Seven Steps to a Budget
In an age of recession, everyone is talking about being more careful with money. From an Islamic perspective, no matter what the economy is like, being careful with spending and saving is necessary to help avoid extravagance, provide for family, prevent debt as much as possible, and allot money for charitable giving.
One of the most important habits that we all should practice is budget tracking. For some, keeping track of where their money goes seems like a daunting task, but here is a plan to make it easy and painless, requiring only a few minutes a week. No matter how poor your spending habits are now, this is a great way to get on the right track.
Step 1: Get an updated statement of all your accounts from your bank, or view them via online banking. You can obtain statements by going to a branch of your bank and asking for them. Most will give up to three months of statements for free as long as you aren’t asking for them constantly. Online banking is the better option, because you can view all account transactions instantly. One aspect of online banking that is extremely useful is bill pay. You can enter the account and address information of all your recurring bills such as mortgage, utilities, and loans and set up recurring payments. This can help avoid late payments and saves money in postage. Many banks offer online banking and bill pay for free. If yours doesn’t, you probably should consider changing banks. Online banking is as secure as through the mail – the chances of identity theft through online banking are similar to those created by sending your bills through the post office. However, be sure to look for the secure lock symbol in your Internet browser every time you do online banking or purchase something online.
Step 2: Determine your monthly income from all sources – salary, hourly wages, money from family, stipends, etc. If your income is not the same every month, take an average of your monthly incomes over several representative months as your typical income for budget purposes.
Step 3: Go through every penny spent in your account statements and put it into categories. If it is a recurring bill, keep it as its own category. Example categories include mortgage, credit card, gas and oil for car, insurance (life, home, and auto), Netflix, allowance/spending money, books, Internet service, groceries, electricity, and so on. Be careful to include bills that do not come every month but instead come quarterly, bi-annually, or annually, such as certain insurance payments, trash service, property taxes, car registration, and professional society fees or magazine subscriptions. Also, don’t forget to include savings. You may want to break down your savings into categories with goals. It is a good idea to build savings for home maintenance and car maintenance as well as for emergencies and travel. If you do not have a separate bank account for savings, it is a good idea to open one. Studies show that people who have a separate account for savings are more successful at saving. If you don’t have a savings account, you can open one online in just minutes in many areas. For example, U.S. citizens or permanent residents can open an ING Direct Orange Savings account in about five minutes. It is free, has a great rate, is well-rated, has no minimum balance, and can directly transfer money from any US checking account you own on a recurring or one-time basis as you desire.
Step 4: Find the total you spent in every category for each month in your account statements. Then, if you created any new categories such as savings, allot an initial goal amount for each. For any bills that recur less often than monthly, you should calculate or estimate how much you will owe in a year to that biller and divide by 12 and use that amount. For example, you may find that you spent an average of $288 dollars each month on food, exactly $1101.87 each month for your rent, that you want to save $50 each month toward a summer road trip, and that your trash bill is $60.00 every three months, so you need to budget $20 each month for it.
Step 5: Add up every category total from step 4 and compare this sum to your monthly income you found in Step 2. If your sum is greater than your income, you must adjust whichever categories are flexible until the two amounts are equal. If your spending is way out of line or you experience a sudden decrease in income, you may even need to eliminate some categories altogether to make the two numbers balance. Most people find they can eliminate a cell phone or land line, cable or satellite TV, and some of their food budget. It is not recommended to completely eliminate savings or allowance/spending money from your budget, although these may need to be decreased if you are in dire straits.
Step 6: Enter your budget into a spreadsheet. I strongly recommend this one for its simplicity and accessibility: Foxway Budget Tracker Spreadsheet. (Plus, it is free!) You can customize the categories to suit your needs. Then, enter what you actually spend for a given month in the same spreadsheet. Use online banking to help with this if you can, or every time you make a purchase or send a bill enter it into the spreadsheet that day in its appropriate category. If you prefer, do this once a week, but you have to make sure not to miss anything you spent. Your budget won’t help you much if it is inaccurate. This file will automatically compute for you where you have overspent, where you have extra, and your running totals and deficits for each month and the year-to-date. Don’t forget to save your budget file every time you make changes to it and to periodically back it up somewhere such as a flash drive.
Step 7: Periodically analyze your spending compared to what you budgeted. If there are categories that you are consistently overspending in, you may need to increase how much you budget for it by taking away from another item, or you may need to be more strict with yourself in that spending category. Similarly, if there are line items that you frequently under-spend, you may be able to decrease how much you have budgeted for them and put the extra somewhere else. Don’t forget that some items are not paid monthly and that, for example, the trash bill will show as under-spent for a few months until the bill actually comes due. Likewise, some bills vary greatly due to season, like a gas heating bill. You may budget an average monthly payment, but during winter in any given month, you will likely overspend it, and in summer months you will spend considerably less than budgeted, but over the course of the year, the budget should balance out. Finally, analyze your savings against your goals – do you need a newer car more than a new fence? Maybe you should put more into your car savings category and less into the home maintenance savings category.
Follow the above seven steps, and you will be well on your way to meeting your financial needs and goals, even if your financial situation changes over time, insha’Allah.