The biggest confusion seems to be around what to do if you don’t have the same amount coming in month after month or week after week. I’ve talked about this before, but let’s give it another go:

In order for a budget to work, you need to follow some basic rules. Here are The Gail Rules:

1. The budget must balance. Since you can’t spend more money than you make without creating huge problems for yourself, this first rule is the foundation of money management.
2. You must save something. Saving isn’t a nice-to-do that you accomplishing with what’s left over every month. Saving is a Must Do, which is why you must allocate some money to savings each month. Make the savings automatic by setting up a monthly transfer to a high interest savings account and you’re locked and loaded.
3. You must pay off your debt. All that money you spent that you haven’t yet earned has now come Due & Payable. Yup, your shopping has come home to roost. Each dollar that you spend in interest is money down the drain. And each month that you make only your minimum payment takes you a step closer to Debt Hell.
4. You must make provision for the “risk” in your life. Emergency funds and insurance are the tools that you use to reduce your exposure to risk and financial ruin.

Time to make your budget. Your budget is broken down into two parts: Fixed expenses and Variable expenses.

Fixed expenses are the things you pay regularly for which you must cough up a specific amount of money. For example, rent is a fixed expense. So is your car payment.

Variable expenses are the things that change somewhat each month. For example, while you may budget $600 a month for food for your family, that amount isn’t fixed since it may fluctuate depending, for example, on the season or what you must buy this month. (Gee, why does all the laundry stuff run out at the same time?)

But budgets can also be broken down along the lines of Needs and Wants or Must-Haves and Nice-to-Haves. Within your Fixed expenses, for example, you may be living in a place that costs you a bundle every month. That’s not a need. You need to keep a roof over your head, but you don’t need to live in a McMansion. If you can’t afford it – if your cost of accommodation is pushing your budget out of whack and there’s no where else to cut back – it may be time to call the movers!

Take these steps to make a budget

1. Take your budget worksheet and enter in your net income… all of it.

2. Now enter in your Fixed expenses, starting with the Must Haves: (Use black ink to enter these numbers so they are easily identifiable as Fixed Must Haves.)

• Rent or mortgage payment/property taxes
• Car payment
• Insurance
• Saving
• Debt repayment
• Emergency saving

Saving, debt repayment and emergency savings are MUST HAVES. Remember Rules #2, 3, and 4! The must-haves are the things that won’t go away, so you must plan to have them covered every month. While you may be tempted to ignore savings if your budget is tight, don’t. Even a small amount like $25 a month gets you on the right path. Totally ignoring savings until “things get better” means you’re stuck in Not Saving Land. Just a little is all it takes to cross the border.

3.   Now enter in your Variable expenses, starting with the Must Haves: (Again, use black ink to enter these numbers so they are easily identifiable as Variable Must Haves.)

• Groceries
• Transportation
• Medical

4.   Go back to your Fixed expenses. Time to enter in the Nice-to-Haves: (Use another colour to enter these numbers so they are easily identifiable as Fixed Nice-to-Haves.)

• Telephone
• Cable

The nice-to-haves are the expenses that you can make go away, although variable nice-to-haves are easier to cut back on in the low-income months. But even fixed nice-to-haves can be moderated (use your cell phone less, cut down on your cable package for a couple of months) if need be.

5.   Go back to your Variable expenses. Time to enter in the Nice-to-Haves: (Use another colour to enter these numbers so they are easily identifiable as Variable Nice-to-Haves.)

• Clothes
• Gym membership
• Travel

Sometimes there’s a cross-over between must-haves and nice-to-haves, like when your only pair of winter boots are no longer servicable: then that “clothing” item becomes a must have. This is particularly true if you have kids who will insist on growing. In this case, you put in a must-have number to cover the basic needs, and then upgrade it to a nice-to-have number for all the extra things you will want. If you have to cut back later on, the nice-to-have have got-to-go!

6.   Add up all your expenses.

7.   Subtract your total expenses from your total income.

8.   Do you balance? If you’re over, you’re going to have to either cut back on your expenses or find a way to make more money.

When you’re working with a variable income, it is at this point that you need to make some big decisions. In your dry months – lowest income months – you may only be able to afford the basics. In your flush months – highest income months – you need to:

• catch up in some categories of your budget you may have been squeezing, like home maintenance, vacation, clothes, gifts, etc.,
• set aside some money to make sure you have an extra pool of cash available for the dry months so you can meet your most basic needs.

9.   To cut back on expenses, start with your Nice-to-Have Variable expenses. Trim back. Then move to your Nice-to-Have Fixed expenses. Are there ways to cut those costs. Next, look at your Must Have Variable expenses: where can you trim there? And finally, are there ways to trim your Must Have Fixed expenses? For example, if your housing costs are high but you really love where you live, could you take in a roomie to help with the costs?

10.   If you can’t make ends meet no matter how far back you cut then you simply do not make enough money. Time to get a second job, a third job or a better job. You have to do WHATEVER IT TAKES. Not making enough and using credit to fill the gap is financial suicide.

The mistake most people make with a variable income make is spending every penny when they have a flush month or three. Having been living on less during dry months, they see the flush months as the opportunity to spend, spend, spend. Big mistake. You must first ensure you have the money to see you through the next dry spell. Then you can go shopping!

Successful businesses use budgets to keep themselves on track. And so do successful people. The folks who haven’t yet made the decision to spend less than they earn are unwilling to face up to the fact that they think they’re richer than they are. ‘Course, there’s no point in making a budget just because I say you should. You have to make a budget because you’re determined to spend less than you make and want achieve some goals along the way.

Speaking of goals, if you don’t have some priorities you’re likely not to achieve much other than a sense of frustration at not ever getting anywhere. Yup, you can stay in a holding pattern, spending just what you make each month but never really feeling like you’re achieving anything. Setting goals creates a concrete plan to which you can work. While the road to hell is paved with good intentions, the road to success is paved with goals and their accompanying milestones.

Some people loathe the idea of a budget because it feels too constraining. Chillax. If you want to be able to buy something on impulse, simply build in an Impulse category on your budget. Hey, it’s your money, you can do whatever you want with it. It shouldn’t be an exorbitant amount. But having $50 or even $100 a month that you can blow on a whim may be all you need to satisfy your desire to be spontaneous and keep the rest of your budget on track.

Knowing how much you can blow on stupid stuff means budgeting carefully on everything else. It also means knowing how much you actually make. I am constantly astounded at the people who guestimate their incomes. Hey, once you’ve committed to not using credit to fill your spending gaps, you don’t have the flexibility to be wrong, so you better know exactly how much you’re bringing in dude.

Oh yeah… not using credit. Credit (here I’m referring to the money that’s not yours yet, not the tool) is the bane of sound money management. All the folks who pay off their credit cards in full each month can head down to the next paragraph. The rest of you — the chicks with lines of credit that have outstanding balances, the guys with credit cards with balances — all you dopes who are willing to pay interest for the sake of some buy you couldn’t pass up, read this carefully: When you use credit, you’re using someone else’s money – not your money – to pay for stuff. And you’re paying dearly for the privilege. When are you planning on coming up with the money to get that albatross off your neck?

People routinely take short-cuts when trying to build a budget, guessing at how much they spend in certain categories and then blaming the budget when it’s off because the data used was inaccurate, or irregular expenses were ignored. Hey, you’ve heard the term “garbage in, garbage out.” It’s dead true for budgeting. And if you’re not prepared to do the work to come up with a realistic budget, and to tweak the budget as your life changes, gedoudahere!

Being realistic is important. Don’t commit to an astronomical amount of savings if it’s just another way you can prove budgets don’t work. Moving from saving nothing to saving 20% is a stupid idea. Take small steps and work forward from there, increasing your savings as you find ways to cut expenses or make more money.

I swear by my budget; it’s what keeps me honest. When I review what I’ve been spending, I can reassess if those expenses are true indications of a change in my circumstances or me just not paying attention. I’m not a slave to my budget. If I go nuts on entertainment one month because there’s a lot happening, I just look for places elsewhere to trim back. I make choices. Conscious choices. I’d much rather know I’m blowing my travel budget and make some adjustments elsewhere than be surprised with a credit card balance I can’t pay off.

If you’re still of the opinion that a budget is the equivalent of cement shoes, then it’s time for a shift in attitude. Part of why you can’t use a budget successfully may be because you are taking the wrong approach. If you look at a budget as a constraint, you’ll always feel squeezed. A budget should not be viewed as a stop sign for spending. Nope. It doesn’t tell you what you can’t do. Think of it as telling you what you CAN do. It’s your plan for how you will spend your money on the things that matter to you the most.

Whether you make $25,000 a year, or $250,000, you still have only so much money you can spend. And while you may think $250,000 is a lot of money, it gets chewed up pretty darn quickly.

I remember back when I was making $8,500 a year. I couldn’t wait to make $20K. I got there and then thought that if I made $30,000 a year, I could never run out of money. Yes you can. Because it’s never really about how much you make. It’s about what you do with the money.

If you want to maximize your sense of satisfaction about how you’re putting your dollars to work for you, you need a budget. That’s the only way you can plan to use them on the things you value most. That may not mean buying a new Whatever when you see one. Instead, it may mean having the kind of financial security that ensures you have a roof over your head and food in your belly.

While you probably don’t LOVE paying the mortgage, you probably really enjoy having a home you can call your own. And while grocery prices may be squeezing your ability to buy a new Whatever, it’s nice to know you don’t have to subsist on KD and wieners. Perspective is everything.  Knowing your parameters – read “having a budget” — means you can work within those parameters to make every dollar you have really count.

Y’all have heard me rant on about the difference between Wants and Needs, right? Having taken care of the Needs, you then can look at your Wants. But if you’re like everyone else, you likely have far more Wants than money, leaving you feeling deprived. Then you end up hating the budget, your income and your life, so you grab a credit card and head to the mall.

How do you avoid the frustration? By shifting your attitude so that the things you Need also become the things you Want. It’s a reality of life for many that the things we Have are of far less value to us than the things we have yet to acquire. Sad, but true. If we are always taking the things we Have for granted, then it becomes easier to focus on the things we Have Not, leaving us dissatisfied and ripe for an over-spending spree.

Start approaching your budgeting with this new attitude: The things I am spending my money on are the things I want the most. Now it won’t be about what you don’t have, and your budget won’t feel like drudgery or something that restricts how you spend. Instead, it’ll be about keeping the things that you truly value front and centre in your mind so you continue to enjoy them, instead of taking them for granted. 

Alex has another year and a half with me and then, all things being equal, she’ll be heading off to University. Maybe. If she can get her crap together. That’s pretty well how most parents feel when it comes to watching their teenagers approach that age when they’ll be stepping out on their own. We want to do whatever we can to help smooth the way. But sometimes “smoothing” is taken to the extreme and our kids leave home without the good sense God gave a goose!

Prepping for a life on their own starts early, much earlier than most parents think. Whether it is learning how to cook – making KD in the microwave doesn’t count – to learning how often to change their sheets, clean the toilet, or sew on a button, having never been told what to do, or how to do stuff, kids are at a loss. Like the kid who puts tinfoil in the microwave and then claims “but I didn’t know,” your child could be ignorant of some of the things you take for granted, including how to handle her money.

When kids are small, we have no problem redirecting their behaviour, giving them step-by-step instructions for how to do a new task, or patiently watching as they master a new skill. As they get older and start pushing back, we are scared about doing anything that will alienate them. There already seems to be more distance than we want.

Sure, there are the parents who regularly make their kids clean the house from stem to gudgeon. But I’ve been with those kids as they talk about “escaping” home and never coming back once they break free of their parents’ control. One girl I know whose mom refused to allow her to come to a mixed sleep-over party the weekend before she left for university probably doesn’t know that her daughter refers to her as “The Nazi”. Ouch!

So we walk a fine line between helping our kids acquire the basic skills they’ll need to go out on their own and letting them have the space they need to make – and learn from – their own mistakes.

At the very least, our kids should have some sense of what it takes to keep body and soul together: how to clean up after themselves, how to buy and prepare some basic meals, and what to do in the event of certain types of emergencies. That’s not to say that once they leave home you’re cutting the apron strings completely. But it does help for them to know a little somthin’ somethin’ about dealing with the life they’re about to have.

And through all the life lessons there are money lessons you need to be weaving. How to grocery shop on a budget; how to prepare meals that go a long way; how important it is to have a stash of cash just in case the caca hits the fan.

There are the seven essential money skills I think every kid should have before he breaks out on his own. You won’t be surprised at any of these. Not really. So this is your opportunity to take a good look at your kid to see how good a job you’ve done thus far teaching the important money lessons. I’ll cover the first essential money skill in today’s blog, and the rest over the next few days.

Essential Money Skill #1: How to live on a budget.

The thing about a budget is that it not only shows you where you’re planning to spend your money, it asks you to make choices every time you get the urge to spend. Want to go to a movie? If you don’t have any more money left in your entertainment budget, will you use your food budget or your transportation budget to see the flick? It isn’t about NOT seeing the movie. It’s about what else you’re willing to give up to see the movie.

The idea of living on a budget also gets kids used to the difference between their “needs” and their “wants”. They can spend more or less in a particular category of their budget, but they cannot spend more money than they have, so it’s important to understand what their Essential Expenses are: that’s the money they’ll need to spend to keep body and soul together.

TO DO:

Sit down with your child and talk about your own budget, how it works, why you use it, and what it helps you achieve. Never mind the whole “privacy” crap. This is your kid, and if you can’t use your own budget to teach him a thing or two, you’re missing the mark completely as a parent!

For several months before she leaves home, have her work on your budget with you.

Have him make a budget for moving out on his own. Whether he’s leaving home to work or to go to school, if he goes with a plan in hand, he’ll be that much more likely to succeed.  See this article for more information. It talks about how to use a cash flow for managing money, which is the single best way to learn to budget to the dollar.

Keep your hand out of your pocket. If you keep bailing Bunny out of the hole every time she digs one, she’ll never feel the pain and she’ll never learn. Once you’ve established the parameters for how you will help, stick to it. If you’re offering to pay $50 on the cell phone, don’t cover the $100 bill. Pay your $50 and watch the service get cut off! It’s hard, I know. But you know what? It’s way easier to do it now than when she’s got two kids in tow.

Next: Essential Money Skills #2 & #3.

I meet a lot of people – and hear from many more – who want to debate the validity of a budget. Second only to life insurance, budgets are the most misunderstood financial tool around. People see them as constraining, like too tight shoes you squeeze your oversized feet into. People seem them as rigid; think full body cast. People see them as impossible, as in, “I’ve made lots of budgets but they never work!”

Worst of all are the people who throw up their arms and sigh, “I can’t… I just can’t.” Hmmm.

So do you have dreams of things you’d like to have, places you’d  like to go, experiences you’d like to… well… experience? If you want to get from here to there, and you’re not rolling in dough, the way to do it is to make a budget. Your budget is a plan; a plan for how you will spend your hard-earned moolah. Without the plan, you’re diving down the road with a blindfold on. And when you run into the ditch, the ooops can take a long time to fix.

So why does living on a budget makes sense?

First, a budget lets you see if you are living within your means. Once upon a time, before credit was as common as the cold, people knew whether or not they were living within their means because they either had money left over at the end of the month or they didn’t. With credit cards, lines of credit, and overdraft protection, it is much harder to see that you’re not making ends meet because you can fool yourself into thinking you’ve got it covered. However, if you have a budget and you faithfully plug your numbers in, the budget will tell you the truth.

So a budget gives you control over your money. You set money aside for specific purposes, be it accumulating money for your children’s education, saving for retirement, or building a stash of cash for that trip to Europe you’ve always wanted to take. Often these dreams and aspirations go ignored because by the time you get to the end of the month, the money is all gone.

Wouldn’t it be a relief to have money available to handle emergencies and unanticipated expenses when they crop up? Without a budget, people think of most of their less regular expenses as “unexpected.” Having forgotten about the car insurance bill that comes once a year, they’re shocked and surprised when the bill arrives. With a budget not only would you know when to expect the bill, you’d have set aside 1/12 of the total each month so paying it would be no problemo.

It’s also a lot harder to spend willy-nilly when you’re on a budget because you’ve accounted for where the money is going, down to the last red cent. All my budgets come out to zero at the bottom. If I find a category doesn’t work because there’s not enough in it, then I have to cut from another category to make the budget balance. But every cent is accounted for. No surprises. Course, not everyone is prepared to be a grown up and spend money consciously. Some people like the rush of spending on a whim. They hate budgets. But they’re the people most in need of a budget because they have no self-control.

And if you’re married to one of these people, a budget can be a marriage saver since it will reduce arguments about money. The budget serves as your guide so if you and your partner are having a squirmish over whether or not to buy something, you can always fall back on, “not until we put it in the budget.”

Perhaps the biggest benefit reported by the couples I’ve worked with is the fact that their stress is waaaay reduced and they find that they sleep better! Following a budget means you eliminate unnecessary worrying over money and debt. You’re confident that everything is figured out, and as long as you follow the budget, you’ve created a plan that will get you to where you want to be.

BTW, there’s some work involved in making a budget. If you look under Gail’s Tools on this page, you’ll see Gail’s Guide to Building a Budget. There are a lot of people who have found the Budget Worksheet, but haven’t read the instructions! You’re a bunch of dopes. If you think the budget worksheet and the Magic Jars are going to calculate themselves, you’re more delusional than I imagined a person could be. Wake up! This takes work! Remember this saying:

God helps those who help themselves. 

Are you ready to help yourself? Or are you waiting for someone else to solve your problems for you?

People are always willing to volunteer their wisdom about budgets to me. I’m a Budget-Discussion-Magnet it seems. And nine times out of ten, people want to tell me why budgets don’t work. I agree. Most people’s budgets don’t work for a few basic reasons. Here’s my Top 5 List:

Inaccurate Income Projections: I can’t believe the number of people who don’t know how much money they make. People, whazzup with that? How can you have a hope in hell of having a budget that works if you don’t know how much money you bring home. I know there are a variety of pay periods: monthly, semi-monthly, bi-weekly and weekly. But all you have to do is look at how much is coming into your accounts to know how much you actually make. If it varies from one month to the next, then you use the lowest income you have as your basic income, and use whatever extra you earn to fund stuff like home maintenance, vacations, gifts, and the like.

Not Enough Categories: Most people generalize their budgets too much to get an accurate picture of where their money is going. I swear if I see one more budget with “spending money” I’ll spit. It’s all spending money. What are you spending it on?! You have to have enough categories in your budget to give you a real sense of where the money goes and where you may be able to cut costs. Careful now; too many categories and you’ll make your budget such a chore that you’ll toss it in no time at all. Another problem that goes hand in hand with this one is…

Failure to Include Expenses: Not all expenses come in every month. Insurance bills can come annually. Property taxes can come quarterly. Service contracts, dental bills, health-club renewals… there are lots of things that pop up only once or four times a year. If you don’t include them in your budget, you won’t have the money at the ready when the bill comes in.

Cash: People spend cash without keeping track of where it’s going and that throws their budgets out of whack. Some people use bank machines like a wallet, pulling $20 here and $40 there, as needed. The problem with this approach is that money flows away without any record of where it’s gone. And if you know you have a bill coming due in a couple of days, but your partner doesn’t, and (s)he goes into the account for cash, then you won’t have the money available to pay the bill

No Plan to Save: People seldom put a “savings” line on their budget. Despite how well known the “Pay Yourself First” idea is, people still don’t do it. They wait to see how much they have left to save. And it’s usually ZERO, Zip, zilch! If you’re serious about savings it has to be a line item on your budget, you have to identify a specific amount you’re going to save (both for long-term savings and for emergencies), and you need an auto-deduction to a savings account to MAKE IT HAPPEN.

Budgets are a great tool providing you use them the right way. You need to have spending categories that fit your personal situation, your spending habits, and your income. Don’t look to anyone else’s completed budget as a guide, except perhaps for a list of categories you may not have thought of. Make sure you review your spending patterns to see if there are areas where you’re overspending. There may even be things you’re spending money on of which you weren’t even aware.

Budgeting isn’t just about tracking your costs, it’s about making sure you’re spending your hard-earned money the way you WANT to. Maybe you want to get out of debt. Maybe saving for a downpayment is a priority. Perhaps traveling is your big Wanna. It doesn’t matter what your goals are, if you don’t identify them, you won’t achieve them. And with no goals and no budget you can be sure that another year down the road, you won’t be one iota better off.

BTW: I’ve been getting a lot of questions about how I decide what money goes into the Magic Jars. The Budget Worksheet is the place to go to figure this out.