Back to basics week 1: The truth is in the budget

Here we are at the beginning of a brand new year. This is the first article in a 12-week series including putting your financial house in order, cutting grocery bills in half and basic frugal living. Come back each Thursday for a new article, and by the end of the twelve weeks, you’ll be saving money in just about every aspect of your life!

I, for one, am thrilled to see 2009 gone for good! It was a tough year for millions of Americans, but I am hopeful that the economy will turn around sooner than later. I am also optimistic that people (and big business and government) will remember the hard lessons we have learned in this lean time. More and more people are discovering what it means to be frugal and live within their means. For those economic pundits encouraging people to go deeper into debt and spend, spend, spend in order to turn the economy around – shame on you! That’s what got us into this mess in the first place – irresponsible financial behaviors. Now is not the time to spend as if money grows on trees. It is time to take stock of your finances and determine a responsible course for the New Year. The very best tool to help you chart that course is a budget. If you don’t have one, you need it – now. It is like a best friend that wants to help you become debt free and achieve financial freedom. Listen to what it “says,” and you will know what you need to do in order to live comfortably within your means. It’s one powerful piece of paper!

A basic budget shows you how much money is coming in, how it’s being spent and how much you have left over at the end of the month (and hopefully you have some left over!). Developing a budget is serious business, and a workable, realistic budget is the key to helping you keep your financial resolutions. Be prepared to sit down with your financial records, a pencil, a calculator, some scrap paper and plenty of chocolate (trust me, you’ll need it). Feel free to work on part of the budget one evening and finish the next night. Creating a budget takes a few hours, but doesn’t have to happen in one long marathon session.

1. Look over the worksheet categories and amend them to fit your income and expenses. Add and delete categories as they apply to your specific earnings and spending habits.

2. Calculate your average monthly income including net employment income, spouse’s income and all other sources of income.

3. Use your checkbook, bills and receipts for the last two to three months to average how much you are actually spending per month on the budget categories listed.

4. For expenses that occur more or less often than monthly, convert the annual amount to a monthly figure when calculating the monthly budget amount. For instance, if your homeowner’s insurance is paid yearly, divide that annual cost by 12 to obtain the monthly amount.

5. Total the income category and total the expenses category.

6. Subtract the total expenses from the total income to calculate your net income.

7. If your Net Income is a positive number, good for you! This means that you have money left over at the end of the month after your expenses have been paid. Apply any extra money to paying off debt and increasing your savings. Remember that extra money left in a checking account tends to be spent.

8. If your Net Income is a negative number, then your expenses equal more than your income and it is time to make some immediate adjustments in your spending. You are living beyond your means and it is time to apply some frugal living techniques right away.

9. Update your budget quarterly to see if any changes need to be made and to ensure that you are staying on track. I know that sounds like a lot of updating, but you can see at a quick glance if anything has changed in the categories and make changes as needed. Your budget will let you know right away if you are spending more than you should. “Listen” to it carefully and heed its warning if you are spending too much.

10. Once you have completed your budget, it is time to record your daily expenditures in order to determine where you can cut expenses and control total spending. Track your expenses, every day, for everything you spend in a month. I know this sounds like an incredibly tedious project (and it is), but it works – I promise. At the end of the month, you will have a crystal clear picture of where your money REALLY goes and what non-essential expenses you can cut immediately to get to a positive net income.

You have now made it through the eye-opening world of budgeting and should have a much better idea of where you stand financially. Continue to update your budget, especially as your expenses drop and you live more frugally. Here’s to a fabulous, frugal and debt-free new year! As I always say, it’s your money – spend it wisely!