If you are an average American family you
have over $5000 in credit card debt, a mortgage and a car payment. You feel swamped every
month by bills, but you know you could get out of debt if you had just a little more money
each month. Survey's indicate that just $300 more a month would save most people from
filing bankruptcy and losing everything they have.
Unfortunately, bad budgeting is learned,
and it's going to take awhile to break all of the bad habits you have formed. That's why
we are starting the Budget Challenge. We are going to take it one step at a time so you
don't get discouraged!
Budget Challenge Step
One
Budget Challenge Step Two
Budget Challenge Step Three
Visit the Budget Challenge
Message Board for support and join the Budget Club for
e-mail support!!
Step One:
First we need to set three goals. There's
no point in starting a trip if you don't know where you are going! Your first goal is
going to be choosing a bill to pay off. You may not be able to pay it off by the time the
challenge is over, but you will be able to set a date for when you want it paid off. I
want you to go through your list of debts and find your credit card or loan with the
highest interest rate. This is the bill we are going to work on paying off. Once you have
the bill I want you to use this calculator to help you decide
how long it will take you to pay it off. You can plug in different numbers to see how
different payments will affect the length of time it takes to pay the debt off. For
instance, if you have a credit card with $2000 on it, your interest rate is 18% and you
pay $50 a month, you will pay it off in 61months. If you pay just $10 more a month it will
be paid off in 46 months! Write down how much you owe on the bill, how much you
will pay monthly and the date when the bill will be paid off.
Our next goal is a pleasant one. I want you
to pick something that you want to buy for yourself. It could be a new dining room set or
a vacation. This is what we will be saving for. In order to make our savings goal you need
to know how much it will cost and how long you have to save. For instance, if you are
saving for a week at the beach in June and it will cost you $600, you will need to save
$100 a month, since it is January. Write down your goal, how much it costs, when
you want to have the money saved and how much you need to save each month in order to meet
your goal.
Our third goal is going to be the same for
everyone, long term savings. Your long term savings could be for retirement or for
educational purposes for your children. Everyone will have a different amount that they
would like to have in the future, but for general purposes we will be setting a goal of
saving 10% of your income to go to long term savings. Calculate how much you should be
saving each month according to your income. For instance if you make $1000 a month, you
should be saving $100 each month. Write down your monthly long term savings
goal.
Now I want you to draw a picture of the
three goals, about the size of a credit card, and cut it out. Tape the picture onto your
credit card, make copies if you have more than one, and in your checkbook. These pictures
will serve as reminders when you are shopping so you can stay motivated to meet your
goals!
Step Two:
Step two of the challenge involves two
parts. The first one will take you under an hour to complete, the second part will take
you a month! Yikes! It’s not hard though!
First I want you to fill in our monthly budget sheet with the amounts you THINK you
spend and earn. Don’t stress too hard on this part, we are just going to compare it
with our actual list of expenses at the end of the month.
I bet most of you thought we were going to
write a budget in the first part didn't you? Nope. How can you write a budget if you don't
know where you actually spend your money? I know you think you know where you spend your
money, but after this exercise you'll be amazed at how much money you are wasting.
Part two involves keeping track of all the
money you spend this month. I don't want you to run out and buy any expensive tracking
software or anything. You need two things: Some paper to write down each days expenses,
and a little notebook to keep track of stuff when you are out of the house. You will be
writing down the date, what you bought or paid, and the amount.
I want you to set aside ten minutes each
day to record all of your purchases. Some days it will only take two minutes, just make
sure you do it everyday. We are trying to form new habits so don't wait until the end of
the week to do everything.
Let's start at the beginning of our day.
Most of us stop at the coffee shop and pick up a latte. Okay, write it down, if you don't
have time, make sure you get a receipt. After working for several hours we go out to lunch
with a friend, there's another expense. We have to pay the parking garage when we leave
the building, write it down. See why the little notebook is handy? We pay for a lot of
things with cash and we don't get a receipt because we don't want the car to be filled
with them. Just write it down in your little notebook.
Once you are home, dinner is cooked, and
the kids have a bath, you can relax. Just take your little notebook out and transfer
everything to a larger sheet of paper. If you pay any bills that day, make sure you write
them down also. Don't try to categorize anything right now and don't write anything down
as cash. You don't buy cash, you spend cash, we want to know what you spent it on. The
important things on the list are the date, the amount, and what you bought. Keep a
separate column for money that you earn such as paychecks and bonuses.
Now let's deal with Wal-Mart. Huh? We all
have that one store where we go in for one thing and end up spending two hundred dollars.
For me it's Wal-Mart. You can write this expense down two ways. You can write it as one
receipt or you can separate it into several. I separate it into several. We always buy our
diapers and other personal care items there. That's one receipt, I call it my necessities.
The other things I buy, like cookies, film, flowers, etc, go on separate receipts because
we don't always need to buy these things, so I want to know how much we are spending on
them.
How do you deal with ATM withdrawals? Like
I said before, don't write it down as cash. If you take $20 out and you spend $15.75 on
lunch, write down the $15.75 that night. The next morning instead of going to the ATM to
get money for your latte, you already have cash to use, so write down the price of the
latte.
What about things you use a credit card
for? Write them down in your notebook just like everything else. What we are doing is
seeing what kind of spending habits you have, so that you will be able to write a budget
that will work for you.
What about expenses that come out of your
paycheck? Don’t include these just for the sake of simplicity. These expenses are
automatically budgeted for you, meaning you don’t have to deal with the money
yourself, so we can rest assured the expenses are taken care of!
Don't forget expenses like bank fees, ATM
fees, and bills that are automatically deducted from your checking account.
Sound easy enough? You don't have to cut
back on spending or anything (yet), just keep track of where your money is going. Once you
see how much you are spending in each category you will be able to write a budget that
works for you. The importance of this step shouldn’t be overlooked. In order to stick
with a budget, it has to be reasonable for you, not for anyone else.
Step Three:
This step is where we reconcile our
budgets. For the past month you have been tracking your spending each day to see exactly
where all of your money is going. Now you are going to take that list and put the expenses
into the categories of the Monthly Budget Worksheet.
Once that is done, compare it to the Monthly Budget Worksheet you filled out in the
beginning of step two.
You will likely see that you were off in
several categories if not more. You need to take some time to figure out why you were over
or under your budget estimates. In my first budget I was way under in categories such as
dining out and entertainment. We realized the problems came in when we were in a rush,
running late from the commute home or just not feeling like cooking after work.
Write down the categories you were
off in, and a plausible reason. Then write down how you could cut those expenses.
Be reasonable here. Are you really going to cook from scratch every night to cut your
grocery bill? If not, then don’t write that idea down, it will only make you hate
your budget. In our budget we realized we could cut dining out costs down by making meals
in advance or using our crockpot more. We also researched recipes for our favorite
restaurant meals. Be creative!
If you found that you don’t have
enough income to cover your expenses, you are at least at a point where you now know how
much more you need each month. From there you can decide what needs to be done, whether
it’s a drastic cutting of expenses, asking for a raise, or getting a second job.
Remember those goals you wrote down in step
one? Dig those out so you can start planning on how to reach them! The amounts you decided
you need to put aside each month should be included in your budget as an expense. So if
you are saving for a vacation that amount should be included under vacation, or if
you’re saving for new carpeting it will go under household repairs. To make sure you
aren’t spending this money each month you should deposit it into your savings or
money market account. This can be done by writing yourself a check at the beginning of the
month or even having it direct deposited right into your account by your employer.
As long as you aren’t spending more
than you are bringing in, you should have some money left over each month. The fastest way
to get out of debt and build an emergency fund is to take half of this money and put it
towards each. The first half will go towards your debt with the largest interest rate.
This is the bill you identified in your goals in step one. Let’s say you have $100
extra each month. Take $50 of that and add it to your bill you are trying to pay off. Once
that bill is completely paid off, take the total amount you were paying on it and apply it
to your next debt. Continue this pattern until all of your debts are paid off. With the
other $50 extra you have each month you will begin an emergency fund for future unexpected
expenses. This can be added to your savings account or you could start a new account for
it.
Now you need to follow your budget for the
rest of the year with the Monthly Budget Worksheet. As the year progresses you may need to
refine some of the categories, break them down further or add some in to help you keep the
budget working for you. Your budget should never be written in stone, it’s just a
guide to help you accomplish the goals you have.
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