it go down faster.  Then when you have the minimum savings built up, the money from that had been going towards savings will go towards debt tackling the smallest debt first.  The only exception to this rule is if you have one that is 0% interest, it can be put further down the list.

Step 4 is assign allowances. Some will probably think I am a bad person for putting this before long term savings but few people can stick to a fairly strict budget long term without some sort of treats from time to time.  Everyone in the family gets an allowance, even if you don't hand it over to the kids, this is a budgeting thing.   When we first implemented this system it was $20 to my husband who sometimes needed to each lunches with coworkers and $10 for me and $5 for each of the kids.  Now days we have a bit more of an income and one child still at home who is a teen and more active in things so it is $40 for each of us and $15 for our daughter.
This covers clothes, trips to movies, makeup, ect.  Fun things we want to do.  This is where a a great deal of the things from the frivolous category spending happens and some of the want.  You know I am a bit of an environmentalist so yes even frivolous spending can be done responsibly and we will discuss that later.
Step 5 is retirement and education savings.  Even if you don't have much left to your budget at this point you should be putting something back every month.  Even if it is just $10 for each person.  The only exception to this being step 5 is if you have a retirement program through work a traditional pension plan or 401k plan that matches, then it becomes STEP 1.

Even if your kids are 17 today and you can only put back $10 a month, it will be something and it will pay for a text book. and it is better than doing nothing and they will be happy to have one less text book to pay for.

The earlier you start on retirement the better.

Once you have paid down all of your debt except your mortgage start focusing on step 2 and step 5.  I would recommend equal amounts to both accounts until you either have 3-6 months of expenses saved or you have maxed out your annual contributions to your retirement and education savings accounts.  Then focus heavily on the account the other account.  You can also give yourself a modest increase to your allowance if there isn't anything that you need to save up for, such as a new car or a down payment on a house.
If a new car or house is in your future saving up for those would be Step 6.