Editor's Note: A version of this article was previously published on Debt-Free Mormon Blog. It has been reprinted here with permission.
If you've read any of my articles or followed my blog, you're probably thinking, "Great, another lecture on budgeting!" I apologize. But it seriously is important.
The reason I have a tendency to continue writing about this topic is because it is the key to winning financially and the foundation to everything personal finance. But mostly I have to write about it to remind myself to keep doing it and to do it better.
I cannot stress how important it is to get yourself — or your family — on a budget and have a plan. The budget is a very powerful tool and the key to getting you and your family out of debt or avoiding debt all together. Budgeting isn't easy, but you have to do it if you want to win.
I hear a lot from people that there is no way they can get out of debt, because their current circumstances just don't allow any extra money in their budgets to do it. Getting out of debt does feel like a daunting task. It's easy to look at the hill you have to climb and talk yourself out of ever getting there.
I used to think the same thing too at one point. However, getting on a budget helped me control my expenses and eliminate nearly $22,000 of debt in the first year I began my debt-free journey. Since then I have paid off more than $50,000 of debt. There is absolutely no way I could have done it without budgeting. The budget is our friend.
Have you ever gotten to the end of the month and wondered what happened to all your money? Of course you have. We all have. If you are asking yourself this question at the end of each month then you're likely not budgeting. If you are budgeting and still asking yourself this question, then you can do better. If you don't tell your money where to go, then at the end of the month you will end up wondering where it went. The budget tells your money exactly where to go.
The budget is the foundation upon which debt freedom is built. It causes you to gain control of your finances and live on less than you make — eliminating the need for credit cards and borrowing money. So now that you're going to be on a budget, go ahead and cut up those cards. You'll thank me later.
I still remember the day I said goodbye to my credit cards. It wasn't easy, but it was the first step in learning to live below my income.
The budget is a specific, written game plan in which you tell your money exactly how to behave. It's important that a new budget is created regularly (weekly, bi-weekly or monthly). Every single dollar (your total monthly take-home pay) must be spent on paper before the month begins. In order for the budget to work, those who make the budget have to work as well — do not deviate from your written game plan. It requires discipline and accountability. Be intentional about your spending. You'll be surprised by how much you will get out of your income when you begin to budget. You'll feel like you got a raise.
Dave Ramsey, a renowned financial expert, author and talk-radio host, and someone I consider a mentor of sorts, refers to this sit-down as the "Budget Committee Meeting."
If there is an issue regarding the budget that comes up later during the month and requires a budget adjustment, sit down again and make the appropriate changes together. When both spouses are on the same page and understand the household finances equally, your ability to control spending and your get-out-of-debt power will be amplified.
We need to care for our own households first, meaning the first things accounted for in the budget and the first bills paid should be food, shelter (rent, mortgage, utilities), transportation (car payment, gas), and necessary clothing. After the necessities are covered, use the remaining money to pay the other expenses (credit cards, medical bills, entertainment, etc.).
Getting out of debt requires sacrifice. You might have to cut the cable and other non-essential expenses temporarily until you have the money in your budget to afford them. You might also have to avoid eating out — which can be pretty expensive and cause additional strain on the family budget. You'll be amazed at the amount of extra money you can find in your budget by avoiding restaurants and eating in. Be creative in finding ways you can free up some room in your budget in order to gain control of your money and life.
As a Christian, I practice the law of tithing by giving 10 percent of my income to my local church, The Church of Jesus Christ of Latter-day Saints. If you are also a tithe payer, this should be added to the top of your budget. If you are not a tithe payer, I would still highly recommend adding some form of giving to your budget and making it a priority. Giving to others is a wonderful thing and you'll be amazed at how it can change your financial situation for the better. I don't know exactly how it works, I just know it does.
When setting your budget there are a few guidelines that can help push you in the right direction. Check out the recommended percentages and guidelines for a successful budget. These percentages will help you know where you are overspending and where cuts need to be made.
I also recommend the mint.com mobile app. It is a wonderful tool that will help you track your expenses and stay in line with your budget. Give it a try.
But you don't need fancy software or special forms to make a budget. All you need is a blank piece of paper and a pencil. The important thing is that your budget is put in writing. If goals aren't written down, they are far less likely to be achieved. Put the amount of your monthly income (your take-home pay) at the top of the page and spend it accordingly; line-upon-line until you spend it all. Until you hit $0.
For fixed-expenses utilize automatic checking account withdrawal options or employ an envelope system. This will help you track your spending and stay within written budget.
Mastering the budget takes time and practice. Be patient and stick with it. Be willing to make adjustments as your financial situation continues to change. The more you do it the better at it you will become.