People of all ages and backgrounds have issues with money. It’s nothing to be ashamed of, it happens to the best of us. While money can be a mystery to many, it doesn’t have to be. Budgeting can give structure to the chaos and begin to give you a sense of comfort about how much money you have and exactly where it is going. Budgets come in many flavors. Some are complicated and require a degree in physics while others are ridiculously simple. As you may have guessed, we at Kashcalf prefer things simple. So, let’s take a look at some Budget Basics.

What is Money?

Everyone knows what money is, even my young son knows what it is, he calls it “green paper”. For most other people (older than 3) money is defined as a unit of financial currency that can be traded for goods or services.

In the world of budgeting however, money is much more than that. Think of money like little employees. Each employee (or dollar) has a specific job to do. Some pay for bills, others pay for fun and some pay for your future. Before we delve further into all that, let’s first look at where money comes from.

Gross Income

Gross Income is anything that provides someone money. Income can come from the sale of items, dividends from investments, income from rental properties or most commonly from a paycheck received from an employer.

Net Income

You can’t know what to save and what to spend if you don’t know what you have to begin with. Net income is your take home pay after taxes and other deductions have been removed from your paycheck.

Here is a basic layout of the difference between Gross and Net income.

Let’s say you make $3,000 a month and after your taxes and deductions you only bring home $2,000.

$3,000 (Gross Income)

-$1,000 (Taxes and Deductions)

————

$2,000 (Net Income)

So be sure to sit down and hash out exactly how much money you bring home after taxes and deductions every month. This will be the starting point for any direction you decide to go with budgeting.

Basic Categories of a Budget

Fixed Expenses

These types of expenses are regular, recurring expenses. Most occur weekly, monthly or semi-annually and are difficult to avoid. Car payments, rent or mortgage payments, insurance premiums and real estate taxes make up most people’s primary fixed expenses.

Flexible Expenses

Flexible expenses are typically viewed as unnecessary expenses. They consist of things like impulse purchases, luxury items, and entertainment. They are summarized as expenses that can be cut back or removed entirely.

Savings

Traditionally savings is the amount of money left over after fixed expenses and flexible expenses have been deducted from net income. This is the category where money will be set aside for your future.

How to do it?

Control Spending

We all do this. What is one more item in your shopping cart or one little impulse purchase while waiting in line? This is probably the most difficult and the most important part of the budgeting process. The world is designed for us to consume and we are drawn to new things and new experiences. This combination makes it very difficult to control our spending but it is by no means impossible. Through vigilant focus people can start to curb their spending and begin better financial habits. It isn’t easy, but what in life is worth having that ever is?

Many believe that if they just earned more money they will get to enjoy that ever elusive financial freedom. That is not true however. People’s income can rise to multiples of what they previously made but if they don’t curb the impulse to spend, they will be in the exact same position as they were before. Just with more things. This phenomenon is known as Lifestyle Inflation. To truly change your financial life and your future you must learn to control spending.

Set Goals

Budgeting is fun in the beginning. It is fun to see where your money goes and to see the impact your choices can have on your financial life. Then like most things the shine inevitably dulls and it becomes tedious. Having set goals can give you the motivation to continue with your budget once the allure wears off.

Types of Budgets

Cash Envelope

This budgeting system is as basic as it gets. Get yourself different colored envelopes, they will represent the different categories of things you spend money on. Blue = Food, Red = Rent and so on, you get the picture. Fill the envelopes with the appropriate amounts of cash for each category. Then only use cash from the envelopes to pay for things.

Watching your money physically leave your hands has a bigger impact on you psychologically than simply scanning a card, thus making you more frugal.

Besides, who doesn’t want to start the day with a huge envelope of cash?

Start the Envelope System TODAY!!!

50/30/20

This is a very popular budget where users are to budget 50% of their income to “needs” (fixed expenses), 30% to “wants” (flexible expenses) and 20% to savings.

One of the advantages of this type of budget is its ease of use. Everyone can calculate 50% of their net income. Just watch out for the tendency for your savings to drop. Month one you may save 20% but by month twenty it may have worked its way to 15%. Watch your wants. They are ever hungry.

And no. As much as you may love it, Starbucks is not a need.

Saving First

This method is typically reversed from a more traditional budget that prioritizes fixed and flexible expenses before savings. Known also as a pay yourself first budget, this strategy takes the part people generally like the least and forces them to do it first…namely the saving. By taking a chunk out of your paycheck as soon as it hits your account you assure that you will save exactly what you need to. In traditional budgets when saving is done last it often competes against flexible expenses. Flexible expenses are enjoyable and provide immediate gratification while savings are often seen as boring. Thus over time more and more money is taken from savings and put into flexible expenses. In this saving first method once you remove cash earmarked for savings, fixed expenses and flexible expenses must battle it out for the remaining money, obviously fixed expenses win out.

Conclusion

These budget basics can bring you financial direction, increase your wealth, limit your spending and secure your future. They are often annoying at first but if you stay the course they can provide you the financial security you deserve.