I have been doing a lot of reading lately and there are a few books which have really made an impact upon the things we do as a family. One of the books I highly recommend is The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey.
There are a number of steps in his book designed to get you on the path to financial freedom but one really resonated with me. Now this is the part where I give you permission to have a good long groan because for me, that important point was about putting together a budget.
So why do we need a budget?
The reason we don’t ever seem to get any closer to what we really want is because we make small decisions each day, often on a whim, that only satisfy our immediate desires and sabotage the things we really want to achieve. We might state that our aim is to pay off our credit card debt and save a deposit for a house. Often though, we merrily go along each day spending money on small unnecessary items that take away our capacity to put any aside to achieve our bigger goals.
It is easy to forget how the small amounts of money spent on things like take-away for lunch or another new pair of shoes can add up to a significant amount over time. A budget enables someone to achieve their most cherished desires by saving them from the temptation of their immediate wants. As John Maxwell puts it, “A budget is people telling their money where to go instead of wondering where it went.”
Things I discovered while putting together the budget
The first thing I did was to get out all of my old invoices, bank statement and credit card bills. I went through them and found out where we spent our money last year. This might seem like a chore but you really only have to do it once and it’s the only way to get a good idea of exactly how much you spend. You may find you are very surprised.
I was fortunate in that I had kept most of the paperwork but with net banking it should be easy enough for anyone to access their details. On top of the mortgage repayment, I found all of our bills such as rates, power, phone and insurances and wrote down all of these amounts.
I then worked out how much we spend on food, fuel and other variable expenses for things we don’t want to give up like dancing lessons for our daughter. I worked out how much we spent on these things in the year.
I added all of these amounts together and worked out how much our fixed expenses were. I truly got a surprise when I did that. The figure was nowhere near as high as I was expecting. Given that we earn quite a good wage but find it difficult to save, I had expected the fixed expenses to make up the vast majority of our money. How wrong I was! It wasn’t even 50%.
This told me that most of our money was being frittered away on things we weren’t even aware of. They weren’t on our list of desires, that was for sure! These things could, in all probability, be given up and give us the opportunity to put that money towards the things we actually want, which at the moment is an overseas holiday.
While I have never had a problem with creating a budget for our family and have actually taken this step a number of times, I did have a problem sticking to it. After reading Dave Ramsay’s The Total Money Makeover, I was able to work out why. The thing I had been doing wrong was that while I had worked out where the money needed to go, I was recording our expenditure after we had spent the money.
Dave Ramsay advocates spending all of your money on paper before any of it gets spent in real life. He says that we should “Set up a new budget every month. Don’t try to have the perfect budget for the perfect month, because we never have those. Spend every dollar on paper before the month begins.”
This was a revelation to me. Once I started to do it I discovered a couple of things:
1) I get to see where all of our money is set to go and find out in advance whether there will be enough to cover the bills.
2) There is the opportunity to adjust the areas in which we plan to spend our money so that in some pay periods, certain items can be allocated more and in others, they can be allocated less.
3) I can easily see where changes need to be made and have the opportunity to make them.
Once I started doing that I changed a few things that really made an impact on our money situation.
A) Each pay day I consult the budget and transfer the money for our fixed expenses out of the everyday spending account. This means that we can’t accidentally spend the money that is needed to pay the power bill.
B) Probably the biggest change I made was that I included an item in the budget called savings. This meant that our saving was priortised and accounted for. We no longer plan to save what is left over at the end of the pay period because invariably that will be next to nothing. We now put that money aside first and spend what is left.
C) My husband and I each have an amount of money we are free to spend however we wish. This means that no one feels like they are deprived or has to ask the other person for money. This certainly makes the budget much easier to stick to.
So, if you would like to find out how to sort out your finances and get ahead on your dreams, I highly recommend checking out The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness