The “B” word has become a scarcity in today’s society. With the ease of online banking and simple apps like Mint, most people only want to know if they still have any money in the account rather than creating a budget and naming every dollar. The only way to gain control of your finances so that you can pay off debt and save money is to budget with the understanding that you will live on less than you make. When starting this process it’s important to complete the budget with your significant other (if you live in the same household). Also, we recommend completing the first “rough-draft” budget on paper. Finally, plan on doing one budget at the beginning of each month.
The ground rules:
At the start of budgeting, we need to write down all income coming into the household that month. Write this number at the top of the page.
Grouping. We need to figure out what expenses the household has and rank them in terms of both category and importance. The first group should be mandatory spending item such as: utilities, gas, groceries, rent/mortgage payment, etc. Then rank the mandatory spending categories. The first things that should be paid each month are housing, lights, water, and food, which means they should be placed first on the list of expense priorities. These are the basic things that your family needs to survive. Next, list any remaining expenses. After all your expenses have been paid on paper, you start to pay off debts. We recommend paying minimum payments on all debts then focusing the remaining money on the smallest debt first. As each debt is payed off, simply refocus the remaining money on the next smallest debt. Eventually you will pay off all your debts and can refocus the budget towards building wealth.
Persistence. Things go wrong. It took my wife and me months before we had an accurate budget. Don’t lose hope if you’re off a little bit on your budget- I guarantee it will happen. Do take improving it seriously though. We recommend treating the budget as a contract. If you’re significant other doesn’t take the budget seriously and overspends on a category, then you aren’t going to live on less than you make and won’t meet you goals of paying off debt.
Emergency. The old adage anything that can go wrong will go wrong will happen sometime during this journey. That’s why we recommend setting aside a $500 emergency fund. This will provide enough cushion to pay cash for most emergencies. We recommend building this mini emergency fund prior to paying off debt with the remaining money in the budget after expenses. If you already have money in your non-retirement savings account you need to take anything more than $500 and apply it towards debt. This will be an admittedly hard thing to do. Just remember that once we have paid off all our debts, then we will truly have freedom and can rebuild the Disaster Fund and Build Wealth.