The CINCO Steps to Budgeting
The “B” word can be scary. We’re talking about the word Budget. A budget can elicit a number of different feelings. Often it reminds you that you’re spending too much. Or maybe you prefer to stick your head in the sand and ignore it. Perhaps you think of a straight jacket every time you hear the “B word” because it makes you feel like you are restricted and can’t live freely. No matter how it makes you feel, the reality is…you need one. CINCO has five easy steps to follow to help you create a budget you can live with:
1) Cash Flow Monthly Budget
To start a basic monthly cash flow budget, you have to go back to basic Accounting 101 were you list all your credits on the left and your debits on the right. Under credits, any source of income (salary, tips, child support, etc.) should be listed. After you determine how much money you receive each month, your next step is to look at where your money’s going. When listing your debits, be sure to include all your expenses: mortgage/rent, utilities, groceries, dining out, gas, car payment, credit card payments, etc.
This monthly cash flow budget will help you determine precisely how much money you need each month to make ends meet.
2) The Full Budget
In order to create a full budget, take a look at your monthly budget. List each debit item according to its importance. Start with your mortgage payment/rent since you need to keep a roof over your head. Next might be your car payment so you can get back and forth to work. Continue the list in this way, ordering from most important to least important.
If you have money left over – congratulations - continue to step number 3. If you are “in the red,” you will need to start eliminating debts. Start with the last thing on your list - is it something you can eliminate from your budget? For example, if you budgeted $100 a month for dining out and entertainment, you should be willing to eliminate these from your budget until you get into the “black” again. Continue eliminating things from your list until, at the very least, you have the same amount going out as you have coming in.
Better yet, try to have more in the plus column so you can put the extra into savings.
By setting some money aside, you will be better prepared to pay cash for any emergency that might arise. (Look at Step 4 for information about creating an emergency fund.)
3) Pay Off Debt
List your debts (not including your mortgage) from your smallest balance to your highest balance. Next to your balance list the corresponding interest rate. For example:
- Capital One $2,612 18.99% APR
- American Express $4,232 12.99% APR
- MasterCard $5,562 9.99% APR
The smallest balance should be your number one priority to pay off. Pay the minimum amount on the other debts while trying to make double (or whatever amount you can afford) payments on the smallest debt. Once the smallest debt is paid off, take the same amount you used to pay it off and apply it to the next debt on your list plus the minimum amount you were paying on this debt. Do this until all your debts are paid off.
4) 3 Month Emergency Fund
Once all your debt is paid off, you should start adding the money you were using to pay off your debts to your emergency fund. This emergency fund is for those unexpected life events: loss of a job, car repairs, new roof, etc. It is not a fund to be used to buy clothes, a new car, or the new Xbox 360. It is only to be used in case of a real emergency.
Your goal is to have enough money to live on for 3 months. This 3 month reserve should keep you afloat in case you lose your job. For example, if your monthly expenses (the debits in your full budget plan) are $3000, your goal is to have $9,000.
Once you have reached the 3-month goal, take yourself out for a nice steak dinner and then shoot for 6 months. After you have 6 months worth of savings, you can start investing.
5) Review Your Budget Monthly
It is important to review your budget regularly to make sure you are staying on track. After the first month, compare the actual expenses with what you had created in your budget. This will show you where you did well and where you may need to improve. Try not to get frustrated if you didn’t stay on budget. Remember that you are changing a learned behavior and it will take time to relearn. The important thing is to keep trying each month and not to give up.