Creating your first budget can be stressful. Often times when I meet with people to help them with their fist budget I notice a few mindsets that need to be corrected regarding budgeting. This article is going to address a couple of those misconceptions and lay out some practical guidelines for setting your first budget.
The Bucket Principle
I was meeting with a young man a few weeks ago and he began to talk to me about how stressful planning for his wedding was. He detailed all of the expenses that they would soon incur and how worried he was about being able to pay for all of them. It was here that I first considered the principle of the bucket.
Picture a bucket, as this young man was adding expenses the bucket was getting larger and larger. As the bucket grew he had to figure out how he was going to find the money to fill the bucket and pay for them. This is a rather stressful and dangerous view of money, but one that many of us hold to.
Budgeting takes this view of money and flips it on its head. When you begin to budget your expenses are no longer the bucket, but your income is. Thus budgeting is using your money in such a way that you can fit as much into the bucket as possible. You no longer have to worry about having enough money to pay for the bucket now you are considering what you can pay for in light of the size of your bucket. If you want to pay for more you must find ways to enlarge your bucket. Your income should dictate your expenses not the other way around.
Handcuffs vs. Map
I talk to so many people who view budgeting as if they are handcuffing themselves for the rest of the month. They view budgeting as writing down a list of desired expenses as if they are in stone and limit themselves for the rest of the month. People will say things like, “I don’t want to budget because I like to be adventurous.” Often times they worry that budgeting will keep them from last minute opportunities.
This view of budgeting as handcuffs could not be farther from the truth. A budget is a map that helps you get to where you want to be. If you don’t know where your money is going then you will have no way of getting to where you want to be. By tracking your expenses in light of your income you are able to set money aside for that unexpected adventure or that last minute opportunity.
1. Start with Income.
Put the bucket principle into practice by figuring out how much money you have to spend and then deciding where you will spend it.
2. Label most important expenses first.
All expenses are not created equal! Start with the most important expenses like shelter, food, and transpiration. Then work your way from there down to the least important things like entertainment.
3. Be Specific.
When labeling the different categories of your budget be specific about the category and the amount to be spent. This will allow you to fit more into your bucket.
4. Be Realistic.
Don’t just be wishful, budget an amount that you actually believe you can stick to.If you are not realistic about your budget you will not actually stick to it.
5. Review It.
Maybe you spent more last month in a particular category than you intended or maybe you spent less. Adjust your next month’s budget so that it takes those numbers into account. Your budget should become more accurate as time goes by. This is accomplished through a routine review and edit.
Dave Ramsey’s Total Money Makeover.