As part of my continuing series of money issues for blue collar workers and families, today I wanted to talk about average family budgeting basics. I know that budgeting is a topic that had been done to death, but I think it is time to take a look at the issue from the perspective of the lower middle class and working poor. For the most part, budgeting is budgeting. Money comes in and money goes out. But for those of us that don’t wear a tie to work and have to worry whether or not cushioned inserts are worth buying, there tends to be a lot less money coming in! So having the budgeting basics down is as important, if not more so, for us blue-collar types.
Budgeting Basic #1: Know Your Income
The first thing you need to do is add up all of your income. This can be easier said than done. Are your hours variable? Seasonal? Do you work two (or three or even four) jobs? Do you make any side-income, such as scrapping, mowing lawns, or yard sale arbitrage?
Let’s start off with the variable and seasonal income. On Target Coach highlighted several bloggers views on how to budget on a variable income. The general gist is to figure out two numbers. For budgeting purposes, you are only interested in your net pay. Your gross pay is what your boss told you your pay was going to be when you got hired, such as my $9.55/hr. Your net pay is what actually makes it into your bank account, pre-paid debit card, or cash in your wallet.
One is the minimum income you can expect in a given week. If you are seasonally employed, that is going to be 0 some of the time and a larger number during the others. Unless the weather gets really foul, when I’m working I can expect to see at least $300 in my pay check after taxes. I know I can expect no income (or whatever the unemployment office decides to pay me this winter) for 4 months out of the year, and figure on at least $300 per week for the other 8.
The second is the average you expect. Now, I don’t want to get all mathy here, but the average I’m looking for here (there is more than one kind of average) is called the mode. That’s just a fancy word for most. Go over your past paychecks or pay stubs and see what number you paycheck is usually around. For me, that number is in the range of $400. There are going to be weeks when you make more than average.
Keep these numbers in mind when you build your budget. You obviously can’t budget to live on more than you make!
If you are lucky enough to have a pretty steady paycheck, like gets a lot easier. Just take your net income and go to step two.
For side income, I try to exclude it from the main part of the budget. If it is fairly steady from month to month or makes up a sizeable chunk of your total income (like donating plasma for me), then include it. Otherwise, do the same exercise of minimum and average amount but set those numbers aside for now.
Budgeting Basic #2: What Are You Spending Now?
Do you know how much you spend each month? If you are still reading this, probably not. Or maybe you have tried to make a budget before but always seem to have run out of money when you should have enough on paper.
A common mistake by beginning budgeters is to make a list of your bills and use that for the expense side of the equation. Now, knowing your fixed expenses is important. After all, the are fixed and you can’t get away with paying less without consequences. But they aren’t all of your expenses. You are most likely buying gasoline for a car or truck. Possibly paying for public transportation or chipping in for a carpool. You also have groceries to buy. Maybe the occasional meal out. Plus, I have yet to meet the blue-collar worker who wasn’t addicted to some kind of caffeine, whether coffee, Mountain Dew, energy drinks, or some combination thereof.
Go through your bank statements for the past couple months. You may be surprised by just how much money you are spending!
Budgeting Basic #3: Compare the Two
How does the first number compare to the second? Hopefully it is larger. If not, then you are piling on debt. Realizing this is probably what prompted you to try to create a budget in the first place.
Even if it is, that may not be enough. Is the average enough but the minimum not? Pesky seasonal income leaving you high and dry part of the year? If either of these two scenarios are true for you, then you need to plan for the shortfall.
On the paper or Excel spreadsheet that you are using to make your budget, add a new line. Call it something like “short-term budget savings” The money you earn over what is needed in the other budget lines will go here to be saved for the months when you don’t make enough. Put this money in a separate place if you can. A different account or even bank if you use banks. If you keep it as cash, stuff it in an envelope somewhere safe. If you use a paycard, well, just try not to spend it!
What if your average income isn’t enough? You have two options: try to earn more or spend less. Unfortunately, earning more isn’t always as easy as it is made out to be by white-collar financial gurus who make a living telling people how easy it is to make more money! If you can work on some side income, that is awesome. If not, you are going to have to find some fat to trim.
Go back to your expenses. Figure out what areas you could live more frugally. Maybe you could adjust the thermostat to lower your utility bills. Adjust your lawn watering schedule. See if you can reduce your cell phone minutes or switch to a no-contract or prepaid carrier.
Many people think of dropping services such as cable to save money. Before you make that call, check for any early termination fees. In the first year of DirecTV service, “cutting the cord” would have cost more than we would have saved in a year! But if you are out of contract with any services, see if you can renegotiate a better price. You can threaten to leave. And if they still won’t budge, switch.
Also take a look at those other expenses, like groceries or your caffeine fix. Try to incorporate more store brands, and shopping at multiple stores including discount and wholesale stores. As far as caffeine goes, whatever form you take it, you will find a better price at the supermarket or store such as Walmart or Target then you will at the convenience store. Plan ahead and save.
If your budget is going to be tight even with cost saving measures in place, you will probably want to set up a cash flow projection as well to make sure you don’t run out of cash in the middle of the month.
Budgeting Basics #4: Setting Goals
Once you aren’t going into debt to pay the bills or having to figure out which bill isn’t getting paid this month, it’s time to set some goals. Maybe you want to put some money aside to actually retire before the age of 110. Or build an emergency fund to pay for any unexpected expenses like a car repair or hospital bill. You could want to buy a new car without having to get a car loan. Or save up for a down payment on a house.
The money leftover at the end of the month will go towards these goals. Well, actually, not quite. Instead, figure out how much money that is and put it toward these goals first. By moving the money out of your main place of spending it (checking account, debit card, or cash in wallet), it’s harder to spend it!
But do keep some money to spend on yourself. Not so much that it hinders your ability to save for your goals, but enough that you don’t feel limited by the budget. If you feel like your budget is getting in the way of enjoying life, you are more likely to stop following it and blow your money on something.
Do you have any other budgeting tips for those on limited means?