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how to make a budget

One of the most important monthly rituals in my house is making a budget.  My wife and I sit down somewhere between the 10th and 15th of the month in order to determine how much we can spend in the coming month and how we will build our life.  I personally prefer to make a budget from the 15th to the 14th of the next month, because by that point I know how much money I already received from my primary source of income (by Israel law, employees must be paid no later than the 10th).

It is important that both the husband and wife work together to agree on this budget.  This does not mean the wife just lets the husband do what he wants and she agrees; she must be part of it.  I have heard plenty of couples who financial problems start with the fact that one spouse controls all the money.

Making a budget means assigning an address to every shekel you earn, telling it to do before it tells you.  In order to do this you need to determine two things:  your inflow of money and your outflow of money

inflow:

Include any money you have received in the past month.  This includes any money you earn, your spouse earns, and any money you receive as a gift.  For example

₪300 from Bob’s birthday
₪100 from Sue babysitting
₪3000 Sue’s paycheck
₪2000 Bob’s paycheck
₪5400 total

As you can see, we’re dealing with only ₪5,400.  No more.  There is no spending anything above this without going into savings, or even worse, debt.  If you need more, then realize what you will have to do, and consider how you will need to pay it back.

 The next thing is to list our outflows of money.  I prefer to list them by order of flexibility.  For example, I cannot change the amount I pay for rent, but I can change how much I eat out.  Obviously your list will vary.  It may even vary every month; that’s fine.  The important thing is that every dollar you have has an address.

 Finally, fill in the amounts starting from the least flexible to the most

₪2600 Rent
₪150 Internet
₪500 Electricity
₪200 Water
₪100 Phone
₪300 Transportation
₪100 Medical
₪1000 Groceries
₪50 Clothes
₪100 Eating out
₪100 Misc
₪100 Charity
₪100 Savings
₪5400 total

Your inflow must equal your outflow.  Every shekel you make has to have an address.  If you get some extra money during the month, you can either choose to add it to your current month (add the money to you inflow and outflow) or save it for the next, but do not do what most people do and spend it both times.

A wise woman once told me that every budget is a fiction; it’s just a matter of how historical your novel is.  If you see that something is not working in your budget, or that you are going to have to break a limit on something, then call an emergency budget meeting with your spouse where you both determine what you will have to change in order to ensure that your inflow still equals your outflow of money.

I personally keep an excel file on the desktop of my computer than will automatically subtract any money I type in and tell me how much I have left.  Some people I know like to keep a countdown of how much thay have left to spend in each catagory on the fridge.  The important thing is to be aware.  Once you have a budget, you’ll be surprised how much more easygoing you’ll be about spending money.  No more guiltly meals out and regretful splurges.  Next time you go out, you’ll kow that it is exactly what you can and should be doing with your money.

if not now, when? – a guide to recession saving

When I hear what most people tell me about saving money for the future, I want to slap them.  How am I supposed to save for the future when I can barely make ends meet?  I am in a recession and while small tips here and there can help me save a shekel or two, I cannot change how I am living – I live at what I consider a minimum for myself (certainly less than I ever did in my entire life).

The people telling me to save always quote Hillel’s famous line to inspire me, “if not now, when?”

I think that is a fair question.  If I can’t save now, then when can I?  Or better yet, how much money do I have to make in order to follow a budget and save?

The fist step is to write up a budget, including the amount to put into savings (I use a reverse budgeting system).  But if your income does not meet your budget, then you have to either make more money or cut back on expenses.  Have a goal.  Have a target amount of income and once you make this amount, live by your budget and start to put money into savings.

The targeted amount cannot just be some dream amount you hope to get years in the future; it must be a realistic amount within your grasp that you can possibly reach in the coming months.

Let say that Bob makes ₪ 6,000 and is barely making ends meet.  Once he makes the target amount of 7,000 he can start thinking about saving for the future.  But how will he make it there?  Either he has to get another job, or his spouse has to get another job.  If these two things cannot happen, then he must make his budget smaller.  If this does not work out in the long run, then Bob must move or do something else entirely, because he cannot continue on the road he is on.

It’s hard to tell people save for the future during the current economic climate, but by setting a goal, a Specific, Measurable, Attainable, Relevant, and Time bound goal, then you’re going in the right direction.

In the meantime, the two best ways to save money are:

(1) continue to change your shopping habits to try to save and

(2) involve yourself in the world of budgeting.  Many Jews learn Chafetz Chaim because by concerning one’s self with the laws of gossip, one is more likely to be aware and avoid speaking gossip himself.

PS – for those interested, here is another good article about reverse budgeting

making ends meet – the art of reverse budgeting

This article will tell you how to budget for your household, or more correctly, how to reverse budget your household.  This means that instead of figuring out how much you can spend, you tell yourself how much you have left to spend.  The clock is ticking, and you will be aware of the tradeoffs you make and the implications in your budget.

The steps to reverse budgeting are:

#1 – Figure out your total income

#2 – Figure out total unavoidable expenses.  This includes items such as rent, you cell phone bill, medical expenses that you have no control over whatsoever.  Your income minus your unavoidable expenses will be your Gross Income

#4 – Put aside a small savings.  Build your savings by putting aside a small, set amount of money.

#5 – Plan ahead – put aside some small amount of money for future expenditures.  Put some money aside for the holidays, save money in order to anticipate emancipation costs for your children.  Always include a small cushion of money in case the unexpected happens.

#6 – Spend what you have left.  Whatever is left over at the end of the month, rolls into next month’s spending money.  Use this money to pay for your expenses, weigh if you can afford to go to a movie, or else keep the money and save for an iPod.

For example: If I make ₪ 6,000 a month:

₪ 3000 is put aside immediately to cover rent, electricity, phone, internet and medical expenses.

₪ 300 is put into savings

₪ 200 is put into planning ahead.  I know that the Tishrei will be here in a few months and I will have to pay shul fees, buy a lulav etc.  Also, I want to have some money set aside in case something terrible, God forbid, should happen.

This leaves me with ₪ 2500 to spend on food, transportation, and having fun.

Now let’s say I am deciding to buy a new shirt and tie.  If I do, then that means there will be less money for other items.  If someone can give me a ride to a destination that normally costs me ₪ 20, then I have ₪ 20 more that I can spend.  The important thing is to know how much you have left as all times.  I like to carry around a piece of paper with a number and ever time I spend money I cross out the number on the paper and replace it with how much I have remaining.  This helps me to keep in mind the cost of my spending and  its impact.

tradeoffs

When I was growing up, managing my finances was simple.  I was an average ten year old with a steady job (doing chores) which paid a steady income (allowance).  And while I used my salary to purchase comic books, baseball cards, and even birthday presents for my relatives, I never ran into a single problem such as overspending or running a minus in my account.  Now that I am older and running a house, I look back and say, “What happened? How did I go from such a responsible young boy to an adult on the verge of debt?”

At first my answer was that I have more serious expenses now.  I am no longer buying luxuries exclusively; I am buying the basic needs of my household.  I stomached this answer for a while, but when I think honestly about myself, I know that this is not true.  I am not living like a pauper and there are people who make less than me that seem to manage it all much better and keep their heads above water.

After a lot of thinking I came to my second answer: I did not track my money carefully enough.  When I was growing up, every penny could be accounted for, but now I was spending everywhere and I don’t know where my money is going.  So I went about writing down every penny I spent for the next 2 months.  And while this method certainly made me more conscientious of my spending habits, it did nothing to help me save. I had all of my financial information but no idea what to do with it.  Moreover, living like a miser lent itself to binge spending, so I was spending either nothing or everything and could not find the right balance.

Then I finally got it.  I understood the one thing that made me stay within my budget my entire childhood.  The one thing that, if I could only rekindle, would help me budget my expenses today as well.  When I was younger, I understood the idea of tradeoffs.  I understood clearly when I bought something what I was giving up for it.  If I were to get a soda, then I would not have enough money for a comic book.  And if I were to get my sister a birthday present, then I could not get myself an extra pack of baseball cards.

Understanding tradeoffs is essential to budgeting and spending.  Without knowing what you can and cannot cut back on, when you can and cannot spend extra money, it is impossible to get a handle on your expenses.

This blog is designed to share information relevant to modern day budgeting. In the weeks to come, I plan on discussing budgetary concerns that will show you how to get a handle on your expenses and your life. Some of the upcoming topics:

How to make a budget

How to determine your expenses

How to control you expenses

How and when you can afford luxuries without straining your budget

How to start saving without stressing your budget

and many more…