Budgeting Breakdown: Create Your Budget

I know, sitting down once or twice a month wreaking your brain, playing with numbers and a pile of papers does not sound like the most lit weekend.  There is always something else I would rather be doing than spending a few hours budgeting.  In complete honesty, though, those few hours have given my mind peace and my visions clarity.  Me and my husband have been able to make plans for trips, for big purchases, gotten ourselves out of financially burdensome situations (doctor and hospital fees, anyone?) and have felt empowered to tackle and even envision the bigger plans in life.  Budgeting, although it can feel cumbersome only if it is done without a method, is a life saver, a marriage saver, and a mind saver.  Yes, it is just that awesome.  And I am going to help you figure out your method today (insert muscle emoji here).  Please do note that I refined my methodology by following Dave Ramsey‘s method so that is the basis I will be using in this post.

Why budget, you ask? Here are two major reasons why I recommend everyone to take their dollar bills to account:

1.  Empowerment through knowledge.  As cliche as it sounds, it is actually liberating to know the complete financial picture of your household. Knowing where the money is saved, for what it is saved, where it is going, and how it will be used gives you the clarity of mind to tackle every financial setback as well as room to celebrate anything life throws your way. You are able to go visit your sick relatives, plan a getaway with your loved ones, or get that gadget you have been eyeing with complete confidence and even plan for that umrah trip knowing that it is not going to set you back in the coming months.
2. Reality Check. What would I like to do?  I would LOVE to stay for a few nights surrounded by green nature (and we live in the desert FYI), add a few architectural (and green) touches to the backyard, finally renovate the kitchen, and install solar panels.  (Any rich person listening? Do you want to make someone really happy? :p) I can say with complete honesty that at this point, NONE of these things are possible as far as my mortal ability is concerned.  In fact, I might actually be able to tackle that first thing in a few months if I prioritize it.  It’s knowing what I can do and what I can work towards (and knowing what is beyond reach [see: how to buy a private jet]) is where the reality check comes in. You know what can be done and what needs to stop filtering through your day dreams.  It stops you from impulse buys and regrets.

1. The First Steps

Have I convinced you yet?  I hope you have seriously given controlling your finances a serious thought and now that you have read this far along, lets jump into what needs to be done before we even start divvying up the next paycheck.

Research Spending Patterns

In this day and age of technology, every information you might need regarding this is at your fingertips.  What you first want to pay attention to is: Where does your money go?  Go back through the monthly bills you receive in your home and average out how much you spend on each one.  Rent/mortgage, utilities, cable/tv/internet, charity, groceries, doctor bills, credit card bills (see “dealing with debt” later) and electronic devices are some of the things you should focus on.  What I consider these to be are the “Non-Negotiable”s (NNs).  NNs are such that even if you wanted to, you can not eliminate them from your life – your health and wealth depend on them.  No, movie trips do not fall into that category.  Resist the urge to include such expenses!

Second thing to focus on is:  What is your income? That is, how much do you earn in a month.  Take note of that number and subtract the NNs from it.  Now you should have a pretty accurate idea on how much you need to live (the NNs) and how much you can play around with (the remaining amount).  Pretty cool, right? This is the beginning of your realistic financial picture.

Long Term Expenses

There are some expenses that do not come out of your account every month.  Things like car tag payments, yearly subscriptions (hello, amazon prime) and maintenance of appliances is something that is taken out once a year.  These do not fall in the emergency category. Why?  Because you plan for those, you know when these payments are coming, and you signed up for them.  So look at the long term expenses and divide them by 12 (if they are to be paid yearly, if it is every two years, for example, then divide it by 24).  These do not have to be written only for large payments.  We have a bill of $36 that is due once a year, and you bet I take out those $3 every month to save for it. You will be taking out that amount from your check each month so by the time the 12th month roles around and that big subscription payment is due, you are ready to whip out those dollar bills without any undue burden.  Isn’t that just exciting?

Dealing with Debt

Every time I have heartfelt conversations with my girlfriends, I always ensure them that “this is a judgement-free zone.” Everything we talk about is in confidence and no one will formulate someone’s character assassination based on what was shared.  So my fellow beings, this is a judgement-free zone.  If you have debt, student loans, credit cards, you name it, this is the time to record it.  Don’t be disheartened and let Shaytan trick you into thinking that “it doesn’t really count.” Yes, yes it does count.  It is part of your budget, it is part of your life, and only you can truly understand the grip it has on you every day.  It is a chain digging into your ankles that keeps pulling you back from your future dreams. Debt is not fun, so let’s work on getting rid of it.

Look at all of your debts, discover what is the minimum payment to be made for each, and write that number down in your NNs. Only your minimum payment, no more and definitely no less.  We are going to use that number in what Dave Ramsey called, “Debt Snowball.”  This method is genius and we will get to it soon, insha’Allah.  Trust me, it is amazing and very addicting. (more information on this and financing can be found at Debt Free Muslims).

Did you add the minimum debt payments to your NNs?  Perfect! Let’s move on to the next step.

Add the Fun

What are some things you would like to spend on? Date nights, shopping, Islamic seminars, vacation, hajj/umrah are some of the things which you might add onto your list.  Don’t assign any specific dollar bills to these items, but just write them down so that you are aware that you have to find room in your budget for these things in order to remain sane.

I think the most misunderstood thing about budgeting it is that some assume there is no room for exploration in it.  In fact, this is where the joy of budgeting kicks in.  You can still go on shopping trips and other guilty pleasures while ensuring your bills are being paid and NNs are being taken care of if you plan for it.  So don’t skip this step, keep the fun in your life, and add some categories which make your heart sing.

Categorize

Create categories for each of your spending needs/desires.  Take a piece of paper and start writing down where does each of your items belong. Do not write any numbers at this point.  Just divide up your items in categories. For example, you might want to put Mortgage/Rent + Gardener Fees + Insurance into one category titled “House.”  And water bill + electricity bill + phone bill etc into “Utilities.”  You may want to add car payments + gas + car insurance (if separate from house) in the “Transportation” category.  And lastly, don’t forget to add your fun items like shopping + date nights into the “Personal” category. Please feel free to add or subtract from each, create new ones, and move them around to a pattern you see fit.

One Category You Can Not Miss

Yes, there is one you simply can not miss (after your NNs of course).  This is what Dave Ramsey calls “Blow Money.”  Which basically means that there might this amazing deal for something you absolutely did not plan/budget for that has popped up on your screen, and it needs to be paid from somewhere.  That “somewhere” is your Blow Money.  That is for you to spend on whatever you wish, however you wish, each month. That is your pocket money, your monthly eid-gift to yourself, your monthly birthday-anniversary gift (ha!) and whatever luscious name you can think of.  Include that in your categories because we are humans, after all, and we all fall into our impulse patterns.

2. Safety Net

This is where you will zoom in a little more into your financial picture and protect yourself from future surprises.  You need to prepare yourself for emergencies that no one can truly plan for.  Things such as emergency room visits, medical tests, car breakdowns and air conditioning units collapsing tend to become heavy burdens as they are normally big expenses.  The only way to deal with those is to be prepared.  If you previously dealt with such expenses via your favorite credit card, then you know how the debt has effected you.  How do you do prepare, then?  Create an emergency account.

This account is ONLY for emergencies, the ones that no one can predict or plan for.  Buying a TV on Black Friday is not an emergency nor is that visit to Ulta.  “Emergency account is only for emergencies.” Engrave that as your mantra and do not budge from this commitment.

How much to add into your emergency account? This, actually, is your first priority after NNs.  It is recommended to have at least $1000 saved in your emergency account to begin with, if your income does not support that, aim for $500.  If you do not have that cash readily available now, everything that is remaining apart from NNs when you do your monthly budget will be sent to it.  Get that number up there and keep it.  Which means, should you have to take out funds for that emergency room visit, your priority becomes to replenish those funds.

The ideal goal for this emergency account is to be able to sustain you for 6 months should you be unable to get any source of income.  For most people, that amount is $15,000.  Don’t feel discouraged, that is your ultimate goal.  This is what you will seek after you have paid off all of your debts and have fallen into a comfortable financial situation. But for now, having $1000 (or $500) is what is necessary. This deserved its own section on this post because its just that important.  In fact, many people have emergency categories for their emergency account so they don’t have to touch their emergency funds.  Try saying that five times.

3. Create Your Notebook

Whether its a fancy bound notebook, or one you can get easily find in most stores, choose a notebook that is going to be your companion for a while.  Love it, write inspirational quotes on it if you must, heck, put stickers on it, but make it yours.  This notebook is going to go through some transformations, but it will become your best friend and that one gift from Allah which results in a peace of mind.

Debt Snowball

Let’s talk about this magical solution to becoming free of debt.  This is a simple process and if it is maintained, it works wonders.  The basic premise is this:  You will pay off one debt at a time, without defaulting on any other debt account, and you will focus on the smaller owed amount first.  Once you tackle the smallest debt, you will get motivation you need to tackle the bigger one.  If you focus on the biggest one first, then you will feel discouraged as it will take a very long time to pay off (car payments are a doozy). So, focus on that one account which has the smallest balance while making minimum payments for all of the other debts.  Let the games begin.

RULES:

1.  You are no longer using any of your credit cards or debt accounts to do anything.  The balance you owe is not going to increase by your hands.
2. You are going to dedicate as much momentum and energy as you can into paying that account off.  Which means, through your calculations, any funds that you can possibly squeeze out of your check is going to go towards that one debt, on top of its minimum payments.  So if that credit card minimum payment is $25, you are going to pay that plus as many extra funds as you can get while you are paying just the minimum payments for your other debt accounts.
3. This is your mission to free yourself from burden of debt in this life and in the next.  With your dedication and duas, this process will become easier as you began to knock out those debts from your list.  Stick with it, don’t slack on it, and you are going to look forward to spending your paycheck on things that you love rather than on pesky debts that suck it at all in.

The Columns – The Allocated Spending Budget

Are you ready? The magic carpet ride is about to start and you are on your way to seeing the bird’s eye view of your monthly expenses.  This is where the magic happens.  First, figure out how many income checks you get each month (we get three, your number might be different).  Then create the columns in which you can write down the category+items on one side, and later, you will fill out the rest of the columns as the income check comes in.  Your NNs (including charity and your Emergency fund and debt snowball) will always come first – in life and in the notebook.

Write down the calculated amount from the first step for your NNs in the correct column from which you plan to pay it out of.  So if you are paying rent/mortgage from checque #1, put that amount in that column.  Do the same with each category.  This is where you will need a pencil and an eraser because you will be playing with the numbers and seeing which cheque should deal with which expense (if you have multiple income cheques).

Then divert your attention to the “debt snowball” “fun” categories.  What amount can you spare for each without exceeding your budget? Play around with the amount that seems fair to you.  Keep in mind being free from your debt is your goal in this category.  Add as much as you can without depriving yourself of something extra money to spend in the “Blow” category.  This should not be an unrealistic budget.  If you have $300 left, do not allocate $250 on Blow and leave the rest for debt.  Instead, perhaps consider dividing it further and controlling those surprise wants.  The more quickly you pay off your debts, the sooner you will be able to enjoy adding more into your Blow column.  And if you don’t have any debt, then you are free to allocate the funds as you see fit.

Some things to consider

Take this from personal experience:  Save a little at a time for bigger expenses.  This is where the “emergency category for the emergency account” comes in.  I will give you a personal example that I have been using in our monthly budgeting.  Some of the bigger expenses that fall into our columns don’t really fit into the “fun” category but are good to have on hand nonetheless.  There is a category titled “Small Household Fixes” in our budget should something small break and needs to be fixed like a fan, faucets, plumbing issue etc.  I allocate a little bit of funds there each month to be able to handle these unwanted fixes.  Another such category in my budgeting notebook is “Doctor Bills.”  While thanks to God, we don’t go to doctors routinely, but should we need to go, I add on a little bit at a time each month (preferring to add the regular insurance copay due each time we visit) so that I have a pool of funds where such fees can come out of.  This way, the emergency funds are left untouched and I am still prepared for any such instance.

4. The Extra Tidbits

1. While the preferred method for financial gurus is to withdraw cash directly from the bank as soon as the check hits and divide it up in the categories by adding cash into envelopes dedicated to each category, it is not something that is feasible for our family in our circumstance.  So for us, we have created separate bank accounts where, while budgeting, the funds are transferred into.  For instance, we have a separate emergency account, a separate “billing account” for the utility bills and groceries etc, and a separate Blow account.  Doing so has limited accidents and us spilling over other categories.  However, if you find yourself able to withdraw cash and put that amount into a different envelopes from which you will withdraw from as needed, then do so.
2. DO NOT CROSS CATEGORIES.  This is also very important that is why it is in all caps.  (Isn’t that why such thing exists?)  You can only use what you have in that category.  If you went on a shopping trip and you had allocated $50 dollars from your monthly budget towards it, you can not spend any more than that. You can not “borrow” them from another category (even worst, the NNs and “put that in later”). No and no.  If you run out of those funds in that category, it is gone.  This includes groceries too.  Use funds from each category wisely and once you are out of those funds, know that they will not be there until the next month rolls along.
3. If you can not withdraw cash for envelopes as I mentioned before, then consider creating a balance sheet for each long term expense.  Write down each time you add into it and every time you withdraw from it so those funds are not lost among the sea of others in your bank account.  This gives a clear picture of what you have in each category giving you more control and flexibility in their usage.
4. Be patient.  It took me a few months to get the system that works for our home down.  I made some mistakes and adjusted and readjusted some categories.  In the beginning as I was learning the process, it used to take me a few hours.  Now, I dedicate one hour for each paycheck and it is all done.

So work through your mistakes, stick through the process, keep making dua, renew your intentions periodically, and insha’Allah you will find yourself feeling more in control of your finances and eventually be able to not only make fun plans for yourself, but help others in various acts of charity in the future.

If you were wondering how do I use this system in creating my own budget for our family, I have made a video just for you:

If you have any further questions or thoughts or experiences, please share them in the comments below.  I would love to hear what you have say!