Where does it go?

A few days ago, I asked followers on the Facebook page what aspect of finances they wish they knew more about. My friend Patrick joked “how to keep the money that gets deposited into my account to remain in my account.” It was a funny response but it got me thinking about how things were before we had a budget. I remember asking myself at the end of every month: where does it all go?

Since we started doing a monthly budget, I don’t ask that question any more. I know where it all goes and it goes where I tell it to go. Before we started doing a monthly budget, the thought of putting it all down on paper seemed daunting. It would be so much work, it would be hard to manage, it would be…(fill in your own excuse here).

The first month it was a bit of work. We had to figure out what we were spending our money on. We then had to make an effort to cut back on that spending and track where our money was going.  The second month, it was easier. By the third month, it almost seemed automatic. The budget doesn’t change much for us since our income is pretty steady. Since we budget for pretty much anything that can happen around here, special occasions and other unexpected things don’t come and bite us in the butt.

Starting a budget is easier than you think. Get out a sheet of paper or open up your spreadsheet program on your computer. Write down your expected monthly income. If you are salary this is much easier. If your pay fluctuates, use the minimum amount you would expect to get paid that month. Don’t include overtime. I’ll show you how to figure that in later.

After you’ve got your income at the top, it’s time to spend it. Spend it all on paper. Start with the basics: food, shelter, utilities, transportation (gas, insurance, repairs). Next list out the minimum payments for all your debts (car loans, student loans, credit cards, personal loans, etc). After that, list out the other stuff: donations, life insurance, hair cuts, clothing, gifts, entertainment and anything else you can think of. It helps to go through a few months of bank statements to see what you spend money on.

Some items, like repairs and gifts are spots where you put a bit of money each month so when your alternator dies or the holidays come around, you’ve got some money put away.

Is there money left? If the answer is no, then you need to go back and find somewhere to trim back. You need to be at zero when you are done.

If the answer is yes, this is where things get interesting. Take out a second piece of paper. This is where you make your to-do list. First write down Emergency Fund and put $1,000. Next write down all your debts from smallest to largest, except for the mortgage. Every month that you have something extra, you put it toward that list. You’ll start to see items fall of that list rather quickly.

No debt? You should try to save up three to six months of expenses in a savings account. You never know when you or your spouse might lose your job. After that, add other things to your to-do list. Maybe it’s saving for a car or a vacation. The sky is the limit here.

If you want more information about this, check out The Total Money Makeover. Dave Ramsey is one of the best financial folks out there. It’s not get rich quick. It’s more the tortoise and the hare approach. Buying his book years ago was one of the best purchases I ever made.

Today’s photo courtesy of Salvatore Vuono and freedigitalphotos.net

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