At long last, Step 3 of our 5. Believe me, it is much easier to do these steps than to write about them. Probably even easier to do them than to read about them.
- Determine income and pay periods for the month
- Name your Income
- Make it balance
- Allocate your expenses for each week
- Prioritize Irregular Income
Ah, math. If you don't already have a nice sharp pencil and good eraser handy, grab one. You'll need it. (A blackboard would work too, of course.) A calculator might be helpful too, if your arithmetic is rusty. I promise that there will be no algebra or calculus in this step. All we need to do is add up all the expenses and make it equal the total income.
You'll also need a plan. We use Dave Ramsey's Monthly Cash Flow Plan (find it here), so I'll be walking you through it. If you don't want to fill it out, you can always use a legal pad.
I find it helpful to start at the end. On the third page of the Cash Flow Plan (CFP, from now on) at the very bottom is a line in bold that reads "Total Monthly Income". You should have figured this out in
Step 1, so go ahead and fill it in. Below that line is the word ZERO. This is the goal. In the budget world, balance equals Zero.
Now, back to the beginning. Pull out the list of expenses that you made in
Step 2. Draw a line at where your income ended. On our example sheet below (which is a simplification of our actual budget), this line comes after Caleb's Sallie Mae payment, but before mine.
Now, as much as we'd like to tell Sallie to stuff it, it is a better idea to take a look in category 4 and see if there's anything that can be cut. Looks like we wont be saving to go to Ohio this month. :(
Voila, Ohio is gone, our math is adjusted and now we can move on to our CFP. (See how messy things get when you use pen?)
If you're having trouble with this step because there's just too much debt, you'll want to use the pro rata plan. Dave gives the basics here and here. This is a more in depth look. If you're this much underwater though, you'll want to get more help than we can offer here.
The CFP has many categories and subcategories for you to fill in. Use your list as a guide and make any changes to the form that you might need. You'll notice that is in basically the same order (Giving, Savings, 4 walls, etc.) as your list. Fill in each item's cost in the Sub Total column. At the end of each category, add up everything and put the total in the Total column. At the end of each page, add up all your totals for the Page Total.
If you're feeling particularly ambitious, or if addition just isn't enough to satisfy, divide the total for each category by your total income and fill in the % of Take Home Pay column on the far right. This can be very useful if you've never budgeted before to see what areas are eating most of your income and might give you ideas for where to trim your lifestyle.
At the end of the month, you'll fill in the Actually Spent column (assuming you kept track of such things, which you should so that you can fill this in). This will help you assess where changes need to be made so that you can make a better budget next month. It takes a few months (3-6) to really get the hang of it.
Continue to fill in and add up categories through the whole sheet. One nice thing about the CFP is all those categories because they'll help you think about all the things you might need to buy in a given month. The trick to budgeting is planning ahead as much as possible. Unexpected expenses will happen. Use your emergency fund to cover them, then plan ahead for the next time. Also, think a few months out. Any big events approaching? Birthdays and Christmas can be easier to afford if you spread the cost out. If you save a little ($10 or $20) each month, then you wont be caught needing to pay $100 all at once. Same goes for car repairs or household maintenance. Establish a savings account dedicated to this, and suddenly, emergencies wont be, because you planned for them.
When you get to page three, you'll add up the totals from all three pages and compare them to the Total Household Income that you filled in earlier. Hopefully, the Grand Total will be less. If it isn't, you'll have to cut something. Again, start with the Incidental categories: Recreation, Personal, perhaps Clothing and Restaurants. If possible, don't cut these categories completely. If you don't allow some fun in your budget, you will have fun outside of it and kill the whole thing.
At the same time, it's important to recognize that getting out of debt means sacrificing. This is the point where you need to tell the whiny kid inside of you to go into timeout and let the adult make tough decisions with the ultimate goal (financial peace and freedom for you and your family) always in mind.
Have things that you just can't cut, but know you should? Or things you'd like to get eventually but aren't pressing at the moment? Make a list. We'll deal with them in Step 5.
If, however, your Grand Total is indeed less than your Total Household Income, this is not a license to party. First, make sure that you've filled in everything you should have (all the categories on all 3 pages...), then it's time to do some subtraction. Find out how much extra there is, and add that to the payment of your smallest debt. This extra is known as a "Snowflake" and will help get your Debt Snowball rolling. (We talked about our Debt Snowball back in May.)
Your Grand Total, minus your Total Household Income should equal ZERO. Income = Out go. So, add it up again and make it balance.
Told you the eraser would come in handy.
