I’ve had a lot of questions about how I budget my money from family and friends. As you may have read in Changing My Belief System I didn’t always want or care to budget. Since 2001, I have made a system that works for my family and allows us to spend without worry that we are going to go over our annual budget numbers.
Annual budget? I have trouble with a daily budget!
Is this your concern? I thought this way in the past but have found a way to create a budget that allows you to live without counting every penny (as you spend).
Before I show you my method, I need to tell you that it’s not a miracle cure if you’ve got major debt problems. If this is your situation, your future depends on getting your spending and debt in order! Get the help you need. Don’t be afraid to ask questions and start working towards wealth.
Here is the Lewis Empire budgeting method:
1. Know all your incoming cash flow
You work hard for your money so let’s start with the fun part. Go through your year and know all the income that you are expecting. This is your starting point.
2. Know what you spend.
I now use Quicken software to help me track my expenses but I started with a simple spreadsheet. Set one up and break your expenses down into categories that will help you know where your money is going. Although I now am much more detailed, my original categories were: Entertainment (Books, Movies, Tickets), Claimable (Benefits), Business (AdWords, Domain Names), Home (Furniture, Appliances), Automotive (Repairs), Fuel, Eating Out (Restaurants), Eating In (Take-out), Grocery (Food, Toiletries), Clothing, Travel, Gifts, Cash Withdrawals.
3. Track Your Cash Withdrawals
This is the main budget killer. How often do you withdraw $60 then discover that it is all gone after a few hours on the weekend?
When I started tracking this I realized that I was taking out an average of $156 a month could not be attributed to anything substancial! That means that I had $1872 ($2600 before taxes) that was being used on small items (probably coffee) – my own personal Latte Factor! Looking at this another way, if I took that $1872 per year and invested it at 8% for 20 years, I’d have about $95,000 in the account. That changed my opinion of small cash withdrawals.
4. Know what’s coming up
If you’ve got some large expenses coming up then put them into the budget numbers today. Don’t wait until the day arrives to do this, you need to know about it now. If there is a computer in the future or you’re dying for a new ipod then work it in. The further ahead you can budget, the better off you are going to be.
5. Break everything down into monthly expenses
That $1000 car repair is $83.33 per month in your budget. Your heating bill is not $300 in the winter and $50 in the summer it’s $175 per month. The Domain name for your business is $0.42 per month.
The reason I choose monthly is because that’s the traditional pattern for most of your home expenses and how most people are paid. If you find that something works better then do it.
6. Calculate your “Investable Income”
Now that everything is broken into monthly numbers, take your monthly income and subtract the monthly expenses. That’s your “Investable Income.”
Here’s where the rubber hits the road. Is your Investable Income a negative number? That’s a problem because it means that you are living above your means. At this stage, you need to go back through all of your expenses and start to cut items until you at least reach zero. Ideally, you should be able to get to the point that there is a positive number – this is where you can start to grow your wealth.
7. Don’t spend your excess income
Excess income is not your Investable Income. Excess income is the extra account balance that will result in the months that are traditionally less expensive. For example, if your heating bill is budgeted at $175 per month but your summer bill is only $50, you should have about $125 extra in your account – remember, this is going to be used by January’s bill! Don’t spend this money.
There are two ways to safely keep your excess income. The first is to have the will power to have a lot of extra money in your account without spending it. The second (and more reasonable) is to set up an account with an online bank and deposit this money during low months and withdraw during high months.
8. Build up a buffer
This is the final secret to a successful budget. For the first few months, use your Investable Income to build a buffer within your account. This will be used to cover the months that are more expensive so there is no risk of over-draft.
Why this works
Once I had all of my numbers in place and realized that I was in a positive monthly position I knew that I would never need to worry about daily expenditures again. Budgeting is a process that needs to be continually updated or monitored. If you get a raise, make more money online or have a cash windfall then build it in. I’ve had all three happen and I didn’t just see it as a way to justify more spending. Set it in your budget.
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