Budgeting 101

Notes From The Financial Shepherd

Why Dollars + Change = Sense by Glen Wright and Sy Pugh

The main purpose for the budget is to plan how someone’s money will be spent. Since most of us have limited resources, budgeting provides a way for us to monitor and manage personal cash flow, and to meet both current and future needs. Everyone needs a budget, regardless of how much or how little money they have, because everyone needs to have a solid understanding of their individual financial position. Following the example of the wealthy, it is important to know that most affluent people have an excellent understanding of their personal budget and a keen awareness of how money comes in and where money goes out.

In creating a budget, start with research and fact-finding to get a good assessment of what your true financial situation is. Use the information you discover to record all details about past cash flow, both income and spending. Paycheck stubs, check registers, tax returns, and receipts are all great sources of information. For those individuals who are advanced in budgeting, the preference is to use reward-based credit cards that provide annual statements. For those new to this process, we are not referring to store-based credit cards or debit cards. Reward cards offer a return-on-investment for purchases made or goods and services that are used, hence adding to your cash management and savings plan. Using a good reward card wisely can save you hundreds or thousands of dollars per year in addition to providing excellent records for tracking and categorizing your expenditures. If you already have a household budget in place, make sure it is updated with all current bills, loans, and other financial obligations. If you are just beginning to budget, begin with the steps below.

Step 1:  Set goals in three categories. Short. Intermediate. Long-Term. Short- term financial goals include saving toward emergency reserves, vacations, or anything planned within 24 months or less. Intermediate goals are between 2-10 years. The goals may include saving for a new car, saving for a new home, or planning for a child’s college education if the child is older than 8 years old. Ironically, even though intermediate goals tend to have the highest price tag, this category of financial planning is the one people are least likely to do. As a result, deficits in these areas tend to spill over into short- and long-term goals and negatively impact financial planning for immediate and future endeavors. Finally, long-term planning encompasses retirement, estate planning, and college education funds for children under the age of 8. Long-term planning entails any financial aspirations beyond 10 years from now.

Step 2:  Maintain your records. This can be difficult, but it is very necessary in order to get a good grasp of what amount of money comes in and goes out each month. We recommend using the credit card option because it is helpful in keeping and maintaining a system of good record-keeping. In the hustle and bustle of appointments and deadlines, we often forget the quick lunch meeting receipt or coffee shop expense that remain unaccounted for in our budget. Then, at the end of the month, we’re left wondering what happened to our money. Paying for items using credit and debit cards makes record-keeping and financial accountability very easy. Part of being obedient to God’s plan and becoming a Financial Shepherd is being transparent with your budget. So if you are going over this with your financial planner or spouse, make sure you discuss the entire budget.

Step 3:  Finally, there must be a periodic review of the past, present, and future to monitor your financial progress. Your budget must be monitored daily in the beginning, and as you grow, budget reviews can become less frequent and occur weekly, and then monthly. Everyone needs to monitor their spending no less than on a monthly basis. This practice will help identify what is going well and what you need to change before it’s too late.