How to Budget – Step 5 – Apply the Formula for Success



Budget, budgeting, money, money management, saving, expenses, income, Roth IRA, 401k, 401(k), 529, Mint.comEvery great budget follows one simple formula:

• [ Money In > Money Out ] = Good

Or in other words …

• [ Money In – Money Out > $0 ] = Good

Basically you’ve got to have more money “coming in” than “going out”. Any other way is just a recipe for disaster!

Don’t under-estimate how incredibly powerful this equation is. Everyday, people make the mistake of buying things on credit that they can’t afford or taking on payments when their income simply can’t sustain it. It’s simple physics that you can never have more going out than coming in.

What Is Our Goal?

1. Under NO circumstances should your “Ending Bank Balance” for ANY month go negative. In fact, your balance should be at some minimal level (For example: Between $1,000 and $2,000) every month so you don’t even get close to negative. A negative number means you’re going into debt – precisely what we’re trying to avoid.

2. As often as possible, your “Monthly Net Exchange” should be positive. A positive number every month ensures you are following the formula above. However, given some of those special purchases you may make every once in a while (like a family vacation to Disney or buying Christmas presents), your budget may go negative. That’s okay as long as your Ending Bank Balance can cover it. But don’t make it a habit!

How Did You Do?

Applying this logic to our budget, what do you see? Do you have a positive balance at the end of every month? Are there any times throughout the year where you will run out of money? If so, consider the following:

Start by reducing your overall credit card expenses. Remember, this is just a number we set as our “target” that we should not go over every month. By far, this will be the easiest category to attack because most of the purchases you make are discretionary. Start by knocking your number back by $100 or so for each month and see how that affects the bottom line. For more safety margin, reduce it even further.

Try to tackle some of your bigger bills one at a time. These would be the things like your insurance, TV service, cell phone bills, and even your mortgage. Which ones can you live without or get rid of? Which ones do you think you could reduce? You’d be surprised at how negotiable most of them are.For my own financial health, I like to pick at least one major expense each month and work towards reducing it. Once you call up your service provider and start talking about a competitor’s offer, you’d be surprised at how they start offering promotional specials and discounts.  If you’re still struggling to bring down some of these expenses on your own, you may want to try using an online service to help compare things like insurance costs, credit card rates, etc.

Make more money. As unlikely as this sounds, people do it all the time. Your job is an excellent place to start. Go for a promotion, raise, or bigger bonus. Not going to happen? Try other ways like selling things on eBay, Craig’s List, holding a garage sale, making investments, becoming a landlord, doing side jobs, etc.

This is usually the part of the budget that hurts because if you don’t live below your means, it becomes very apparent right away that you’re heading for trouble. However, just like a good diet or exercise plan, no gains are ever made without some sacrifice. Make the adjustments and start living financially fit.

Next, we’ll turn up the music and try to fit in some goals.

… Go to the Next Chapter

 

Table of Contents:

How to Budget – Introduction

How to Budget – Step 1 –  Where Does All My Money Go?

How to Budget – Step 2 – Income Vs Expense

How to Budget – Step 3 – Take It All The Way to 12 Months

How to Budget – Step 4 – Add In Those Special Times

How to Budget – Step 5 – Apply the Formula for Success

How to Budget – Step 6 – Adding In Your Investment Goals

How to Budget – Step 7 – Sticking to the Plan!

How to Budget – Making It Easy with Mint

How to Budget – Download My Excel Template

 

Photo Credit: Microsoft Clip Art

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