Yes, for most people the word BUDGET is a dirty little word. Before reading this article I am sure there are several critics that have already pegged this article for what they think they are going to read. Keep an open mind when reading this, and by the end my hopes are that you get at least one valuable piece of information.
For starters Wikipedia defines budget as the following: "a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending."
Secondly, Webster's dictionary defines budget this way, "The amount of money that is available for, required for, or assigned to a particular purpose."
With that said you are thinking yes I know what a budget is as defined above. My point to you is this, do not be afraid. Just have an open mind. Nowhere in either definition does the word budget say something like EVIL.
Yes, this article is about budgeting but in a manner in which you can still live comfortably and do those things in life you want to do. If you follow the next few steps life should become easier in due time. Remember months of reckless spending got you to this point, and one month of being conservative will not be your saving grace.
This sounds really easy and it was meant to be easy. For the first step, if you are on salary then just write down your monthly income before and after taxes. Remember that if you are having some sort of savings plan come out (either a Christmas club or 401k), don't forget to track that on your monthly expenses. Now for most of Americans that are paid hourly, you have a little bit of a harder time; however, if you take your last two months' worth of check stubs you can do the same thing.
Now that you know you figured that you make $3,000 a month before taxes and say, after taking out those pesky taxes we all love so much, insurance and say five percent for your 401k you know you are really left over with only $2,100 to spend or BUDGET each month on your expenses. See- that was not too hard, so pat yourself on the back! Next, after figuring out where you spend all your cash, remember to record everything so you can see where you can cut back. Are you spending too much on rent, food, drinks, fun or traveling?
Now you know that you spend too much money in a couple of categories I have listed above or even a few that you created yourself. Now you know that you need to pay yourself first and cut back in various categories. In my humble opinion you need to save 10%, so that means living off of 90%. If you think about it 9 out of 10 is great, well at least while I was in school 9 out of 10 was still an A. Remember to put this money aside for your retirement. About this point I am sure there are several readers out there saying I can't save 10%, I say to you find areas you can cut back and put that extra 10-20% towards your bills and very soon you will be financially free, able to save that 10% you said you couldn't.
Point number four will be one of the hardest points for most; well it was the hardest point for me. This entitled me or you to getting a second job, cutting back and giving all that hard earned money to those dreadful creditors you owe. Don't want to get a second job? Well that is fine too, make a pile of everything you want to get rid of and have a yard sale. It is amazing how much one can make at a yard sale. Before moving I sold a lot of junk and made over $1,500.00. So I know if I could do it, well you can do it too. Ok, the first reader does not have a house, well that is fine too! Sell your things on Craigslist!
Now that you are enjoying life and living within your means, it is time to stop and smell the roses. Well almost. Most financial planners say that you should have six months of funds saved up in case of an emergency. I will even go one step further in this economy. One should have twelve months saved up plus some emergency cash. For most people by getting a second job, having a yard sale, and just cutting back and living on 80-90% of your means they can obtain twelve months' worth of savings in 18-36 months. Remember that since you are now tracking all of your spending and you are now spending less, if you run into a hardship you will ultimately need less.
You want something nice say a watch or vacation or something else you've had your eye on. That is completely fine. As a hard working individual you are entitled to things if you work hard. Now you're thinking in the past I would just run out and buy that watch or vacation on credit. That is the first mistake, thinking you have twelve months to pay for it. What happens if you lose your job or get ill? No, if you really want that $1,000 watch or vacation is it worth getting a second job? For most folks they would say no. For those of you that want that expensive watch or to go on that nice vacation, then get a second job or have a yard sale. Another great way and in my opinion the best way is by just cutting back even more. There is an old saying that goes, "It’s not until you lose something that you see its value." So to save up for that watch or vacation just cut going out to eat for two months and then go out and buy what you wanted.
This last and final step is the best. I say this because after you spent say the last 18-24 months of your life seeing what works for you, saving money for an emergency fund, and adjusting to your new way of life, you are now at the point where you can help someone else out. One of the best ways to help others in faraway countries is through a non-profit website called KIVA. At KIVA you can donate/sponsor an individual looking to start up a company. Without your funds those individuals would not be able to support themselves or their families. If you are looking to keep your money local remember there are literally thousands of charities but remember to look and see how much of your actual donation makes it to your local community. Besides monetary investing, know that you are on your new path to living. You may not need that second or third job and say well I just do not have enough money to be able to give perfect strangers my hard earned cash. Well for those individuals remember that you can also donate your time to people in need. The best example I can think of in this matter is Big Brother and Big Sisters.
I really hope that a point or two will help you out. I know for me thinking two years ahead is not easy. Well I will be honest, it was not easy, however after the first six months I got used to my new budget and I realized I would rather have peace of mind vs. wondering how I was going to pay all these bills I got myself into. So let me say if you start the journey to become debt free, once you obtain debt free status you will never want to go back.