Balance the Budget
Now that you have your income and expenses identified and written down, it’s time to balance the budget. The goal is to have your income and your expenses even out. If those two numbers are equal for the month, you have a good cash flow plan, otherwise known as a balanced budget.
In other words, when you add up your total expenses for the month and subtract them from your income, you want the difference to be zero. That means you’ve accounted for every dollar of your income and give each dollar a purpose within your plan.
If your expenses are higher than your income, that can be a pretty scary situation. Don’t let panic set in. Take a moment to relax and calm down, then go back through the budget to find places where you can reduce your expenses. This is a hard step but it can also be very liberating to take control of your spending habits.
If your income is higher than your expenses, that means you’ll have money left over (as long as you stick to the budget) at the end of the month. Before that money burns a hole in your pocket, make sure you go back into the budget and find a place to put that money. Put it in savings, pay off some debt, or whatever you want. Just make sure you have a plan for that extra money so it doesn’t disappear!
But How Much Should I Budget For?
When working with people on their first budget, I often see them get overwhelmed with determining how much to budget for each category. They’ve never tracked their spending and they have no idea how much they typically spend on things like groceries, restaurants, or gasoline. They don’t have an idea how much is an appropriate amount either. In many cases, this can cause a sort of paralysis that keeps them from moving forward. As a result, the budget never gets done at all and they give up.
If this is you, you’re not alone. Don’t be embarrassed. Don’t be
intimidated. It’s not that bad.
To get an idea of how much to budget for, you can look at your bank statements for previous months. Try to identify the main categories and break your transactions into those budget categories. If that doesn’t help, you can keep your receipts for a month and see where your money is going. That will give you a good idea of how much to plan for each spending category.
The Iterative Budget Process
If all else fails, just give it your best guess. That’s right. Just guess. I hate to tell you this up front, but your budget is going to fail in the first month. Yep, it will FAIL. Nobody is so good that they’re going to predict exactly how much gasoline or electricity they’re going to consume next month. So the budget isn’t going to be exactly right.
But that’s a good thing. The budgeting process is iterative in nature. Your first one doesn’t have to be perfect. It just has to be written out and attempted. The fun part comes when you add up all your receipts for the month and see how you did. You’re going to mess up. Some categories will be overspent. Some will be underspent. And some you might actually get just right.
Now here’s the trick: Don’t let your mistakes get to you and become an excuse to quit. You didn’t learn to ride your bike without falling off a few times. This is no different. Identify where your budget was wrong and make changes for the next month. You’ll make mistakes in the next month’s budget too, but not as many. Learn from those mistakes and get a little better for the following month.
After three or four months of working your budget, you’ll begin to dial in your expenses and have a pretty good idea of how much to budget for each category. Maintain this progress and the mindset of continuously improving, and you’ll be a budget superstar before you know it!
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