Basic budgeting should be taught as part of a required personal finance course in schools everywhere. Although I’m sure it’s taught in some schools, I’m also sure it isn’t taught in all schools. In my early marriage years, I employed basic budgeting as I struggled to survive living from paycheck to paycheck, something I had to learn by myself. I made barely enough money to support a wife and two growing sons and being frugal was a necessity.
Preparing a Budget
Some people are led to believe they need specialized software or some special notebook in order to prepare a budget. It just isn’t so. You can do it with a pen and paper, as long as you know how to write and do some basic math. Having a cheap calculator nearby can come in handy too.
You need to start each page with your estimated income for each pay period. Next, you need to list your expenses and subtract them from your income. What you have left is what you can save or spend on non-expenses.
Needs vs. Wants
When you’re listing your expenses on your budget sheet, you need to list your “needs” as expenses and not your “wants”. Your “needs” include your mortgage loans (or rent payments), utility bills, car payments, groceries and things like that. Your “wants” include things like going to the movies and other recreational pastimes as well as items you want to buy for yourself or your family.
When you’re preparing your budget and you find that you end up with a negative number, the first thing you need to do is to make sure there aren’t any “wants” on the list.
Creative Budgeting and Financing
If you maintain budgets for pay period of up to 3 months out, you may find that you don’t make enough to pay something when it’s due during one pay period but that you can in the pay period following that. The best thing to do is to try to move expenses from budget page to budget page to see if that can correct the problem. If not, short-term loans are another solution.
Getting standard short-term online loans through banks or credit unions can be exercises in futility. They sometimes want information that you either don’t have or can’t give them. More often than not, they cite a lack of expendable income as a reason for denial.
Other options that I don’t recommend without reservations are payday loans and direct deposit advances. Payday loans are provided by other than banks and direct deposit advances are provided by banks and credit unions where your paycheck is directly deposited to. The direct deposit advance is the better option. My bank charges $2.00 in US dollars for every $20.00 borrowed as the finance charge, which is then automatically deducted from the next deposit along with the amount borrowed. Payday loan companies charge much more and you have to make a special trip just to pay them off.
Take Care of Necessities First, Not Last
I know people who will spend money on themselves and their families before they pay their bills. When the debt collectors call and when their cable, telephone and other services get cut, they complain that they don’t make enough money. They actually do make enough money. They just need to learn to budget wisely and stick to their budget. They also need to learn to do things to stretch their expendable income as far as possible.
Instead of going to the movies, which has become rather expensive lately, rent videos and watch them at home instead. Take up other hobbies that aren’t as expensive and can consume a lot of your free time, like stamp collecting or coin collecting. I write as a hobby. It consumes all of my free time and it doesn’t cost me anything more than the cost of my high speed Internet connection, which I would have anyway, and my web hosting expenses. In my case, my hobby pays for itself and then some.
Part-Time Jobs
I also know people who work part time jobs in order to catch up with their expenses. More often than not, they caused their own problems by not taking care of expenses before treating themselves to their “wants”.
In my 30+ years of experience in dealing with people who survive from paycheck to paycheck, failing to create and maintain workable budgets is the primary reason they have problems that can only be solved by working at part-time jobs.
Lists and More Lists
I’m a strong proponent of keeping lists for all kinds of things. A budget is just one of those things. As I mentioned in a previous article, even holiday shopping lists should be maintained in order to remain within a budget. Spending money during the holidays shouldn’t be reason to go into debt, regardless of how much you want to spend on a particular person.
If you’re in debt due to spending too much on Christmas gifts (even if you tried not to), now is a good time to start working on a new budget. Good luck!
[Originally published in December, 2008]
hey RT,
Very nice post on basic budgeting. It’s a shame that so many people live paycheck to paycheck. I was raised to live within my means, or to live under my means and save. If you don’t make enough to save, that means you need to make more or spend less.
I’d appreciate if you could teach the State of California some basic budgeting. It seems they have a serious problem with only spending what they collect in taxes, and think that if they don’t have enough to cover their spending that that means they’re just not collecting enough.
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Hehe…. I didn’t want to get involved in that.
You are hitting the nail on the head – proper budgeting and careful use of the money you DO earn is the key not just surviving, but thriving.
I think one thing that has helped us (I’m self-employed) is setting aside a separate account to squirrel away our 15% or so self-employment tax (FICA) another account for the property taxes, etc. Those once a year or once a quarter expenses used to clobber us, but we’re ready for them as they come now.
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Wow, this needs to be sent to half the people I know in the US. I was working with a guy who had like $50,000 in credit card debt, he owned the credit cards illegally so he couldn’t file bankruptcy without going to prison, and he was working while taking government disability checks, so he couldn’t file taxes to boot… He was so deep over his head he had literally no way out. For some reason it all hasn’t caught up to him yet, but that’s the story of so many people in the US right now.
Living simply and within a budget isn’t a bad thing at all, nor is it difficult. It’s just the complete opposite of what we are taught to do from childhood up.
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Great information for keeping up with your finances – i’ll need to send this to my wife! :D
And unfortunately the lists of needs have increased greatly over the last generation. You’re right RT – pay the man first and play later!
Thanks.. We recently bought a home and this post really helps motivate me to start a budget.
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I’m still quite young and have never been in debt or in need of money, and never will. First of all, I’m saving a lot of money now and building revenue-generating assets so I’ll be safe in the future. Plus, I’m still going to budget, and since I’m not going to have any children, life should go pretty well, ha.
Glad you’ve got it all figured out, mate…
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I agree with you 100% budgeting and all every day financial affairs should be taught in schools In my opinion It Is more important than alot of the subjects that they are teaching.When they leave school they are thrown out Into the big wide world with non of this knowledge
This is a timely article. Not only do I wish you could teach this to various governments worldwide, I also wish you could go back in time about a year, slap me in the back of the head and tell me what for… because I know better, yet I keep falling for the ‘ole credit card trick.
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Payday loans are a big no no! I was reading up on them and most payday loan companies charge upwards of 11,000% interest per year.. It just happens to be hidden in their policies..
RT, I completely agree with you… only perhaps they should start teaching the younger ones more to do with currency and financial issues (that arent overly complex).
Society would benefit and who knows where our dollar would be.
i think one of the problems some people experience in relation to budgeting is patience and consistency. some people neglect to keep their records up to date, fall behind, are unable to keep track of where they are financially, are therefore unable to make good decisions regarding spending, and then maybe just give up on the process altogether.
it’s also about making this type of tracking and planning a habit. it needs to happen on a regular basis, else it loses much of its impact.
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I actually use Excel to budget. I can budget 6 months in advance and know within a few dollars exactly how much money I can spend without going in the whole.
I had to learn the whole lesson about necessities first the hard way. I use to pay my bills and hope I had enough for food and gas. Well, I discovered that if I always ran out of money and ended up hating life. By taking care of those basic needs, when I did not have enough money it was ok. The bills eventually got paid ;)
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I totally agree, but I find that having a joint budget actually helps in this case – it’s kind of like a contract that both parties sign up to to control spending. In our (and probably most) cases it involves compromise from both sides – one agrees to budget more than they’d like in a certain area, the other to spend less than they’d like. But it helps to defuse those periodic blowups that happen if you don’t have a way of communicating about this stuff.
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This is a great article. Everything that you have pointed out is what I’ve lived by ever since I became a man. Never get your needs and your wants mixed up. Living like this has kept me from making many mistakes over the years. The outline that you have pointed out will work for anyone and should be required or adopted by all. Thank you so much for sharring your story. By the way, I lived in the Philippines back in the 80′s and enjoyed living there very much and would love to go back.
I didn’t learn this in high school, I didn’t learn this in college. It’s a must nowadays with the economy. I see a lot of online material starting to focus on this and traffic on my own frugal sites climbing. You’ve touched on some points that I haven’t thought of so thanks for the new ideas!
I know a few politician’s who should heed your advice about needs and wants!
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Great article! Setting and living within a budget is really very liberating. I’ve found that an envelope budget works well also. Put $75 a week cash into your food envelope and that is all you get to spend. The same for gasoline, entertainment, etc. This way you’ll never go over budget…
Started budgeting about 6 years ago with one purpose to be debt free. With this crisis going on at the moment it has been worth the hard work. It has given us a safe buffer we will still feel the effects but it will not wipe us out.
Debt free living is financial dignity.
Good luck to you all over the coming months.
@ John :
“Debt free living is financial dignity.”
That is a powerful statement. Unfortunately I have never lived with this kind of dignity – yet…
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Managing money wisely is absolutely essential when living on a tight budget. I use mint.com to keep me posted about my spending and gives me alerts when my checking account is running low.
but the best budget technique is to keep everything on the head, and as you said, differentiate between needs and desires.
good article.
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It’s hard work really to write it all down and make sure that all things are considered but it is better than coming up short.
I have been guilty in the past of spending money on wants rather than needs first. But I’ve learned my lesson and I’m gonna start spending wisely. Thanks for the tips here.
Ammazing!!! I like your idea, needs vs. wants… I got an idea about that, only buy your needs to save money.. Don;t buy the things that are un-needed.
I agree, budgeting really needs to be taught in schools. I thought I knew what i was doing until i started my own business, made me realise just how important creating a proper budget can be… cash flow is king for business start ups and the only way of monitoring that is with a good, well laid out, budget
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This is something I struggle with. I’m not a budgeting fan.
I’ve always thought if you spend more than you make, just make more!
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Living paycheck is no fun. I had to do it for a whole year until I finally paid off my credit card debt.
I always reminder everyone – AVOID credit cards during these times – It’s incredibly important.
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Great post.
I must reiterate out that if times are hard, any form of credit is a bad thing. Interest charges and fees will quickly eat into the little cash that you have.
I agree. I am determined that credit cards, loans and other forms of borrowing for everyday needs are to blame.
However, in my opinion those are not interest rates and other fees that eat all the income; rather, as many have already noted, – those are people’s wants that generally exceed people’s earnings but are made accessible via credit cards!
I suggest that people borrow money for vital needs only, such as health, education and housing.
What a great a tread this has been. Regarding Nigels comment “if times are hard, any form of credit is a bad thing” that is spot on if you are in a hole STOP DIGGING. Budgets are hard for most people but for people who like columns of figures and spread sheets they are real easy. If you are not one of those people just keep those budgets real simple or you just anit going do it. A very easy way is have 2 bank accounts One called “pays the bills” one called “for living off”. That stops the hole getting deeper. But if you want to get out of the hole go for pay your self first (10% of your all your incoming)treat it like a bill that comes out of “pays the bills”
Stay Well Stay Happy
John
It is a tragedy that dealing with money is not a subject taught at schools more fully. Most of us have the poorest idea of how to handle money when we leave school.
I feel this is definitely a topic for education – but it is one of those where not only many parents have a poor grasp of the basic principles of handling money; but ditto many teachers.
I think this is one area where the government would, ideally, step in.
The fundamental principles of handling do not change; some bright person ought to be able to devise a template of “the ten rules of finance” or something similar which could be taught to kids from the youngest age for a couple of hours a year. By the time they left school most would have the hang of it.
OK – so I’m an idealist :-)
I can do 4 rules…
Spend some of your money
and save the rest.
Get rid of the debt with the high interest
then learn enough to invest in the best.
Stay Well Stay Happy
John
eliminate debt and month to month payments wherever possible. stop the cable. turn down the AC. cut the phone off. etc. Eat off the dollar menu. Eat boxed cereal, beans and rice. A dollar saved is a dollar earned.
Budgeting is one of the most important skills in adult life. It should be taught to our children at school. I liked the lists idea, which is very helpful. Thanks.
I learned a long time ago that, barring unforeseen circumstances, my wife and I are the only people who will determine our financial destiny. I shake my head when I see neighbot after neighbor, both older and younger than me (I’m 38) cry about their financial circumstances. Many have great jobs and have have plenty of time to save and pay off debts.
In these days, I’m comforted that my only debt is my house and it will be paid off in 4 years. We paid off our first house in 8 years. It has taken much of discipline and even more self-restraint, but I sleep at night, even in this deep recession.
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Most people never sit down and look at where all the money goes. I saved some money and put it in some interest paying accounts untill it paid one bill. Then the money i did not need to pay that bill with i saved to pay another. Finaly my interest or dividends pay my cable dsl and phone. I wish i can get all of the bills paid like this.
If more people thought like this we probably wouldn’t be in a recession. This should be taught at every grade level in school.
A vary educational article. I am sure the information will be useful for many people to cope with economic hardships!
I agree get out and do what you can. Waiting around the some to help you is a waste of time!!!
I think one thing that has helped us (I’m self-employed) is setting aside a separate account to squirrel away our 15% or so self-employment tax (FICA) another account for the property taxes, etc. Those once a year or once a quarter expenses used to clobber us, but we’re ready for them as they come now.
Budgeting is not difficult, but it’s a challenge for most people because they don’t want to take the time to track the income and outflows. They often don’t realize that a few minutes a week is all they need to give to make sure their family is on track and won’t end up in financial trouble. There are lots of helpful online software programs to help make this easier.
For your budgeting plans to be very effecive, you need to talk to your spouse and children about any budgetary limitations you are facing. Also let them know of financial goals you intend setting. By being totally honest about the bills and loans you have to pay, and your intention to save certain amounts of money for emergency funds or financial goals, you can help your family understand your collective financial situation. This in turn will allow them to change their view on purchases they make.
I fell into the payday loan trap. Every month I got farther and farther behind because I had to pay the principal, plus interest, when I wasn’t living within my budget to start with. I can see where a payday loan could help one through a temporary tight spot that was NOT the result of poor planning, but rather an emergency. Still, I would have to say that they are a dangerous situation for those with financial problems already.
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Thanks for the great post! I really like the part where you advise to focus on needs before wants. Very tough for some people but well worth the attempt.
Hoooh! i really agree on what you are saying. as what mr FORD says, it would be best if you consider first the needs before wants. we can survive without having the wants. consider first our priority(food, shelter clothing!)
thanks for this great advice.
You’ve lived an interesting life, RT, and you make some very interesting points, all of which I agree with. I second the fact that you can’t succeed solely on the merit of a college degree; you have to make the most of what you learn in college and be good at what you do. But undoubtedly, as you illustrated, a college degree definitely opens doors that are closed for people without a degree. Someone with no academic credentials may have to spend years accumulating the experience and reputation required to qualify for a job that a fresh college graduate lands without any practical experience whatsoever. Now whether the college graduate retains that job or not depends on how he builds on and uses his college education. The stamp of approval from undergraduate/graduate degrees indicates that the applicant is less of a wild card, s/he has spent years acquiring knowledge, social skills and training from a recognized institute, and is more likely to bring something of value to the company than someone with no credentials.
Very well written article.Here one thing I want to say is one should save first and then spend rather than spend first and then save.