If you live paycheck to paycheck, like millions upon millions of Americans do, you know how important it is to be able to pay bills on time and not have to worry about day to day necessities. The amount of stress that constant financial hardship can put on an individual is simply unbearable. Pay the electric bill, or feed the family? Pay the minimum on the credit card, or run the risk of having the natural gas shut off due to non-payment? Many people ask themselves questions like this every day. They make painstaking decisions to, theoretically speaking, ‘rob Peter to pay Paul’ due to poor money management skills. The good news is that this cycle can come to an end with minimal effort.
The answer lies in a simple equation that is unique to each household. It involves only basic math skills, and is really quite simple to accomplish. By creating and sticking to a monthly budget, you can free yourself of many stresses you may encounter on a monthly basis- when the rent, mortgage or car payment is due, when it’s time to pay the credit card and utility bills, and when you find yourself needing to head to the supermarket or department store for household goods. When you plan your finances ahead of time, you will find that this seemingly endless weight on your shoulders will disappear into thin air.
Leigh*, a twenty-something single mother from Cleveland, Ohio, knows all too well what it is like to not have enough money for basic living expenses due to poorly managed income. With her meager weekly paychecks, she found herself constantly struggling to make ends meet. “Last Christmas, I had to sell my computer and living room furniture to keep the heat on and buy gifts for my kids,” she said. “It didn’t hit me how bad things were until I walked in the door after work one day and looked into my empty living room. I broke down in tears when my three-year-old asked me where the sofa was.”
With her six credit cards either maxed out or frozen due to lack of payment, she had nowhere to turn but the equity in her furnishings. “I sold my two-thousand dollar laptop, which was just six months old, for four hundred bucks. The couch, which I was still paying on at the time, was sold for a third of what it was worth.”
After the holiday, Leigh was sued by one of her creditors with whom she defaulted, her 2004 Ford Expedition was eventually repossessed, and she was evicted from her three bedroom condominium. Not knowing what else to do, she finally gave up and filed a Chapter 7 bankruptcy to eliminate her debts.
“I knew I was headed down the wrong path, both financially and otherwise. I knew it was time for a reawakening: time to change my pace to one I could actually keep up with,” she stated.
As a requirement by the federal bankruptcy court, Leigh took four hours of credit and money management counseling. She learned the secret to proper money management and has since gotten back on her feet.
“Live within your means, that’s all I’ve got to say. If you don’t need a huge SUV, don’t buy one.” She speaks from experience. “Budgeting my income made all the difference in the world. I’ve learned to value money more than I did years ago.”
Using Leigh’s income and situation as an example, we will begin to explore a proper monthly budget and it’s components. The first and most important step is planning.
As public relations specialist for a local dairy company, Leigh’s yearly income was in the mid-thirties. She would bring home, after taxes, about five hundred fifty dollars per week. Her old lifestyle was that of what someone making twice her yearly salary should have been because she placed so much emphasis on “want”, or non-necessity items and not enough on her family’s financial needs.
First, we will add up all of Leigh’s monthly recurring costs, which include rent or mortgage, car loans, insurances, utilities, credit cards, child care and misc. loans and monthly charges. For Leigh, we calculated that her monthly bills would now total $1300 on any given month.
Next, we will add in informal recurring charges, or, things you need to pay but don’t actually get billed for. These include gasoline, other transportation costs such as vehicle maintenance or highway tolls, grocery and household goods, clothing or medicines. Estimate gasoline usage and grocery store shopping, but remember to be thrifty where possible by shopping local and buying sale items. It is recommended that you allot $25 per month for each person in your household for a clothing allowance if possible. For Leigh, we calculated these totals to be $450 per month.
Last, but as important as first, comes a planned savings schedule. Put as much as you can in to a savings account and do not touch it. When an emergency comes around, or eventually you want to take a vacation or weekend getaway, you will be glad you have it. Leigh had decided to save $100 per month.
With these totals now correctly calculated, we estimate Leigh’s monthly recurring budget to be $1850. This means that Leigh needs to budget $427 per week. The remainder of her paycheck, $123 per week if her check is $550, can be used for recreation, such as going out to eat, visiting the movie theater or going to the amusement park.
If Leigh continues to follow this budget and lives within her means, she will not have to constantly worry about how she will pay the next bill because the money will always be there to pay it. For Leigh, who is paid weekly on Fridays, she deposits her weekly $427 in to her checking account. Her savings, which she has “billed” to her self on the 15th of each month, is transferred to her savings account on that day she chose.
“I can’t explain how rewarding it is to know you are supporting your family and don’t have to hide financial problems from them anymore.” Leigh said. “Learning to budget my income and differentiate between my wants and needs was the best thing that has ever happened to me.”
Let’s break down the budget into a simple math formula so you can sit down and evaluate your situation:
First off, you need to determine your income status: Approx. Monthly Income x 12 / 52 = Average Weekly Income (AWI)
Next comes the actual budget: Monthly Recurring Costs (MRC) + Informal Recurring Costs (IRC) + Planned Savings Schedule (PSS) = Budget
Now we will do this: Budget x 12 / 52 = Weekly Budget Contribution (WBC)
Your Weekly Budget Contribution, or WBC, is the total amount you will need to deposit in to the bank to stay on your budget. This way, when bills come, they will be paid directly from that bank account.
Note that if you are extremely behind on bills, it may take several weeks or months to recover to the point where you will be able to budget only the amount you need to cover MRC’s that are current and paid. If you find that your budget outweighs your income, you will need to make drastic changes to your lifestyle. Be sure to eliminate non-necessity items such as cable TV, high-speed internet, cellular phones, cigarettes, or other high priced items that you don’t actually “need” (And, in all reality, can not afford). If you have a high car payment, consider selling your car and purchasing something at a better price that has good fuel economy. If you find that you either , a. cannot give up some of these luxury items, or b. can not shave enough off of your budget to meet your income situation, you will need to either find additional income or compromise and downgrade your lifestyle to one that is within your means. Not doing so can be stressful and have negative results.
Putting yourself on a monthly budget plan is a simple, secure way to assure that yours and your family’s needs will be continuously met. You will find that being on a budget will put your mind at rest, and you will no longer find yourself scrambling at the last minute to pay bills. In fact, if you play your cards right, you may never make another late payment again due to lack of funds. Best of all, after a few months or possibly years on the budget, you will find that as your savings account grows, so will your sense of security and independence- and peace of mind is a priceless thing to have.
*Names have been changed to protect identity.