Have you ever had a conversation about what you can afford? The better question to be asking is, what’s your budget? The words afford and budget are used interchangeably which is a common mistake when it comes to personal finance.
Why Budgeting is Important
Budgeting is influenced by personal decisions. And we make better decisions when we plan how to spend our money. Also, budgeting is a discipline to achieve your goals. And it allows you to adapt to unforeseen circumstances like the two layoffs we survived without touching our savings.
And yet, I encounter people who disagree with how we budget our money. Let me say that again. They disagree with how we budget and make assumptions about our income and what we can afford.
Here’s what I know. It is not how much you earn, it’s how much you spend. This shapes your family’s financial picture. Sadly, 68% of Americans do not have a budget.
During the pandemic, families with a budget felt less financial pressure because they had an emergency fund.
[bctt tweet=”What you can afford stems from your disposable income while a budget allocates money to achieve your goals.” username=”simplyenoughamy”]
The Budget Matters
By living simply, on a budget, my family achieved financial freedom. We can afford more and budget less.
Spending without a plan encourages the use of credit cards. Debt is the opposite of financial freedom. And brings stress to the 78% of Americans who live paycheck to paycheck.
How to Establish a Monthly Budget
What if this month you created a budget? Online banking makes it easier than ever. If you’re just getting started, try my keys to success.
1. Be Accountable to Your Partner or a Trusted Friend
Set up a time to talk about this important topic. Put the kids to bed early, turn off the TV, and get out a pen and paper. Talk about your financial goals for giving, saving, and spending. A budget won’t limit your spending but instead, ensure each purchase supports these goals.
2. Identify Categories where you Routinely Overspend
For me, it’s dining out and groceries so I monitor them closely. We strive to be intentional about dining out and look forward to the experience. But it means we curb takeout and create a meal plan to achieve this spending goal.
3. Make Giving and Saving a Habit
Our tithe is set at 10% each month and sent automatically. We budget additional charities that are important to us. So when someone asks for a donation, I can say “no thank you” because my giving budget is already spoken for.
The same is true for saving. What would you like to save? Start budgeting now. Write it down.
Studies show that the most generous givers do not make millions of dollars. They just budget for it and establish the habit. We instilled the importance of saving and giving with our son. He tithes 10% from money earned and cash gifts. The amount may be small right now but it creates the habit.
4. Talk about the Budget
We talk budget as a family so our son will develop this skill. There’s no greater gift we can give our kids than financial freedom. It’s a life without debt and one of contentment.
5. Budget Your Disposable Income
Disposable income is defined as the money after paying for your 4 walls.
- Food
- Rent/Mortage
- Utilities
- Transportation
You need a budget to figure all this out. Start with your monthly income, subtract these four categories. And you are left with disposable income whose first job is to pay off debt.
After the debt is paid, this is really what you can afford.
And how you choose to spend it is the budget. The budget should account for every penny. Allocate all of the funds remaining to achieve your goals. And of course, reduce spending in categories to meet the budget available.
6. Just Start
Start somewhere. Start with categories that are out of control. (Groceries, Amazon, shoes, dining out, Starbucks.) Commit to a budget this month. Use a cash envelope system to ensure you don’t exceed the budget.
Keep going until you have a full budget. It has transformed our relationship with money and stuff.
Do you have a budget?
It’s a new month.
The perfect time to set it up.
loved “A budget isn’t meant to limit your spending, it allows you to be intentional about every purchase.”
I have had a budget for almost all of my life. I find it a great way to keep financial fear at bay.
thanks Jonda – so glad that quote resonated with you!
This needs to be taught in our schools. So many people don’t have a basic understanding. I was watching a documentary on the college loan situation happening now and thought this should be taught to 8th or 9th graders. So many kids (with no guidance from their parents) put themselves so far into debt because they don’t understand the ROI on a college (loan-funded) education.
I hear you Janet. We have been very intentional about this education at home with our son. He is 15. We’ve been doing spend/save/give since he was in kindergarten. He recently spent on paper the cost of all the components for gaming computer, $1,300. And while he has a good chunk saved, he opted for another system that’s half the price. He mentions how helpful this exercise was.
I so agree with Janet. If most people don’t know how to put together a budget, what kinds of categories they need, this should be taught in schools. It seems so important and so practical at the same time. Kind of shocking statistic on the number of Americans living paycheck to paycheck. It seems so hard to get ahead these days, especially after the upheaval of COVID. Thanks for sharing this important post!
Thanks Seana! I agree how shocking that stat is.
This is the topic I harp on with my adult daughter. Thank you it is much needed
You’re welcome. I would encourage her to find a Financial Peace University group. Check their website! I’m sure there are online ones too.
I couldn’t agree more! I was surprised to learn, as an adult, that my elementary school was one of the FEW that taught finance as part of math, from how to write a check (OK, maybe that’s not as useful anymore), fill out a deposit slip, make a personal budget, balance a check register (which I still do). It helps that “things” don’t really interest me; the research backs it up that experiences are more memorable and valuable, and if you budget for them, there’s no financial stress associated with spending on those experiences. A budget is a plan, no different from a road map; without it, you won’t end up where you want to be!
I am in charge of our family’s budget and planning out goals beyond the everyday expenses is so key. I’m glad you made a point to mention that. I also love the idea of “spending your money on paper first.” That’s a really great way to think of it and a smart idea to stay on track!