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Have you ever heard the idea of taking your budget down to the “four walls?” It basically means that you have an emergency budget ready for whenever you may need it. Knowing how to create a four walls budget isn’t always clear though; especially if your’e new to budgeting.
The idea of your finances being four walls was originally made popular by Dave Ramsey. If you have never heard of him, he teaches people to pay off debt and to use a cash based, zeroed out budget.
How to Create a Four Walls Budget
In other words, in the Dave Ramsey budget, you account for every penny in your budget and give it a place to go. No dime is left unaccounted for.
In his four walls budget, you take that idea one step further and remove all unnecessary expenses leaving only the necessary ones. This idea works well for getting out of debt and it works even better for creating an emergency budget.
How to Create an Emergency Budget
Before you begin creating your four walls budget, you will need to gather a few things.
You will need:
- Your checking account statement for the past 60 days.
- Your Income – This could be paycheck stubs or just direct deposit amounts
- An account ledger to keep track of everything
To start creating your emergency budget, grab your checking account statements and go through them line by line. You don’t need to worry about account balances here.
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You’re only looking for the expenses your family absolutely must pay for each month and how much those expenses are. Write each expense, its due date and the amount down on a page in your account ledger.
How to Create a Buffer in Your Emergency Budget
Once you have all expenses written down, go down the dollar amount column and round each one up to the next dollar. For instance, a $10.21 Hulu charge would be rounded up to $11.00.
Doing this will help you create a small buffer in your budget and ensure that you always have enough money to cover your expenses.
How to Budget for Variable Expenses in an Emergency Budget
We all have two types of expenses in our budgets. The first type is a fixed expense. These would be things such as your mortgage or rent. They are the same amount of money every month.
The second type is a variable expense and these are things that can vary each month. Your electric and water bill are great examples of these. How are you supposed to include them in your emergency budget though?
The answer is to find their median cost. In other words, go through each variable account and write down their costs for each of the past twelve months. Then divide your answer by twelve. The answer you get is the average cost of your variable bill. Use this number in your emergency budget.
Now, because it is an average and it is a variable cost, I do recommend you add $25.00 to your average number. This should help cover any variations that may arise.
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Steps to Create an Emergency Budget
After you know your total expenses, you will need to know your total income. This one should be easy and take you only a few minutes. Total your income up both weekly (or bi-weekly) and monthly.
I am a firm believer that an emergency budget should be budgeted backwards. What I mean by this is that instead of totaling up your expenses each week and then assigning your income to cover them, I believe an emergency budget should be done by starting with your income and covering your expenses – based on priority – until you have zero money left.
As I said earlier, an emergency budget is meant to cover only your most urgent needs. Take those expenses and assign a priority to them. Things such as rent and groceries should get a higher priority than your kids homeschooling curriculum.
That sounds harsh but homeschool can wait and hungry babies can not.
Confused? Let me explain.
Assume you have $1,000 in income and $1500 in expenses. You know that you can not spend more money than you have. By assigning the most important expenses first, your budget might look like this:
- Income: $1,000
- Rent: $600
- Power: $100
- Water Bill: $75
- Work Transportation: $50
- Groceries: $100
- Cell Phone: $75
What If You Have More Expenses than Income?
In that example, everything is covered in one shot. Chances are good though that yours will not be and you may not even be able to do so financially.
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In the event that your expenses are more than your income, you will need to look at how often you receive a paycheck and make the following adjustments:
Once a Month Pay:
Total your expenses and income for the month. You will need to cover everything all at once.
Bi-Weekly, Every 2 Weeks or 1st/15th :
Total your expenses and divide by two. Prioritize the most important first and budget them using your first check of the month. Split high bills between both paychecks if necessary and you are able to do so without high late fees or shut offs.
Total your expenses and divide by four. Prioritize the most important first and budget them using your first check of the month. Split high bills between multiple paychecks if necessary and you are able to do so without high late fees or shut offs.
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What if I Don’t Make Enough Money To Pay My Bills?
This answer, unfortunately, is the same whether you’re creating an emergency budget oer not.
If you don’t make enough money to cover your bills, you need to make more money.
B ut that can sometimes be very complicated in an emergency situation. You may be quarantined to your home, there may be no power, etc.
In other words, you need to plan for ways to earn extra money that don’t require you to leave home. If you’ve never looked for a work at home side job, they’re not as hard to find ideas for as you may think.
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