Friday, January 9, 2009

Budgeting Money; an Essential Tool in Today’s Economy

Creating and following a well thought-out budget is essential with the slow economy that we are facing today. With a recession going on right now, and talk of a depression on the horizon, the only sure way to handle the financial pressures is to create a budget for the money that you work hard to earn every day.

Money is a limited resource. Most of us will claim that we don’t have enough of it, although the reality is that we have plenty of it and don’t know how to use self control and thriftiness to save it. Go and visit with anyone who lived during the Great Depression and they will let you know that all of us have plenty of money. We just need to gain knowledge to know how to control our money and the wisdom to use what we have learned.

The basic tool of controlling your money is to create a budget. This has been talked about for many, many years, and can be found in countless books, but many of us fail to take the time to sit down and create a thorough, well thought-out budget.
I have a 5-step guide to help you create a budget that will help you to track expenses better, spend less money, and take control of your finances. Remember that it doesn’t matter as much how much money you make, what matters more is how it is spent.

1. List all of your income resources at the top of a spreadsheet by month.
Listing your income and where it comes from will show what amount of money is flowing into your pool of money. Your stream of income may be little or may be small or you may have multiple streams going into your pool. It helps to actually draw a picture of a pool with a big stream going into it for the main income and smaller for other income sources. You can then get the idea that your pool is filling up with water/money.

2. List all of your regular monthly expenses a couple of lines below the income lines.
Listing your expenses will not only show how much expense you have going out it will also show you areas that are fixed or are variable. Fixed expenses may be mortgage payments, phone bill (unless you have teenagers), utilities bill, insurance, etc. Variable expenses might be food items, grocery bill, electric bill, etc…
Now go back to your picture of the pool with your nice streams filling it up and add some drains all around the pool. You could put a big one in middle for the mortgage as this is usually the biggest expense or drainer of your pool of money. You can then add other drains all around the pool depending on their size of money.

3. Add your monthly income and subtract from your monthly expenses to get your monthly profit.
The amount of money when you figure the difference between the income and expenses can be large, small, or in several cases a negative number. The point of the first 3 steps is to know what that number is so we can know what needs to be done with it. We can’t change until we know for sure what needs to be changed. We can’t keep our pool full and overflowing if we don’t know how big our drains are and how quickly the water/money is running out. The idea is basic but sometimes it helps to visualize something with a similar concept to help us gain that knowledge I spoke of earlier.

4. Make and follow a plan of action to either reduce the size or amount of drains in your pool or increase the amount or size of streams going into your pool or both.
Now is the time to act upon the knowledge you have just received by following steps 1-3. You now know what amount of money you are losing or gaining each month. You need to put plans in place to reduce your expenses or increase your income. Some examples of reducing your expenses would be to go shopping for groceries less often. For my wife and I, we have a large drain for the shopping trips for groceries. We know that this drain is large and we have made a plan to make it smaller. Maybe you have a subscription to satellite or expensive internet service or a myriad of other things that could be reduced or eliminated. As you make your plans, envision your pool with the drains disappearing or getting smaller, thus allowing your streams of income to stay in the pool longer making it fuller and grow bigger. Try making more income by taking on small local jobs, writing articles, starting a home business. Just like with the drains getting smaller, envision the streams getting bigger. A combination of reducing expenses and increasing income will make your pool of money grow very quickly.

5. The final step is to hold accountability meetings each month.
This step is one that many faithful budgeters miss and should be the most important. This is a time to review your expenses and to make sure those drains really are getting smaller and see if any have grown bigger in the process. It is a time to re-assess the budget and see if any drains need to be made bigger to make the budget more in line with reality so you don’t have any unplanned draining. A budget only works if you are accountable for what is in the budget and can adjust and revise areas that need to be on a regular basis. At the end of each month is the best time to asses the budget. You need to pull out a bank statement or other data to show what was actually spent so that accurate data is reviewed. This step will greatly improve your budgeting effectiveness.

Times are difficult right now and many of us may, if not already, fall on hard times where our streams may dry up temporarily. If that happens we need to plug as many drains as possible to slow down the draining of our pool of money. If we have been budgeting correctly and filling our pools to capacity and more, then when these hard times come, we will have enough pool left to cover us until our streams start running again. Take the time and effort to budget. You will experience a comforting and safe feeling knowing that you are in control of your money.

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