There Are Two Parts To Your Budget Equation

accounting equation

Many people only consider reducing their expenses when times are tight. But, there is only so much your budget can take in the way of belt-tightening. There are two sides to the budget equation.

Another way to tackle the problem is to look at the other side of the equation. You can help your struggling finances by increasing your income as well.

Understanding The Accounting Equation Or Budget Equation

On the first day of an accounting class in college, the professor put the accounting equation on the board. It is an equation that drives the financial world.

Assets – Liabilities = Equity.

To put it another way in a budgeting aspect, your income – your costs = what’s left at the end of the day. There are two sides to the equation. There is your income, and then there are your monthly costs.

When the budget gets tight, many people fall back on the tried and true method of getting our finances under control by cutting costs, but that is not the only way to get your budget back in alignment. You can also increase your income.

Budgeting isn’t easy. Many people feel overwhelmed and give up before they even get going. But even among those people who don’t quit, many miss the most critical step when creating the family budget: tracking all of your expenses. And I mean down to the penny.

According to Gallup’s annual economy and personal finance survey, only 32% of American households prepare a written budget or use software for a spending plan.

Reasons to Add Fun Money to Your Budget

You Can Only Squeeze So Much

You can squeeze the excess costs out of your budget only to a certain amount. Eventually, you will hit a limit as to how much cost-cutting measures you and your family can endure. After serious cuts to your budget, your way of life will ultimately be degraded.

Your family may start to rebel if the cuts are too deep or too drastic. Eventually, you can cut your budget all the way to the necessities of food, shelter, clothing, etc. That is why raising your income may be a better option than cutting costs to the bone.

Three Ways to Increase Your Income

If your budget is just not adding up and you need extra money to make ends meet, you should consider increasing your income. Here are five ways to increase your income and relieve some pressure on your family’s monthly budget.

Take a Second Job

One of the fastest ways to increase your income is to simply get a second job. A job at night or one right after your primary job can be a great source of added income. I’m not talking about starting a whole other career, but you could find a job that pays an hourly wage to help supplement your income.

Sell Something Big

Do you have a large car payment? What if you sold your car and didn’t have that payment anymore? Would your budget be easier to manage every month?

You may want to consider having a “beater” car that is cheap and paid off that gets you from point A to point B instead of one with a payment plan if you are having trouble making ends meet with your budget.

Sell a Bunch of Small Stuff

Another way to raise money to help your budget is to sell some of the small things that you have lying around the house. I used to have over 300 DVD movies until my wife asked me one day how many times I watched the same movie over and over again. Television shows on DVD are another great example. You can sell complete seasons for a lot of money.

How many times are you going to watch and rewatch that first season of CSI? It may be a great show, but you most likely will not miss owning the DVD.

Do You Lose Track Of Cash?

It’s the spending side of the  budget equation we struggle with. And that’s why you have to be vigilant.

It’s easy to lose track of cash, for example. That’s one reason that my wife and I use a credit card to budget with each month and track spending. Cash has a way of leaking out of your pocket. You don’t remember where it went, and it’s easy to toss or misplace receipts.

“Tracking every penny of expenditures with receipts and income is the first step to gaining control of your finances,” says Eric Wentworth, author “A Plan for Life: The 21st Century Guide to Success in Wealth.” “Money leaks are nearly invisible, but can ruin any attempt to get control of your finances.”

Dave Ramsey is famous for saying that every dollar of income must have a name. Families must assign every dollar in the budget a purpose at the beginning of the month. At first, families often find it burdensome to track spending that closely. But start by committing to do it for just one week.

Keep a notebook with you and write it down every time you spend cash, along with the place, and item category. Save your receipts. Odds are after you get the hang of it, you’ll find it’s not too hard to keep at it for another week, or two or three. Tracking your spending will soon start to become second nature.

Track Expenses Like You Track Calories

“If you want a successful budget, you have to be honest with yourself and figure out where all of your money is going,” says Glen Craig, author of the popular personal finance blog “Too often we list out most items, but we don’t take it serious enough to find everything. And then the budget never has a chance to work.”

You will have no idea how much your family is spending every month until you keep track. Like counting calories, we focus on what we count. It has our attention. When we write the money spent or calories eaten in a journal, it helps us to visualize, monitor and change behavior.

How do you categorize your spending in your budgeting? Do you use the envelope system? Many financial experts recommend putting a set amount of cash in categorized envelopes at the beginning of each month. Then you spend the money from the envelopes.

An empty envelope forces you to stop spending in a category. You can prioritize and visualize how much you are spending on separate expenses of your family’s life with this system.

“Understanding what you spend and where you spend it is the most important step to setting up a family budget,” says Matthew Moore, founder of the Clear Retirement Group. “Most people don’t track where their money goes. By categorizing your spending or allocating to envelopes, you put a system in place that holds the family accountable to their long-term goal.”

When the budget gets tight, many people fall back on the tried and true method of getting our finances under control by cutting costs, but that is not the only way to get your budget back in alignment. You can also increase your income. This is a tactic that can be well worth your time and effort if you are having money troubles.

A portion of this article was originally published on AOL Daily Finance. It is reprinted with permission.

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