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, namely having more knowledge about what’s happening with your money so you can be more intentional about how you use it, ultimately having more money 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 is the right tool for the job — a tool that will give you increased peace of mind and help you accomplish your most important financial goals.
Plan to succeed
Using a budget involves three key activities: planning, tracking, and reviewing. This month, we’re taking a look at planning. To get started, download SMI’s free Cash Flow Plan form as well as our Recommended Monthly Cash Flow Guidelines.
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 healthcare. At first, you may have to guess how much you’re spending on some of the categories. Do your best.
Then use the Recommended Monthly Cash Flow Guidelines to help you fill in the “Goal” column. The Guidelines are for a close-to-ideal situation. They assume you have no debt other than a reasonable mortgage — one requiring no more than 25% of monthly gross income for the combination of your mortgage, taxes, and insurance. (It’s even better if you can keep that to no more than 20%.)
If you have other debts — credit card balances you carry from month to month, a financed vehicle, student loans — you’ll have to spend less in other categories to allow for the debt payments.
The Guidelines are not intended as one-size-fits-all plans. You may value vacations more than regularly buying new clothes. Adjust accordingly.
Prioritize your goals
When filling in the “Goals” column, here’s the process we recommend.
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 your monthly “increase,” is where God started his Old Testament followers, so that’s a good place for us to start. 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 your savings 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 use it to get out of debt as soon as possible. When you’re out of debt, use the monthly income you were putting toward your debts to build your emergency fund up to three-to-six months’ worth of essential living expenses.
With your emergency fund in place, you can then redirect most of your monthly savings allocation (8-15% of your income) toward investing, while continuing to put the rest (2-5%) toward additional savings 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 setting goals for giving, saving, debt repayment, and investing, fill in the spending categories, starting with the essentials (housing, maintenance/utilities, transportation, taxes, food, and health) and ending with the discretionary categories (household/personal, entertainment). Strive for a balanced budget where total income minus total outgo equals zero.
Periodic income and expenses
If your income fluctuates — as is likely if you’re self-employed or on commission — be conservative in estimating your income. Base it on the monthly average over the past 12-24 months. When you have an especially good month, set aside a portion to help cover expenses during months that are not so good.
Certain expenses do not occur every month, but do occur at some point every year (e.g., home and vehicle maintenance, various insurance premiums, Christmas gifts, and vacations). These need to be accounted for on your monthly Cash Flow Plan. Take the annual total for each, divide by 12, and put the amounts in the proper categories. Ideally, transfer the total of all such categories into a separate savings account each month so the money is there when you need it.
Having some “his” and “hers” money allocated in your budget promotes marital peace. Some couples do this with their clothing budgets, each one having a separate amount he or she can spend freely as long as they stay within the total. Others use this idea to allocate money for lunches with friends or hobbies.
If you’re new to budgeting, just get started — and use a pencil. Expect to stumble and make some mistakes; you’ll get the hang of it. Once you do, you’ll wonder how you ever lived without a budget. 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.