I get it. Most people hate the dreaded ‘B’ word. No, not the explicit one, but you should dislike that one as well. I’m referring to the ‘B’ for BUDGETING. The very term makes people cringe in fear of giving up their beloved coffee or treat. For some, it means massive restriction and complicated spreadsheets that you must manage during your already booked and busy day. You feel powerless because you can’t do what you want to do. Sounds familiar?
But what if I told you that budgets have the opposite effect?
You Are in Control
Actually, budgets empower you to control what you spend your money on. It is like a GPS. It empowers you to direct your spending by providing you the quickest route to your destination. Rather than aimlessly spending your money on the next best fad which leads you further from your destination than when you started. That’s what happened to me and I ended up in thousands of dollars of debt. (Read about it here)
Mindset is Everything
Truthfully, it all starts with your mindset. Your budget can mean anything you want it to mean. It can be your financial empowerment plan, spending plan, restriction plan, or whatever. While you can look at your budget as a restriction, you can choose to look at your budget as a tool that will accelerate your financial goals.
Choose to use empowering words and you will see progress towards your goals. You see, you are not committing to a budget per se, you are committing to your goals that will reduce anxiety and create a solid financial plan that will stimulate wealth.
The key is to make it simple, automatic, and most importantly sustainable.
But, I don’t have the time to manage a budget? I hear you, but you must make time for your dreams because you are the only one who can make them come true. Truthfully, budgeting does not have to consume hours of your time and this article will show you how.
In this quick read, you will learn 5 steps to create a sustainable budget that you can commit to.
Step 1 – Determine Where You Want to Go
When you begin any journey, the first step is to identify where you want to go. There is no sense in starting to drive and you have no idea where you going. This is unless you are from the country and you can just jump in the car and drive for hours just to ‘ride’. (this was me and my family growing up, but I digress. Lol)
Do you want to want to be financially free or abundantly free?
Do you want a modest income to sustain you and your family through retirement?
Do you want to leave wealth for the next generation? If so, what does this look like?
There are no right or wrong answers. You just need an answer to know where you want to go.
Along your destination, there are several waypoints on the route. Some of these stops may be near, which will be your short-term goals. Other waypoints may be further into the future that will require more than 5 years to achieve.
Create S.M.A.R.T. Goals
Make your goals SMART and write them down. Smart goals are:
Specific. Measurable. Actionable. Relevant. Timely.
Paint the picture of what your destination and waypoints look like. Visualizing the goal in your mind will help you solidify your commitment.
Make sure you write down your goals. This is an important step! Don’t miss it. Only 3 percent of people write down their goals. Studies show you are more likely to reach your goals when they are written down and easily accessible for reference. Do not be like the 97 percent.
You have nothing to lose, so give it a try.
Establish Your Priorities
Once you know where you are going and creating waypoints along the route, you are better able to determine your priorities.
For example, if you know you want to buy a house in the next 2 years, one of your priorities would be to save for a down payment.
The great thing about your priorities is that they are created by you to meet your goals.
ACTION 1: Envision the type of life you want to have for you and your family. Write down at least 3 short term and 3 long term goals that support this vision.
ACTION 2: Write down a priority that you must focus on to achieve your stated goals.
Step 2 – Know Your Numbers
How Much Income Are You Earning
Now that you have your goals established, the first step is to understand how much income you bring in.
What is your gross income, the total before taxes, versus your net income, the amount you receive after your taxes are paid?
How often does the income come in? Once a month, every 2 weeks, twice a month or sporadically. If your income is infrequent, you must do the next step first.
ACTION: Write down how much income you are bringing in.
Review Your Expenses
Next, identify what expenses you incur on a monthly, quarterly, or yearly basis. It’s important that you plan for and factor in infrequent expenses as well so that you are not caught off guard. Typically, these expenses are treated as an emergency when in fact, they are not. They were not planned for accordingly. For example, if you have a car, you must pay insurance and registration at least once a year. Allocate a portion of your income to these areas now, so that when the bill arrives, the money is available to pay for it.
Once you identify your expenses, categorize them as mandatory versus discretionary.
Mandatory expenses include items such as shelter, food, gas, and savings (survival expense). Yes, saving is that important that it should be a mandatory expense. More on this later.
Discretionary expenses are non-essential expenses that you may enjoy but can live without such as cable, entertainment, and gifts.
Savings Is A Mandatory Expense
Saving is a mandatory expense that should be upfront and non-negotiable. If you want to stop living paycheck to paycheck and start creating wealth, paying yourself first must become a habit.
Most budget planners recommend you to save what is left over, but this is backwards and not an effective strategy to create wealth. Your wealth is created intentionally and not from the spare change remaining.
You must decide, are you worth saving for? I know the answer, but only you can say it and make it a reality for your life.
When saving, your priority should be to fund your cash reserve, then start investing.
Check out the post, 25 ways to save to learn how to kick start your savings campaign.
In the beginning, you should focus on building the habit through consistency. Do not worry about how much you can save, build the habit and the increased amount will come.
Like saving, you should make it a priority to give as well. The goal should be to give at least 10 percent of your income. I can hear the objection… “I barely bring in enough now. How can I give?” If you are not able to give 10 percent, give what you can. It is the action that sets the universal law, of sowing and reaping, in motion.
“Whatever you sow, so shall you reap.”
Sowing is not just for farmers, it applies to you and me as well. So be deliberate about giving something no matter how small to get into the habit of sowing seeds and trusting that it will work out in your favor.
ACTION: Review your spending over the past 2-3 months by conducting a spending audit. Review bank and credit card statements to identify expenses that you previously incurred.
Bringing It Together
Now that you know what your income and expenses are, you must determine if your plan falls into 1 of 3 categories:
- Balanced Budget
- Shortfall – Expenses exceed income (-)
- Surplus – Expenses are less than income (+)
The goal is to be in the surplus category so that you have additional money to save and invest. However, if you are in the first 2 categories, you need to either reduce your expenses or earn more income. Those are the only 2 options. Select one area or both to create breathing room.
ACTION: Calculate your budget by subtracting your expenses from your income and determine which category your budget falls in.
Step 3 – Separate Your Money
Now that you have identified what your known expenses are it is time to set up the infrastructure to make managing your money quick and simple.
Segregate your money in multiple accounts based on the specific goals that you identified in step 1. The first account should be a savings account that is in a separate bank than your primary checking account so that you are not easily tempted to transfer money back and forth.
Here is a list of banks that are offering the highest interest rates.
In addition to a separate savings account, you will need an account for each goal that you created. For example, if you have a goal to travel a couple of times a year, you should establish a travel account that is dedicated to funding those trips. If you are planning to purchase a house, create an account to save for the down payment. Label these accounts and be strict about not using them for anything other than the intended purpose.
You should also establish an account for your monthly bills and entertainment. Since you have already identified how much you need to allocate to your bills, create an account exclusively for that.
Lastly, your entertainment or fun money should be separated from all other accounts. Deprivation and planning to never have fun is like a diet and can create the opposite effect if it is not sustainable. I recommend, setting aside some money for fun, but it should not take priority over your savings or other mandatory expenses, meaning you should allocating more to savings than you do with your entertainment budget.
Savings > Entertainment Budget
If your entertainment budget is larger than your savings, your priority is not for wealth creation.
ACTION: Create separate accounts that align with your priorities and goals.
Step 4 – Automate Your Money
Now that you have the accounts established, remove yourself from the equation through automation. Automating saves you time and energy in trying to manage your money every 2 weeks on whenever you receive a deposit. Tell your money where to go in advance and execute according to your plan.
Most employers will do this for you. Contact your Human Resources department to set up the automatic deposits. If your employers do not provide separate allotments, banks also have an automatic transfer feature available.
Automate Your Bills
Now that you have your money going to the appropriate accounts, you can take it a step further and automate your bills so that the payments are made on your behalf. This prevents late fees due to missed payments. Again, it is one less thing you have to worry about.
Word of Caution: You should still review your bills from time to time to make sure you are not being charged incorrectly for services and you understand when prices changed.
ACTION: Set up automated payment of your savings and bills.
Step 5 – Monitor and Adjust as Needed
Once you have everything set up, it’s time to track and adjust. The first couple of months may require some adjustments, but try to stick with the changes for at least 2 months. Eventually, you will get used to only spending your entertainment money and feeling confident that your savings are growing and all other bills are paid for.
If you need to make adjustments like, increasing your savings allotment that is perfectly fine. If you notice that you need more from your bill account, you can make the necessary adjustments as well. Just note that the goal is to work within your means, so find the money within your budget and reallocate accordingly.
One tracking tool I use is www.Mint.com. It provides several features to establish a budget, track spending, and calculate your net worth. There is also an app that allows easy access on the go.
If you are on a cash diet (which I recommend when paying down debt) and you are not using cards, track your expenses by writing them down and only spend what you have available.
Whatever method you choose, remember what is tracked, gets done, so make it a priority to track your progress and see your growth.
ACTION: Set up an automated tracking through Mint or another budgeting application. Monitor your spending against your goals. If you are tracking manually, write down your expenses and only spend the cash available.
That’s getting your Finances On Point.