If you have tried to save money, spend less, improve credit, or build wealth at some point in the past, chances are you’ve heard that making a budget is a huge step in achieving your goal. If you’re anything like the previous version of me (I’ll call him splurgy Mike), then chances are you read the words about making a budget, they proceeded through your eyes, reached your brain, and were immediately disregarded. “I’ll just watch my spending and the money will save itself up eventually. I don’t need a budget…”
Flat. Out. Wrong.
Does a surgeon cut into someone’s chest and think, “A little patch here, stint there, maybe some stitching in this region, then this heart should basically heal itself?” No. They have a detailed plan. A football coach makes a game plan each week (topical and timely analogy). When a president proposes to balance a budget what do they present to Congress? In addition to a little black magic, that president would have a detailed plan.
Your budget is the HOW when your family comes up with a plan to save for a trip, get out of debt, or open a business.
The idea of a vacation is amazing (you know I love ‘em) but do you know what’s better? Paying cash for that vacation, doing so earlier, and having money to spend once you get there. Fact is, the best way to make a vacation a worry-free endeavor financially is to have a budget.
It’s easy to do. Roughly a 1-2 hour initial investment followed by 30 minutes a week is a small price to pay for financial freedom.
You learn a metric ton about your spending habits. To make a budget you literally track every dollar from your paycheck to its final resting place in your debit column. This can shed a suns eternity of light on where you may be overspending and where you can trim the fat.
This is the tool that allows you to achieve your goals. Taking vacations, starting businesses, paying off debts, learning to live off less so you can make less money and still live comfortably.
Budget crafting puts you in charge of your money. However bleak that first budget looks, you start making choices about what is most important to you, thus what needs cash thrown at it and what can wait. The picture may not be pretty at first, but you’ll be able to work toward buying things with the money you already have rather than the money you plan to earn next week (dangerous practice!!).
This is legit – not sarcasm. I got a message from a reader recently who told me how much she enjoyed the financial articles of MikedUp Blog. She said that making a budget literally saved her marriage and that reading my articles about financial topics brought out great memories of how things started to click for the couple.
I replied, half in shock and half thrilled for the couple, and asked her to explain how budgeting saved her marriage. She said it forced the pair to communicate on a level they hadn’t previously. By sitting down together every Sunday to discuss the family’s finances, the two learned to talk to one another. Serious topics about their financial situation blended into recounting daily events and eventually they were laughing and having fun like they had early in the relationship.
So make a budget, and instead of telling your future kids how budgeting can make them rich, tell them they wouldn’t be here if you didn’t budget with your wife 20 years ago… Now that’s a teachable moment.
How to make a budget
It all starts with a spreadsheet. If you’re at a loss with excel (numbers for us Mac users), send me an email and I’ll send you a template we’ve used. This process will sound elementary and pretty straightforward but that’s one of the reasons why I love it. This is simple math that when used appropriately can allow you to live the life you dream of.
Gather these items from the last year –
All bills (utilities, car payments, phone bill, blue apron type stuff, childcare, etc.)
Credit card statements (this can be especially helpful if you pay bills through your credit card)
Personal account statements (checking, savings, retirement, and the like)
All other financial documents
We will use YOUR spending habits over the last year to make realistic assumptions about what your spending will be in the future.
There are also a few online resources that many people use to help keep better track of their accounts. The one I use and recommend is Mint. It’s free, effective, and secure. Mint links all of your accounts into one centralized location which helps you to see the bigger picture a little easier. You track all of your accounts, make budgets, create savings goals, in addition to a number of other capabilities. It can be a great resource – check it out and use this if you’d prefer.
Once we have all your information together in one place, start with your income
How much money do you have coming in each month? If you’re not a salary or hourly earner, go with the average – it’s not perfect but it is a solid option. That figure goes into your debit (positive) column.
Next, (controversial alert) decide on a percentage you will save each month and allocate that percentage or dollar amount into your credit (negative) column as the first entry (10% is what we shoot for. It’s aggressive, yes, but a powerful target if achievable). I will cover paying yourself first in detail in a later financial pillar post, but for now – trust me. This is the money that goes into your savings, retirement, or other account for a future day. You will not spend this money now. And yes, you are paying yourself first, before we cover other bills.
Segue… Next add all of your essential expenses to the credit column – mortgage/rent, utilities, car payments, groceries, gas for your car, internet (if necessary or if you work from home), … You know what you need. If you’re temporarily forgetting though, I’m here to say you don’t need money allocated to go out to eat. We’re talking essentials here, the things we need to live, be sheltered, fed, to earn an income, and to care for our family.
After this, we need to step back and reflect on what your sum looks like (all of the credits subtracted from your initial debits).
Is there money left over? If yes, awesome! Now you have some fun choices to make. If not, don’t worry. I’ve been there and I know it’s no fun. Taking this step to make a budget is your first step in one day answering the above question with, “Yes, I’ve got money left over.”
If yes – Now decide if you’ll allocate money for entertainment, additional saving, a vacation (I’m winking and saying, “Ehh??” to this one right now), charity, … The choice is yours but what I don’t want you to do is not have a plan. A plan gives you structure and the ability to say, “No,” when presented with an option to pay for something on an impulse. If it’s not in the plan, it’s not in the credit column.
If no – now we have some tougher questions. Can you earn more? Take on additional hours, another job, or ask for a raise? Start a side-hustle, go into business for yourself, … a Myriad of options exist and if you’re able, now’s the time to try one out.
Can you spend less? Get a smaller house/apartment, shop around for internet rates, use a consistent payment plan for your utilities, or try a spending freeze. These options aren’t sexy but they will help you to increase your debit column, thus ease your financial woes.
It’s all well and good to have a great plan, it’s another thing to execute that plan properly
Sir Winston Churchill – “However beautiful the strategy, you should occasionally look at the results.” You will take this advice and institute a weekly meeting with you and all the others responsible for your family’s budget (spouse, significant other, etc.). Pick one half hour time period for one day each week – we chose Sunday evenings. This is a nuts and bolts meeting, meaning you’re straight to the point in analyzing the previous week and making small course corrections for the week ahead.
How did we do, where did the money go, and what do we need to do next week to either maintain or improve? These meetings are where you figure out if your plan is foolproof or just a mythical great idea. Don’t forget the best part though – if last week was terrible, tomorrow is a new day. Make the changes necessary to get where you need to go!
The power of the budget is real
Monica and I have used one for the past 8 years and it’s helped us get control of our finances, understand our goals, and communicate more effectively about ‘family business’ issues. If you want to make significant financial changes or just keep a good financial situation going, a budget is the tool you should use.
It’s not all doom and gloom either. The first months and years were rough. We watched every dollar as we learned our spending habits and made tough decisions about not spending money we didn’t have. It was stressful and not always the best thing in the world, but what I did enjoy is that we had a plan. There was a light at the end of the tunnel and because we knew how we could get there, we had hope. Now that we’re closer to that light, and we have almost a decade of practice following our budget, it’s not a chore at all. We still have the game plan but we can afford to check-in less often because the behaviors are ingrained in our financial brains. Who knew budgeting could become second nature?