Your Budget – The Key to Financial Success

 

What is a budget anyway?

            A budget is just the price tag of the plan I want to put in place.

 

So if a budget is just the cost or the dollars associated with my plan, it makes sense that I would need to start by creating a plan for how I want to spend my money.  Obviously, I have some sort of plan, since I am spending money today, but is my brain, and are my emotions engaged in what I am spending and how I want to spend my money in the future?

So let’s start with long term goals and DREAMS!!!  Do we want to stay in debt?  Work until 75? Or do we want to be debt-free with a lake house or an ocean view home or take that fabulous European vacation?

Take a moment to dream and write that dream down at the top of your budget where you will see it each month as you work on your budget.

Building your budget will require both you and your spouse (if you are married) to come together and agree on the goals and plans (and therefore the numbers) in the budget.  Don’t think that just because one of you prepared a budget that the other will agree to it without their input!!!

The other item needed is discipline to stick with the budget process.  It will be difficult at first, but you will improve.  Your budget will improve and become more accurate and the process will get easier…just give yourselves some time (3 – 6 months).  You see, you have to turn the mundane into a game, or if you’re competitive, turn it into a challenge that you want to win.

A budget will only work if you include everything in it.  In other words, you can’t leave items out in order to make it balance and hope that it will just work out for the month.  This means that you have to include ALL income and ALL expenses and a LINE ITEM FOR SAVINGS.  Actually, a good budget will include the savings line item before accounting for any other expense items.  Let’s face it, you will never reach that dream if your savings line item is at the bottom of your budget.  Life has a way of changing our plans.

Lastly, before we get serious about a solid budget, you need to have an EMERGENCY FUND in place as protection from that “budget busting” surprise.  If you’re just starting out with saving and budgeting, you will want at least $1,000.00 set aside in a bank account or money market fund as an emergency fund.  Over time, this fund needs to grow to 3 – 6 months of total expenses.

 

So let’s get started on the budget…

 

1. Review your spending history by looking back over your checkbook register, bank statements or on-line banking history and credit card statements for the last 3 – 6 months.  You will want to capture your monthly spending into consistent categories such as:
   • Charity
   • Rent / Mortgage
   • Food & Groceries
   • Insurance (including healthcare)
   • Household (supplies, lawn care, landscape)
   • Education
   • Auto (fuel, oil, repairs)
   • Auto loan(s)
   • Entertainment
   • Clothing
   • Pet care

The reason for listing all expenses is two-fold.  First: In order to see what you spend your money on each month (the sticker shock) and second: You want to begin to change what you spend in each category by “telling your money” where it needs to be spent in order to reach your goals and dreams.

It’s best to prepare a monthly budget, so you can account for both recurring and non-recurring expenses.  Recurring expenses will be those expenses that are the same each month and are items like:

• Rent / Mortgage
• Auto loan
• Cable / Internet
• Cell Phone

Your non-recurring expenses may or may not appear each month, but they will be different amounts each month.  They may be items like:

• Clothing
• Food & Groceries
• Entertainment
• Auto Expenses
• Gifts

Your expense budget needs to work hand-in-hand with a ranking of all your non-mortgage debts (School loan(s), Auto loan(s), and Credit Card debt).  There have been several opinions on this part of the budget.  Many say to list your debts starting with the smallest balance first.  Others want the list starting with the largest balance, while another group wants the list ranked based on the highest interest rate at the top of the list.  While I fall in the camp of ranking debt based on the smallest outstanding balance first, as long as you have a ranking of ALL of your non-mortgage debt, and you create a plan to pay down this debt as quickly as possible, either plan will be successful.

 

2. The most rock-solid way to assure budget success is to cut costs, especially impulse spending. Impulse spending is the money we spend when our brain is not engaged.  For example, spending too much on food & groceries by shopping when you’re hungry, spending too much on pay-per-view movies, etc.  Impulse spending happens when corporate America markets items to us that we really don’t need, but the thought was planted in our brain by a commercial on TV, or by those candy bars displayed at the supermarket checkout line.  These impulse purchases can be small grocery store items or they can be large leisure items as well.  Keep your brain engaged and have an accountability partner (your spouse or a close friend) that can keep you on track while achieving your goals.  Another way to cut costs is to negotiate with a few vendors.  You need to make a few phone calls and just politely say, “I need to reduce my costs.  Is there another plan that you have that provides similar coverage but at a lower cost?”  You may be shocked to hear their response.  Vendors to consider calling for these reductions include your home and auto insurance carrier and your cable provider.  There also may be some items that can be removed altogether from your budget.

 

3. Now that we have worked on our expenses, let’s turn to our income. You can start either at gross income and include taxes as an expense item or just start your income budget with your net take-home pay.  This may be easier, especially if your take-home pay is somewhat consistent.  You will want to list ALL your income, which would include:

 

• Take-home pay
• Any rental income
• Investment / interest income
• eBay / garage sales
• Tax refunds
• Income from 2^nd jobs like Uber, Lyft or pizza delivery.

 

If your income varies slightly from month to month, build your income budget on the most normal average income over the last 3 months.  If you are paid on commission and you have wide swings in income, use the lowest average monthly income from the last 12 months.

4. Now that we have ALL income, expenses and an amount we want to save on a spreadsheet, we want our income minus our savings, minus our expenses, to equal ZERO ($ -0- ):

Income                                     $ X, XXX.xx

Minus savings                         $        XX.xx

Minus expenses                      $      XXX.xx

Net personal cash flow          $             -0-    

This becomes an easy check to see if any adjustments are needed in any expense category, or to consider the need to earn additional revenue by working overtime or picking up a 2^nd job.

 

5. Now that most of the hard work is done, the piece that is typically overlooked is the tracking of your actual expenses during the month. You see, you’ve worked hard at creating your goals and dreams.  You’ve invested time to develop a budget.  Why wait until the end of the month to see if you were successful in meeting your budget?  If you always wait until the end of the month to grade your progress, you will never be able to correct your course during the month.  I like constant feedback so that I can make small course corrections instead of major corrections that might be painful.  There are plenty of on-line and desk-top tools to help build your budget and track your actual spend during the month.  Some of the tools available are:
   • Quicken
   • Mint
   • EveryDollar
   • PocketGuard

 

6. Seek advice from a trusted financial planner or coach to help you see 10 to 20, or even 30 years down the road. As your earnings begin to increase and your budget allows you to remain focused on your dreams, you will quickly see the fruits of your hard work.  As this happens, your adviser can help you direct your savings into longer-term investments that can provide for a comfortable retirement or the realization of your goals and dreams.

 

 

Major “takeaways”:

1. First you need to dream about what you want your future to look like.
2. You need a scorecard (your budget) so you can achieve your dreams.
3. Be sure both you and your spouse (if married) are in agreement with the plan.
4. Score your progress by keeping track of your budget throughout the month.
5. Remember, achieving real wealth creation is not how you invest, but what you earn and save, and how much you allocate and spend in various expense categories.
6. You don’t have to “go-it alone.”  Look for someone you TRUST to help.