Every wealthy person in the world uses a budget. Warren Buffet, Bill Gates - they all swear by the budget, despite them being able to buy an entire island if they wanted to. The budget is the blueprint, it's the control of where your money comes and goes, and it keeps you on-track to making sure you're not biting of more than you can chew from your financial future. In this blow I will go over my #1 tool - the EveryDollar app by Dave Ramsey and the RamseySolutions team. If you haven’t read my recent blog post about my four Tools of the Trade, you can find it in the link below:
Assuming you've already downloaded the app, let's dive right into the user interface. You'll typically see three tabs - Planned, Spent, and Remaining. Below I've posted my own personal Planned and Remaining tabs:
This is a snapshot of my typical planned budget for the month. It doesn't have to be exact, but over time you'll be more in-tuned with the staple expenses you expect.
Planned is pretty straightforward - here you'll input your monthly income (Net, not Gross) and this will be your monthly base. Your pool of money that will be drained into your budget buckets. The EveryDollar app is based on the principle of a zero-based budget - that means that every single penny that goes into your pocket, needs to have a bucket to go into. Nothing goes untouched - a place for everything and everything in its place. This is the best organizational tool that I love about this app, it allows you to put things where they belong, and any remainder that you normally would leave sitting in your checking account that would be seen as "money you can waste on stupid," can be placed in somewhere much more useful.
First things first, tackle your Four-Wall expenses: Food, Shelter, Housing, and Transportation. The basic but critical needs for surviving. Your rent, utilities, groceries, gas, car insurance, all get planned and budgeted first. Why? Without it, your chances of staying consistent with a budget are out the door. Most likely, these Four Walls are stagnant - they won't change, which means you'll never see this money go anywhere else. That's good, that's money you don't need to see but need to be paid. I've heard of some people not having rent money to cough up because they dropped it at some party. WRONG. Don't, just please don't. Put them where it belongs and don't worry about it anymore.
Second, you'll want to do something with the remainder. Here are my initial thoughts on the remainder of your income:
If you haven't built up an emergency fund, then sorry, a bulk of that remainder goes in there. Trust me, you'll absolutely thank me when the inevitable happens. Research suggests that the best emergency fund tends to account for 3-6 months of your critical expenses. Best and easiest way to do it is to get your Four-Wall expenses for the month, multiply it by 6 and start there. Depending on how much money you have left in your remaining fund, I highly suggest that at least 50% be budgeted into the emergency fund. Regardless if it's $50, or $500 a month, the point being that you'll know you're be prepared when you blow a tire.
If your remaining fund is not a lot, and it happens, then it puts your Four-Wall budget into perspective: Do you really need to be paying that much on your rent or home? Do we need to be spending that much on groceries? I have 3 (4 soon) children, so I can understand the need for a huge chunk of change to be put into feeding them, but maybe for this month we can skip the steaks and try out some ground beef instead. Decision-making is crucial for trimming of excess fat from your budgets.
If you have a lot remaining, then congratulations, your emergency fund will be filled quicker.
If you're in DEBT, then attack #1 with the emergency fund until you've saved up at least $1,000. Cover your butt, because you'll never know. That being said, the remainder of your cash flow after the emergency fund, if you have any outstanding debt, goes right in here. Again, sorry, but that new pair of shoes or new bag will have to wait. Why wait on giving the government what you owe? Give them what they need and remove them out of your life forever (Except taxes of course). American Express, Sallie Mae, Uncle Sam - say goodbye to all of them and get these debts removed IMMEDIATELY.
If you've completed #2, then go back to #1 until you're covered for the 6 months. Then take a deep breath of relief. Congrats, your remaining money is now YOUR MONEY. Grab a nice steak dinner and celebrate. From this day forward, you're in control. Take that remaining money and do as you wish. If you go back to my previous post regarding the tools, then you already know where I'm suggesting this remainder money flow goes - Investing. More on that later.
The main point of this post is to get you familiar with budgeting. Regardless of what app you use, or if you prefer the old tried-and-true pencil and paper, the choice is yours. As long as you're consistently documenting where and why your money goes where it goes, you're already miles ahead of the people who stray from budgeting. I'd rather we all stay on the same path as Buffet and Gates, because well, look where they are.