Whether you are new to budgeting or have been doing budgets for years, these three rules to budgeting are sure to make a difference. Before Christina and I found Dave Ramsey and began our Total Money Makeover, we did a “budget”. Back then we had a fancy spreadsheet budget but it was incomplete. It only included fixed expenses, and by fixed I mean we were either receiving a bill or someone would have come calling for their money if unpaid. We didn’t plan for things like grocery shopping or gasoline, instead we paid those “fixed” expenses and then filled up the tank (both car and belly) with whatever money was left. Our budget looks quite different nowadays. These three simple rules made a huge difference.
Rule #1 – Every Dollar Gets an Assignment
Dave Ramsey calls it the zero-based budget. No, that doesn’t mean you have zero dollars in your account. The zero-based budget just means that you give every dollar of your income an assignment. You’ll assign some dollars for giving, some for saving, and some for spending and at the end you’ll have assigned every dollar of your income.
Christina and I didn’t do that. Like I said, we paid fixed expenses and then winged it until the next payday. Now, we have “line items” in our budget for groceries and gasoline, as well as, some spending cash and other variable expenses. Our current income is about $4,200 per month and we give all $4,200 an assignment each month. Here’s an example using our June 2015 budget.
So whether you use a sleek spreadsheet or fancy software, be sure to give every dollar an assignment. Dollars that don’t have a mission will go missing. Christina and I squandered hundreds-of-dollars month after month before adopting rule number one.
Rule #2 – Everything Gets Paid On Time or Early
June’s income covers June’s expenses, right? Wrong! We, well okay, I struggled with this one for a while. I really wanted to align one month’s income to that month’s expenses. That meant paying June 1st’s mortgage as many as fifteen days late when I waited for the first paycheck of the month. Well, anyone that has done that a time or two knows how unsettling it is. Christina helped me put an end to that cycle. Now, we pay everything on time or early. Sometimes as many as fifteen days early. We now pay June 1st’s mortgage with the last paycheck in May. When we receive the last paycheck of a month we carefully review any expenses that are due before the first paycheck of the following month. So when we are drafting our July budget and schedule $785 for the mortgage, we know that is for the mortgage payment due August 1st. Rule number two alleviated a lot of stress that came with paying bills within the grace period.
Rule #3 – Prioritize
Here’s the thing—if you are current on your credit card but behind on your electric bill, your priorities are out of alignment. Many of us have had to make tough, gut-wrenching decisions on what gets paid this month and what does not. I encourage you to fend against the stress by drafting your budget by priority. For Christina and I, we give first, save second, and then pay our bills. We also list the bills in order of priority. Dave Ramsey talks about taking care of the four walls first. Food, shelter, utilities, and transportation.
So first, we feed our family. That’s groceries, toiletries, and baby supplies. Then we make sure the mortgage and pesky homeowners association dues are paid. Next are the utilities. For us that is electric, water and sewage, and trash removal. Utilities are only those expenses you cannot avoid, and does not include phone, cable or satellite, Internet, or other monthly subscriptions. Last is transportation. Now Dave and I agree that your auto loan is a debt, and therefore does not belong in this category. This category is for other transportation expenses like gasoline, car insurance, or public transit. The danger of including your car note here is it looks like a priority, when in reality it may be a priority to sell the car.
Once the four walls are properly prioritized and budgeted for, then you can list other expenses like health or life insurance, monthly subscriptions (e.g. phone, cable, Internet, etc.), and entertainment money. Yes, it’s important that you have some money to go out and spend. For Christina and I, we budget $40 per pay period per person. We can pick up something at the drive thru with that money or I can play poker with the boys. Remember, every dollar gets an assignment, and $20 of my spend money is assigned to buy my way into a poker tournament with friends every once in a while.
Round out your budget by listing your debts. Like I said earlier, it’s silly to be current on your credit card and behind on your electric bill. It is important that you pay off your debt (and avoid ever going back into debt), but it is not more important than the things listed above. Our society and bill collectors may have convinced you that your creditors need to be paid before anything else, but that is simply not true. Your credit score is not more important than food, shelter, and the ability to get to and from work.
There you have it! Three simple rules for you and your budget. Mine and Christina’s budget was simply incomplete before finding Dave Ramsey and reading the Total Money Makeover. Now we have much less stress and we tell our money where to go instead of wonder where it went. If you need help drafting a budget and sticking to it, I am here to help. Request your coaching session today!