Fill Out Your Budget and then What?

Your budget is one of two core financial tools that you must use and understand to have success with your personal finances. One of the seven laws of money is that you need to know where your money comes from and where your money goes. Your budget, if filled out honestly and properly, will tell you exactly this.

A household budget consists of two columns and as many rows as you need. On the left side is your income…that would be the "where your money comes" from half of the law. In this column you will usually enter monthly or bi-weekly income in the form of salaries, commissions, tips, pensions or investment income. Generally you will leave out perks, overtime, windfalls, inheritances or other income anomalies. In the case of tips or commissions you should be very conservative in estimating future income from these sources. The same goes for those who make their income in the trades or similar types of contract work where work cannot always be counted on and where some customers may be slow to pay. These strategies are wise because it may affect how much you are tempted to spend on the other side of the budget ledger.

That is the right side of your budget where you enter all of your spending. That would be the "where your money goes to" part of the law. The challenge here is the "know" part of know where your money goes that is not as easy as it may seem. To be accurate in your entries on this side of the ledger, you need to know within 5% what you are spending on categories such as groceries, clothes, fuel, car maintenance and entertainment. If you do not know what these costs are you should take a notebook and start writing down every bit of spending you do until you know what these costs are on a predictable basis. You should know to the penny how much your housing costs, transportation costs such as car payments and other fixed costs are from month to month. These should be stable because in most cases you have signed some contract that sets a fixed monthly payment.

So now you have filled out your budget. What the heck did you do that for? Well the first thing you see is a clear one glance snapshot of your cash flow. You can see where your money is coming into your household and you can see where it is going out. This is all very interesting and it gets more interesting when you add up the two sides of the ledger. You immediately know whether you are making more than your spending, breaking even or spending more than you are making. For some folks this is quite a revelation.

If you are making more than you are spending, this is wonderful. That means you have the capacity to spend more or you can save or you can do a little of both. This is a very happy financial story that if sustained over long periods of time leads to prosperity and wealth. Breaking even is still a pretty happy story but you should still strive to move into a situation where you make more than you spend. The surplus should be enough that you are putting some money into savings each month.

If you are spending more than you are making it means that you have to take some remedial action. You need to increase income, reduce spending or do some of both until you return yourself to a cash surplus at the end of each budget period.

The second reason for filling out your budget is so that you can look into the future and actively manage your income and spending so that you stay in a surplus situation from month to month. A budget shortfall month after month will grow from a problem into a disaster. You can plan and take remedial action to turn this situation around and bring your monthly budget to be in a consistent surplus. Over the long run, you must have consistent budget surpluses for your financial situation to be successful. Too much spending leads to too much debt which results in more interest costs on the spending side of your budget ledger.

Our conclusion is simply that you fill out a budget to know if you are making more than you are spending. You can forecast your budget for months and sometimes years into the future to manage your cash flow so that you stay in a positive cash flow situation. Then you can watch the positive effect that this can have on your other core financial tool, the balance sheet, and plan your moves using that tool to achieve long term financial security. It all starts with a positive cash flow budget.

Get Out of Debt
Use your budget to help get yourself out of debt.