What lies behind the phrases, “getting out of debt” and “living within your means”? They both refer to creating a balance between spending and income. It’s certainly possible to accomplish this and building a budget is the way to do it.
Let’s think for a moment about the term “building a budget”. We might use it a lot without really understanding what it means. This is because they taught us a lot of “important” subjects at school – history, mathematics, grammar etc., but one very important subject they forgot: How to conduct your finances smartly, and how to build a budget. It was critical we know about the Rule of Pythagoras, everything else was insignificant…
Don’t worry – everything we missed out on then, we can catch up with now. And the first rule is: You have to build a budget in stages. So let’s get going from the beginning.
What’s a budget, anyway?
A budget is a tool for determining your household’s financial goals (spending vs income) according to a monthly average.
We build a budget in several stages:
(You might want to use Paamonim’s Excel Tool [Rishumon] to help you write everything down)
- Make a list of priorities
- Draft a tentative budget
- Sum up income vs expenses
- Adjust and improve the budget
Making a list of priorities
Before we can reach a goal, we have to define it. The first step in defining our goal, is deciding on an order of priorities. Most of us manage our finances by looking at our everyday spending. This diverts our attention from long-term goals and causes us to neglect our dreams for the future.
In order to build a budget that will look to the future, we have to decide what we really want – every family has its own list of priorities. You need to define which expenses are most important to your family, and use this as a foundation for building your own personal budget:
- Make a list of all your income and all your expenses. Check if there is a gap between the two.
- Decide for which items you can reduce spending, in order to close the gap between your spending and your income.
- For each item, note the level of difficulty you feel you will experience if you cut spending (low, high or can’t touch it).
- For the items in which you feel it’s possible for you to make cuts, define the new average monthly sum you will spend during the next 12 months.
At first glance, it might look impossible for you to cut anything, but usually, at a second look, you will find many items on which you can cut down.
Now do the same for the income items – only here you will be looking for ways to enlarge your income, instead of cutting it!
Unless you live alone, it’s important to share the decision-making process with your partner and family. Each spouse can try to find ways to cut down on his or her own expenses and increase income – but should not try to do that for the other spouse! This will prevent tension and turn the process into an effective and enjoyable experience.
Drafting a tentative budget
- Once you have examined all your options for cutting down on spending, the sums you have decided on will be your budget for the coming months.
- The Expenses column should be divided into 3 categories: Fixed Expenses, Periodic Expenses and Current Expenses.
- Add your family income to the Income column.
Once you have finished filling in all the budget items with sums of your expenses and income, sum up to check if you have reached a balance (when your expenses are no higher than your income). If you have succeeded – you have drafted a balanced budget.
Making Improvements in the budget
If at this stage you haven’t succeeded in drafting a balanced budget, go back and make further cuts in the expense column, until the budget balances.
Many families find this possible to do in stages rather than all at once:
- First, try to narrow the gap at much as possible
- After a few months, see how things are going and try again.
- Next, try to leave extra funds to pay off debts or open a savings account.
- You will be able to speed up the process of reaching a financial balance by planning your budget to leave you larger sums for payment of debts or savings, and by drafting the final balanced budget as soon as possible.
You have built your budget. Now, let’s see how you can live with it.
Budget management: Stage 1 – Making the decision
Budget management: Stage 2 – Mapping