Basics of Effective Money Management (Systemized Budget) Part 1 of 2

Now that we know how important a good foundational education and true self-control is to having an effective money management system, we need to put the system in place.

Systems are used in just about every aspect of life and business.  Ray Kroc created a system to build his McDonalds empire, franchising is popular due to proven systems, and a systemized budget can and will assist you in effectively managing your money correctly. 

The real question is this, what systemized budget is right for me?  I think we can agree that no two financial situations are the same and even if they were, each person has their own goals in mind.  So when you put these two elements together we need something that is systemized yet flexible enough to accomplish the same end result.  Effective Money Management.

Regardless of how you make your money, whether it be by paycheck, investment income, a social security check, or even if you own a business that pays you, in any of these cases, you have money coming in and you have to manage it effectively.  So lets start with the basics and then we can tweak the numbers and percentages to fit your unique financial picture.

1.  We need to calculate how much money you have coming in on a monthly basis. (we use monthly figures because most expenses are paid once a month)
     a.  If you get paid weekly, simply take that amount (after taxes) and multiply it by 52 and divide by 12.
     b.  If you get paid bi-weekly, take that amount (again after taxes) and multiply it by 26 and divide by
          12. (this will give you an accurate $ amount for each month)
     c.  If you happen to get paid monthly, then there is no calculation needed.

2.  If you are in a relationship where you share the expenses and pay the bills together then do the same
     calculations in step 1 and then add the 2 totals together to get your TOTAL Monthly income.

3.  Now we need to break down your expenses into categories.  This makes it easier to systemize your
     budget.  There is usually about 6 different categories you will spend your money on every month.

     a.  Necessities or Everyday Life-  these are examples of what belongs in this category
          1.  rent or mortgage
          2.  utilities (electricity, heat/ac, water etc)
          3.  phone (home and cellular)
          4.  food  (home cooked food or groceries)
          5.  insurance (homeowners, auto, life, health etc)
          6.  car payments (lease or own)
          7.  minimum payments on your debt (credit cards, personal loans,)
          8.  banking fees (if any)
          9.  home alarm fees
         10. transportation (can be gas for your car or bus pass or even a subway card)

     b.  Entertainment or Play time- again some examples
          1.  Eating out (even for lunch at work)
          2.  going to the movies
          3.  bowling
          4.  movie rentals
          5.  clubbing or dancing
          6.  club fees (playing any kind of sport)

     c.  Education- anything that would be considered a teaching tool or to continue your education.
          1.  student loans
          2.  seminars
          3.  webinars
          4.  book purchases
          5.  cd purchases (not music :) )

     d. Charity- I think this is pretty self-explanatory

     e.  Investments or Interest Creating- this could be anything your expecting a rate of return on
          that you contribute money to on monthly basis.
          1.  401k or RRSP
          2.  savings accounts
          3.  real estate investments
          4.  IRA's
          5.  CD's
          6.  Mutual Funds       
   
      f.  Debt Elimination-  extra money you send to your debt to get it paid faster

Now even with a list like this and putting this money into these categories we are still missing the need for an "emergency fund" or as I like to call it "the in case of xyz" account and a "I want it soon" account.  These two final categories help you eliminate the need to create more debt when these things happen.

Once you have created these categories the next thing you need to do to create a Systemized budget is to figure out what percentage of your income is being used for each category and then adjust as needed.

We will cover this adjustment and recommended percentages for each category in part 2 of the Systemized Budget portion of "Basics of Effective Money Management".

Please feel free to ask questions and comment as needed.

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