Financial Success Starts Here
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I do not like budgeting. It takes up too much of my time and I always end up forgetting to do it weekly/monthly, so it takes forever to do when I have 3 or 4 months of budgeting to get done. But, as I’ve gotten older, I’ve found that it is more important in order to be successful in both my business and personal finances.
I was fortunate enough to grow up in a family that taught me about money. My parents drilled into me that it was important to always pay off your credit card every month in order to build your credit score or keep it high once you get it where you want it. This means that I have to pay attention to how much I used my credit cards so I could afford to pay them off. Using no more than 30% of your available credit, and then paying it off monthly, helped me remember to keep my credit utilization low and my credit score high.
But to keep it up, a budget is a must.
Having a concrete plan in the form of a budget helps me keep both my spending and my family’s spending in check. It makes it easy to make decisions about splurging. I’ve used many budgeting tools over the years: You Need a Budget (YNAB), Mint, Envelope Budgeting, and more. I even created my own budget where I literally have an Excel page where I write down everything that I spend in different categories (that was the most time-consuming).
Goals are Important
To build a budget that works, you need to have your goals in mind in order to make realistic decisions that you can be committed to seeing through. There are going to be times that you want to spend more than you have budgeted, but having these goals attached to your budget will help you get through the tough times.
What kind of goals? For some, it will just be able to not create more debt by living within means, or “paycheck to paycheck”. For others, aiming to pay off debts, buy a house or save for retirement may be their overall goals. My main goal is to be able to travel with my kids and show them the world while they are young.
How to Create a Budget
Tracking your spending, like tracking your food when trying to lose weight, will give you a more realistic view of where your finances are headed and why. It helps you tweak your spending habits toward your goals. And it doesn’t mean scrimping or penny-pinching. It means being aware of what you are doing and why.
1. Get Financial Info
Now that you have your goals, it’s time to get specific. Gather your financial info. Go back through at least 3 months of your bank and credit card statements and find your fixed expenses and your take-home pay (net income).
2. Select a Budget System
I’m sure you’ve heard of different budgeting approaches – the 70:20:10 or 50:30:20 methods – even if it sounds like a foreign language right now. None of the methods are right for everyone, it just depends on what you want to accomplish. If a big goal is paying off debt, then using 50% of your income for expenses, 30% to wants, and 20% to a combination to paying off debts, will work toward quickly accomplishing your goals.
The snowball or avalanche method of paying off debts will help also lower them more rapidly. Both methods have you focus on paying off one debt at a time and then using the monthly payments of the eliminated debt to pay off the next debt more quickly, etc. So, for instance, I was paying $100 per month to student loans, but found I could pay $200 per month toward it. As soon as that extra payment eliminated the student loans, I added the $200 per month to my car payment in order to pay that off more quickly. When that is paid off, I plan on putting the extra $500 per month toward my mortgage. This way, I pay everything off as quickly as I can.
3. Create Your Budget
So, we’ve calculated monthly expenses and compared it to monthly income. If you need to make adjustments so your expenses do not exceed your income, now is the time. Now, separate your expenses into three categories:
Needs: these include rent, food, transportation, insurance, clothing, and other household-related expenses
Debt: loans (car, mortgage, student) and credit card debt. I recommend focusing on making payments first and then putting anything extra you can toward the debt with the highest interest: credit card debt, most often.
Savings: emergency funds (somewhere around 6 months of expenses covered in case of a financial emergency) and retirement funds or a nest egg. If you have an employer that matches your input, take advantage of it as much as you can.
Wants: Very few people have the discipline to stick to a budget that is completely bare-bones. It is easier if you have a little money to play with monthly so you can enjoy your month.
4. Implement Your Budget
Just a pen, notebook, and calculator will work if you want to keep your budget private and old-school. You can also use Excel to have it on your computer, or there is a whole list of budgeting software that will help keep your budget at your fingertips.
5. Reward Yourself
I am a big fan of rewards. I think small rewards at set intervals will help you keep to any of your goals. I try not to give myself a big purchase or food as a reward just because of my own struggles with finance and weight, but I like to have small rewards monthly if we have been able to stay within our budget. For instance: a massage, a new outfit, or something small for the family. If we have managed to stay in budget for the month, it’s well worth it.
Added Tips
Many budgeters recommend using the Envelope Method, preferring to pay cash for as much as they can. The way it works is: you have everything that can be automatically paid set up from a budget account, transfer what you can into your savings or investments, and then separate everything left into envelopes labeled for their intended use. Most people use cash or, if very disciplined, a debit card. Once the funds are used up, you cannot spend anything else until the next budget cycle.
I tried this method with cash, but found that I personally do not like cash and I’m not a fan of debit cards. Recently, I’ve been excited for the $CashApp card to be able to have a limit on our spending without worrying about overdrafts, but I haven’t started implementing it yet (I’ll update about its effectiveness later).
Final Words
Making a budget doesn’t have to be difficult; what really needs to happen is having the discipline to keep up with a budget. Don’t forget to allow for flexibility in your budget and adjust your numbers as things change. Good luck!
