Oomph!  The dreaded “B” word.

Buried in debt, our nation has lost sight of the definition of budget.  Much like food, buried in fat, we’ve also lost sight of the meaning of diet.

A diet is what you eat.  It is the meal plan that you either look forward to and plan, or look back on in regret.  “I shouldn’t have eaten so much!”  What a common statement.  This is the direct result of failure to plan and follow that plan.  Failure to follow the plan seems to be tied to unrealistic expectations of the plan’s purpose.

A budget is the same way.  As Dave Ramsey often says, “there is too much month at the end of your money.”  The reason this happens is because we spend time wondering where our money went, wondering how we put on that fat, instead of telling it where to go.

I recently had a conversation with someone who mentioned that during the time he and his wife “were on a budget,” we had a hard time with it because we had to let go of some of our comforts.  Those comforts, by the way, are usually taking us away from our goals, preventing us from reaching a new level.

The problem with this statement, which I pointed out, was that the word budget was used in a context that didn’t warrant the use of the word budget, much like equating a change in eating patterns would drum up the idea that it means you’re “on a diet.”  Budget is perceived to be a controlling, restrictive word.  It is not.  It’s a road map to financial success, or a snapshot of financial disaster.

Everyone is on a diet.  Everyone is on a budget.  The key is whether or not you’re paying attention to the budget.  If you are, then you’re probably telling your money where it’s supposed to go.  If you aren’t, then you probably feel like the word “budget” places you in a financial prison.

According to Wikipedia, a budget “generally refers to a list of all planned expenses and revenues. It is a plan for saving and spending.”

It’s a plan.  That’s all.  It’s either realistic, or unrealistic.  If you make $40,000 every year, then you have $40,000 to work with.  End of story.

Creating a budget is easier than it sounds.  Grab a sheet of paper.  At the top, write down how much you take home every month at the top.  Now, in order of importance, make a list of your monthly expenses, one at a time, and the amount for that item.  Subtract that amount from your net income and keep a running balance as you work your way down the list.

When you hit ZERO, you’re done.  It’s at this point you’ll experience a revelation when you realize that you’re spending more than you make.  Or, you’ll be pleasantly surprised when you find you have extra money left over.  Either way, a snapshot of how you’re currently spending your money is the first step to building a successful plan for next month.

You won’t get it right the first time.  You may not even get it right the second time.  But over time, you’ll dial in a plan that will ensure you meet your financial goals.

What should those goals be?

1. Get current with everyone expecting money from you.
2. Put a quick $1000.00 aside for emergencies while you complete the next step.
3. List your debts in order of smallest to largest.  Focus all of your energy on the smallest while keeping all of the others current.  When you knock out the smallest, move up to the next smallest debt and add the amount you were paying on the previous debt to the minimum payment of this next smallest debt.  Continue this until all of your debts (except your house) are paid off.  QUIT BORROWING DURING THIS TIME so you’ll never borrow again.
4. Focus your efforts on your emergency fund which should be at least 3 months total living expenses, and even better, 6 months.  Self employed people should be at 6 months.
5. Once you have your emergency fund tucked away, start pumping 15% of your income into growth stock mutual funds with long track records of positive gains in the 10% area.
6. Put another 15% of your income into an educational savings account for your kids’ college education.
7. Focus the rest of your money, all of the rest of your money, on paying off your house.
8. Build wealth to the point where you are able to live off of 8% of your nest egg.

These steps probably look familiar to you if you are a fan of Dave Ramsey.  This is part of his Total Money Makeover plan for financial peace, and mathematically, it never fails.

What if we don’t own a house?

After you have your emergency fund, and you’re investing 15% of your income, start saving for a big fat down payment.  If you must mortgage a home and take out a note at the bank, structure your life so that it takes up no more than 25% of your net income, and lasts for no longer than 15 years.  If you have the discipline to wait, and you have a solid budget that allows for it, focus all of your surplus income on building up cash reserves to purchase a home outright, for cash, with no mortgage whatsoever!  What an awesome feeling that would be.

None of this will be possible, however, if you don’t have a written plan that you review on a monthly basis, that is designed to help you tell your money where it is supposed to go, rather than looking back wondering where it went.  As Dave Ramsey says, “you are the sum total of the decisions you have made up until this point.”  Your financial future is in your hands.  Don’t wait for someone else to make it happen.