In Part 2 of this series we talked about tracking your spending, and how knowing where your money is currently going is critical to establishing a workable budget. Recording your transactions over several weeks will help provide some insight into your current spending habits.
The next step is to establish limits for each spending category. Let's begin by converting your transaction amounts to percentages so we can see what proportion of your spending each category currently represents. Here's an example: If you spent $250 on recreation and your monthly net spendable income (the amount left over after your tithe and taxes have been paid) is $3,337, your recreation category used up 7.5% of your budget last month (250/3337 = .075). Take a moment to translate your spending in each category into a percentage. Write down each one, and then add them all up. When you're done, they should equal 100% of your net spendable income.
To make sense of these percentages, we need a frame of reference. So, listed in the table Budgetary Guidelines are the percentage guidelines taken from page 41 of Crown's Biblical Financial Study Practical Application Workbook.
These guidelines are what Crown recommends for a married couple with two children. You will likely find that your target percentages vary from these somewhat, based on your income level, family situation, and so forth. However, be careful about using that line of thinking to justify huge discrepancies between your percentages and theirs. Better to consider these to be goals to work towards, and use them to help you identify potential problem areas with your current spending.
In the beginning of our marriage, my wife and I didn't realize that over 10% of our income was going to the recreation category (eating out can be a real budget-buster). Without actually tracking our income, we would have underestimated this figure. We also learned that over 25% of our income was going toward our debt category. We didn't want to reduce this number though, because we were really focusing on getting debt-free. In order to have such a high percentage going to the debt category, we had to make sacrifices and adjustments in others. We lived in an apartment at the time, so our housing category was only 15%. Our bargain shopper tendencies allowed our food and clothes categories to be just 8.5% and 1.5% respectively. And though we would have liked to have saved more, our savings was only at 2.2%. These tradeoffs were okay because we (1) knew where our money had been going; (2) had a plan for where it would be going from now on; and (3) were making progress towards our financial goal of paying off our debts.
Making It Personal
As you compare each guideline percentage to your current spending percentage, ask the Lord to show you where and how your categories should be adjusted. Some areas (like insurance) may not leave much wiggle room. But other areas like food, clothes, recreation, and the catch-all miscellaneous category can usually be adjusted if necessary.
You should have in front of you a sheet showing each category, the dollar amount you've been spending, and what that amount translates into as a percentage of your total net spendable income. Now, add two more columns, with headings of “My Dollar Goal” and “My Percentage Goal.”
Go down through each category, and identify those places where you think you can reduce your spending. Fill in your “dollar goal” amount for each one. For example, if you have been spending $210 a month on clothing and think you could reasonably cut that to $180, write that down in the “dollar goal” column on the clothing line. Make a note off to the side that you now have an extra $30 to apply elsewhere.
Repeat this step with all the categories that can be lowered. When finished, it's time to deal with the categories that need extra money allocated to them. Use the surplus from the reductions you made earlier to adjust these categories as need be. Don't be discouraged if you need to go through this cutting/re-allocating process several times.
To see how your new budget compares to Crown's percentage guidelines, take your new dollar goal amount for each category and divide it by your net spendable income. In our earlier example, we changed our goal amount for clothing to $180, giving us a new “percentage goal” of 5.4% (180/3337 = .054). Hopefully, your new percentages will match up more closely with Crown's recommendations. Naturally, if you group your expenses differently than Crown suggests, your percentages will vary from theirs accordingly.
Variable Income and Expenses
Categories that vary from month to month, like utilities, are usually best handled by budgeting an average of the past 12 months (assuming you have the numbers available). Add up your past 12 bills and divide by 12. Also, if you have expenses that are paid just once per year (life insurance premiums, Christmas, vacation), it's a good idea to build a monthly amount into your budget so you're not faced with a budget-buster when those come due. Ideally, you'd save that money each month in a separate account so it's available when needed.
What about income that varies, like jobs paid on commission? Again, the best way would be to take an average of a complete cycle (usually a full year). Pay particular attention to any busy seasons you might have. In other words, if you have a commission job and have just come through your busy season (meaning your recent paychecks have been higher), averaging based only on your recent numbers could present a problem. Be sure to err on the side of caution. It's always best to budget based on conservative numbers.
In Part 4, we'll deal with implementing your new budget percentages. The initial budgeting process may seem painful, but you'll find it gets easier as you get used to living on a budget. Furthermore, disciplined spending is very liberating and rewarding, contrary to what our materialistic culture would lead you to believe. First Corinthians 3:19 reminds us that, “the wisdom of this world is foolishness in God's sight.”
(This article courtesy of Agape Press).
