Wednesday, August 17, 2016
Budgeting 101: Day 3
Today we are going to take a look at necessary verses arbitrary expenses. What the heck does that even mean? Well, we will answer that below but it's really important that we figure these things out before we start our budget. It will help us to figure out what is truly important and what isn't. What a need is verses that want you can absolutely live without if you need to. So let's answer these questions:
What is a necessity?
What must be paid?
What is an arbitrary expense?
Why is this important?
How do these expenses get you closer to your goals?
Shelter - mortgage/rent
Transportation - car/gas/upkeep
Clothes (be reasonable)
Utilities - heat, water, electric
What is arbitrary?
Credit card debt
Like to have’s
The fact is if you are trying to get out of debt, are trying to save for the future or for a specific goal/project then you need to look at your expenses each month. I suggest you write down everything you spend your money on during a given day. From the $5 for your coffee to the $25 you spend to fill your gas tank to the $2 you gave to your kids for their school lunch. Keep track of everything. Do this every day for a full week. This will help you to figure out where you are spending your money. Even if you are using a credit card or a debit card or just grabbing cash - write it down and keep track of it along with what currency you chose to use. At the end of the week go through - how much did you spend on the necessities? How much did you spend on things that aren’t, like eating out or coffee or a pack of gum? How many of these expenses were things that you had planned on spending your money on and how many of them were things you actually needed and had planned on purchasing?
Now figure out what’s important to you. Is it important that you allot money towards coffee or that you make sure you have a line item in your budget for eating out? Is there an area you want to cut back on, such as eating fast food, where the money can be better spent toward your goal of paying off debt or put toward groceries instead?
Keeping track of these expenditures will help you to make a more cohesive budget and will give you a great starting place.
Dave Ramsey says that you should use an envelope system for items that tend to bust your budget. Food, restaurants, entertainment, gas and clothing are 5 key areas he thinks the envelope system works great for.
I have used an envelope system in the past - in college - and I was glad to have tried it. My husband and I have been talking about using a system like that for a while but have yet to do it. I admit that I am very good at pulling out the debit or credit card when I need something and not getting out cash from the ATM. Often times I do not have cash on me and I am trying to get better about that. Tonight at the Farmers Market was a perfect example of when the envelope system probably would have come in handy. My daughters and I went and there were tons of wonderful vendors. While checking out the margarita mixes made by a local vendor my daughters saw the delicious looking chocolate chip cookies for $1. So I pulled out the $5 bill I was saving for tomorrow and bought them a cookie to split. A few minutes later we were checking out some yummy protein balls made by another local vendor and they took credit so I pulled out my card because I don’t carry cash and 5 minutes later we were checking out a local winery and I bought 2 bottles of wine, also with my credit card… ouch. I am now a dollar short for tomorrow, and I have spent money that I didn’t intend on spending and if I had been using the envelope system i would have had the cash I needed and wouldn’t have had to grab the credit card.
Dave Ramsey put together this worksheet for people who are looking to learn how to budget or how the envelop system works. I highly recommend checking it out, as there is a lot of great information there.
Ok, so this is a lot of information I'm throwing at you. We will go back and talk about these things in further detail later on but I really want to get the basic steps you have to take before you can truly come up with a workable budget. I hope that you'll stick with me and head over to creditsavvydiva.com and join the discussion there. I'd be interesting in hearing your feedback on the information I'm providing so far. Thanks!