If you’re not crazy about the idea of using a budget, you’re not alone. Many people think of a budget as something you go on like a diet. Or they think of it as being about less — obsessively spending less on everything and generally having less fun.
But a budget isn’t something you go on; it’s a tool you use. And it isn’t about less; it’s about more — having more knowledge about what’s happening with your money so you can be more intentional about how you use it so you have more for what matters most.
In the Parable of the Talents, Jesus describes us as managers of His resources (Matthew 25:14-30). To truly manage money, a budget — or as I prefer, a cash flow plan — is essential. Using one will help you build a surplus, accomplish your most important financial goals, and enjoy peace of mind.
Plan to succeed
Using a cash flow plan involves three key activities: planning, tracking, and reviewing. This month, we’re taking a look at planning. To get started, go to the downloads section of the SMI website, where you will find a Cash Flow Plan form and Recommended Cash Flow Guidelines.
A budget isn’t about less; it’s about more — having more knowledge about what’s happening with your money so you can be more intentional about how you use it so you have more for what matters most.
Begin by filling in the “Now” column of the Cash Flow Plan with the monthly amounts you are now giving, saving, paying on debts, investing, and spending on everything from housing to health care. At first, you may have to guess how much you’re spending on some of the categories. Do your best.
Next, use the Recommended Cash Flow Guidelines to help you fill in the “Goal” column. The guidelines assume you have no debt other than a reasonable mortgage — one requiring no more than 25% of monthly gross income (preferably less than 20%) for the combination of your mortgage, taxes, and insurance.
If you have other debts — credit card balances you carry from month to month, a financed vehicle, a student loan — you’ll have to devote less to other categories to allow for the debt payments. Look to your discretionary expense categories to find this money.
The guidelines are not intended as one-size-fits-all plans. The cost of living in big cities is different than in small towns, income tax rates vary by state, and health care costs differ significantly depending on whether you are covered by a subsidized plan or on your own. Plus, you may value vacations more than regularly buying new clothes. Adjust accordingly.
Prioritize your goals
When filling in the “Goals” column, follow this process:
After entering your monthly gross income, write down a “Giving” goal. The Bible teaches that giving is to be our first financial priority (Proverbs 3:9). A tithe, or 10% of our monthly “increase,” is where God started his Old Testament followers, so that’s a good place for us to start (but it’s not the intended stopping point).
Next, enter a “Savings” goal. Ideally, this will amount to 10%-20% of monthly gross income (that may sound like a lot; start where you can and build from there). If you have any debt other than a reasonable mortgage, use that savings allocation to build an emergency fund totaling one month’s worth of essential expenses. Once you have that much, take the money you were putting into savings and redirect it toward getting out of debt as soon as possible. Put it toward your lowest balance debt. Once that one is paid off, take the full amount you were paying on it and apply it to your next lowest balance debt and keep going until you’re out of debt.
Once you’re debt-free (other than a reasonable mortgage), redirect the money you were putting toward your debts back to savings and build up your emergency fund to three-to-six months’ worth of essential living expenses.
Once your emergency fund is fully funded, you can then redirect most of your monthly savings allocation (8-15% of your income) toward investing, while continuing to put a little (2-5%) toward saving for items that’ll need to be replaced in the next five years or so, such as a vehicle or your home’s roof.
After all of that, fill in the spending categories, starting with the essentials (such as housing, maintenance/utilities, transportation, insurance, taxes, food) and ending with the discretionary categories (e.g., gifts, clothing, entertainment). Strive for a balanced plan where total income minus total outgo equals zero.
Periodic income and expenses
Certain expenses do not occur every month but do occur at some point every year (insurance premiums, Christmas gifts, vacations). These need to be accounted for on your monthly Cash Flow Plan. Take the annual total for each, divide by 12, and put those amounts in the proper categories. Ideally, transfer the total of all such categories into a separate savings account each month so the money will be there when you need it.
If you’re new to budgeting, just get started — and use a pencil. In the early months, expect to stumble and make some mistakes. Soon enough, you’ll get the hang of it. Once you do, you’ll wonder how you ever lived without a cash flow plan. And be motivated by this truth: “The plans of the diligent lead to profit, as surely as haste leads to poverty” (Proverbs 21:5).
Next month: How to track your cash flow.