Every 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.
As I’ve already expressed, your entire year is not just one month multiplied times 12. Your year is full of different events and one-time events that can greatly influence your money. The next step is to capture all those things in your 12-month snapshot. Here are a few to start with:
Now here is where your budget will become far more advanced than everyone else’s:
• Copy your one-month column 12 times so that you cover all 12 months!
Yes, our budget is going to go for the whole year.
What’s Wrong With One-Month Budgets?
Take that list of your major expenses you created in Step 1 and list them for one month. Create one column and put your rows of expenses near the bottom half of the page.
Now let’s go up to the top of the column. This is where we will list your income for the month. For most of us, that will simply be your paychecks and your spouse’s paychecks.
Congratulations if you have other significant forms of income. Some examples might be:
THIS IS NOT going to be one of those “how-to” examples where you’re told to record ever purchase you’ve ever made. Doing that accomplishes NOTHING but wasting a lot of time. Besides, Mint.com can already do this for you automatically. I’ll have more on that later in this series.
Instead, look back through your checkbook from the past few months. What were your MAJOR expenses? Make a list of them. I highly recommend using Microsoft Excel if possible. And yes, there will be a link to the template we create throughout this series at the end.
Here are a few examples:
Creating a budget is one of the single best financial actions you can take for your household. Once you have your goals and priorities straight, the next step is to learn how to manage your money.
Setting a budget is something that has to be done even before you learn how to invest your money. Why? Because all the income in the world won’t make you any richer as long as you’re spending more than you take in.