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Author Danny Kofke was kind enough to share this piece with us and help us answer the question: "What is a budget?" Please read more about Danny below. Let us know what you think of his budget guide below in the comments. Thanks!
To begin, we first need to know how our money is behaving. This is where the budget comes into play. Now I know many people despise the b-word just like they don’t like the d-word (diet). Both of these bring up negative emotions for many people because they associate the words with being deprived of a desired item. I feel the opposite is true.
By creating a budget, you can actually have your money work harder for you and, thus, eventually have more to spend. What exactly is a budget? In simple terms, it is a list of outgoing expenses compared with incoming money. It is a plan for how you are going to spend your hard-earned money.
Some people get fancy and create elaborate spreadsheets to help them come up with a budget whereas others (like me) simply use a pen and paper to create one. No matter which route you take, a budget should help you easily see how much you have coming in and going out. It is a tool that will help you prioritize your spending so that you don’t run out of money before the month comes to an end.
Now that you understand what a budget is and aren’t so scared of that word anymore, we can discuss why you should use one. First, keeping a detailed account of your income and outgo will help you identify those expenses that are not really necessary.
Now it is pretty obvious that if you live in a house that is way above your means or drive a car that is too fancy for your salary, you will quickly find yourself in trouble. However, for many, it is those day-to-day expenses that add up quickly over time that lead to financial distress.
For example, let’s say you stop and get a coffee on the way to school each morning and then use the vending machine in the afternoon to purchase a snack and soft drink. You don’t really feel this pain because the coffee only costs $2 and the afternoon drink and snack run $3. That’s only $5 a day: not too bad.
Well, that $5 a day over 190 days (the number of days most teachers work in a school year) adds up to almost $1,000! Think of what you could do with that $1,000 if you made your coffee at home and brought in snacks. I bet most of you could think of a nice summer vacation that you could use the money for instead.
Another reason you should use a budget is that it will make your money go farther. Looking at the above example, if you didn’t keep a budget, you may not have even realized you were spending that much money on drinks and snacks. The budget enables you to see this and then eliminate these items from your spending habits. This helps stretch your paycheck and keeps more money in your account.
Finally, a budget encourages communication between spouses. This is so important because too many marriages are hanging on by a thread. Oftentimes, money issues become the final nail in the coffin. Starting a budget should be a team effort in which both spouses (and children, too) meet and participate in deciding what should be purchased and what the family’s financial goals should be. A budget can be a great tool to help strengthen and maybe even save a marriage.
To determine your budget, you need to know how every dollar is either being spent or saved. To begin, we need to list our major expenses.
Unfortunately, too many of us have no clue what our major expenses are or how much we spend on them. We just a write a check or pay our bills online without thinking twice about what this money is being used for. Let’s start changing this.
Below is a list of the major expenses that many of us have. Please take the time to write down how much you spend on each of these items every month. If any of these don’t apply to you, simply cross it off.
If you have an expense that is not listed, add it to the list. Some of the items listed below might be a yearly payment for you (e.g., home owner’s insurance, car insurance, etc.). If that is the case, divide your yearly figure by 12 to see how much you need to save each month to pay for these when they are due.
Retirement fund $ _____________
College fund $ _____________
Mortgage/rent $ _____________
Property taxes $ _____________
Homeowners insurance $ ________
Car payment $ _____________
Car insurance $ _____________
Fuel $ _____________
Electricity $ _____________
Water $ _____________
Phone home and cell $ _____________
Internet $ _____________
Cable/satellite $ _____________
Garbage $ _____________
Life insurance $ _____________
Disability insurance $ _____________
Health insurance $ _______
Tithe $ _______
Student loan $ ______
Extra Expenses Paid By Credit card(s) $ _____
Food (grocery store, eating out) $ ___
Entertainment $ ______
Federal/state income taxes $ _____
A quick way that Tracy and I stay on top of our expenses is by using a Post-It note. In our checkbook (we share an account which is another key to financial success as a couple) we have a list of the major monthly expenses that come out of our checks along with the amount and date they are paid.
Here is an example:
1st Tithe $100
1st Mortgage $1,000
5th Roth IRA $200
10th Satellite $100
12th Phones/Internet $200
25th Electric bill $150 (avg.)
25th Water $50 (avg.)
This enables us to quickly see how we stand on any given day. For example, if it is November 9th, we know we still have to pay the satellite, phone, internet, electric and water bills. This has helped us keep track of our money in a quick and easy way.
Another way we utilize this Post-It note is by deducting our expenses before we spend our monthly money. One of the nice things about being a teacher is getting paid at the end of the month. This makes it easier to budget since you know exactly when the check is coming in and how much it will be.
So let’s use the above numbers in this example. If you total them, my monthly expenses add up to $1,800. We will say my monthly take home pay is $2,800. Before the month gets going, I would subtract $1,800 (my monthly expenses) from $2,800 (my take home pay) to get $1,000. I
would then take that $1,000 and divide it by four (the number of weeks in a typical month; if the month happens to have 5 weeks in it, I would divide $1,000 by 5) to get $250.
I now know how much I have to spend each week without going over my budget.
Congratulations! Now that you have listed all of your major expenses, you know where a majority of your paycheck is going. Next we are going to find out what the rest of it is being spent on. I will give you a little heads-up: this one won’t be as easy as writing down your major expenses.
This one is going to take a lot more time and effort but you will be happy you did it. You are going to track your spending for one month. I am somewhat old fashioned so when Tracy and I did this, we used pen and paper. I know many of you would prefer to use an electronic device. That is completely fine; no matter how you do it, the important part is that you do. T
his monthly tracking includes anything you spend money on: from that candy bar to the night at the movies. Write down or type everything you purchased. Once the month has passed, you will be able to sit down and see exactly where your hard-earned money went. The numbers don’t lie: you either wrote or typed them yourself.
You will now be able to see exactly where every dollar you earned went. Too many of us spend money on things we truly don’t need. As an educator, I am sure you would like to add a little more to your income. There are three ways to make more money: get a higher-paying job, get a second job, or cut back on your spending.
Option A would require us to leave the teaching profession. If you feel it is time for a change, then I say go for it. However, most of you are educators for a far bigger reason than just a paycheck and leaving the profession is not something you want to consider.
Option B is definitely possible but with all the mandates you now have placed on you, this would be pretty tough.
This leaves us with Option C: changing your spending habits. Options A and B both require time to look for another job and are dependent on someone hiring you. Option C is something that can be done today and requires action by just you and your partner.
To help your money go a little further, you might want to implement a cash-only system for impulse purchases. These include items in the entertainment and eating categories because we can easily overspend in these areas if we are not careful.
Items such as electricity and fuel for your automobile(s) are not considered impulse purchases because we only spend what we need in these areas. I have never seen anyone pay the electric company extra or fill up the trunk of their car when their gas tank is full. Tracy and I did this early in our marriage and it helped us greatly.
After we knew how much we needed for our weekly expenses (these included groceries and entertainment) we would pull that exact amount from an ATM machine every Friday. This would be the money to get us until the next Friday.
This could get tricky at times. Let’s say it was Thursday and we had no money left. Friends might call and ask if we wanted to go out to dinner with them. We had to be resolute and say no, and ask if we could take a rain check. By doing this, though, we were sticking with our plan and staying within our budget. I will also warn you that it might take you a couple weeks to determine the amount you need.
If you find yourself needing to adjust this number a bit don’t become discouraged; handling money correctly is a marathon, not a 50-meter dash. There are numerous advantages to using a cash-only system. Many of us have an emotional attachment to those crisp, green bills. We know how early we got up and how long we worked on lesson plans to earn them.
This makes it much harder to part with them compared to just swiping a piece of plastic through a machine. In fact, there are studies that show you will spend 12-18 percent less when using cash instead of plastic.
Another advantage of using cash is the time you will save. Many of you have extremely hectic lives trying to balance your teaching with getting the kids to practice and putting dinner on the table. Sometimes we might even forget to balance our checkbooks. This can lead to costly overdraft fees. Taking a set amount of cash out once a week can save you a lot of time since there is just one transaction to write down and balance in your checkbook.
A final reason that using cash is beneficial is that it can save you money. Even though our economy is doing better than it was a few years ago, some stores are still struggling. If you use cash, you can take advantage of this. I had a friend who was in the market for a television set with a retail price of $1,000. I told her to walk into the store with $700 cash and see what would happen. After a few minutes of negotiating, she got this set for the $700 she walked in with. It never hurts to ask. The worst the salesperson can tell you is no. Go ahead and try it yourself. Nothing ventured, nothing gained.
Danny Kofke is currently a special education teacher. He lives with his fellow teacher wife, Tracy, and two daughters, Ava and Ella, in Georgia. He has also taught pre-k, kindergarten, first grade, second grade and sixth grade.
He is the author of the just released book, The Wealthy Teacher: Lessons for Prospering on a School Teacher’s Salary.” Danny’s everyday approach to handling money has led him to be interviewed on numerous television shows, including Fox & Friends, The CBS Early Show, CNN’s Newsroom, Fox News Channel’s Happening Now, The 700 Club, The Clark Howard Show, and MSNBC Live. He has also been interviewed on over 600 radio shows and featured in numerous publications such as USA Today, Instructor Magazine, Woman’s Day, Yahoo.com, The Wall Street Journal, Consumer Reports, Money Magazine, and The Atlanta Journal Constitution.
Danny wants to show other school teachers how to thrive on their salaries too. Learn more about Danny at: www.wealthyteacher.weebly.com
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