Let’s face it, budgets are boring and tedious. They feel restrictive and limiting. No-one wants to create them. I get it, you don’t want anyone telling you how to spend your hard earned money. However, what if I told you a budget can make you rich. After all, everybody wants to be rich! That grabs your attention! Would you at least consider the thought of a budget? Great! Read on.
First let’s start by reframing the word ‘budget’ and how we think about it. To many the word budget is akin to a four letter word. A budget doesn’t mean you have to give up all the fun stuff that life has to offer. On the contrary, it actually helps you enjoy more of what matters most.
It may help if you call it a spending plan. Either way, it is nothing more than a financial road map to manage your money intentionally. Sounds better already.
This financial roadmap can successfully guide you to financial goals. You want to retire at a specific age, you need a path to get there. You want to be rich, what’s the plan to make it happen? A budget can answer these questions.
The first step in creating a workable budget is examining your life and your spending. To control how you spend your money, you must know where it is going. If it is not directed towards achieving your financial goals, redirect it so that it does.
This requires conscious decision making. If you can’t put your finger on where your money is going, complete the following exercise:
Review a copy of your last months bank and credit card statements. Create the categories listed below on a spreadsheet or use the SMART BUDGET WORKSHEET.
Place the transaction amounts in the respective categories listed below. Add each category and determine the percent to total expenses. Compare it with the recommended percentages listed below in the parenthesis.
—Rent/Housing (30-35 percent) - Housing should cover rent expense or your mortgage payment (include home insurance and real estate taxes)
—Food (15 percent) - It should include groceries and dining out. This is the category that typically takes people by surprise. In my experience, people typically spend more on dinning out than they realize.
—Transportation/Auto (5-10 percent) — This category should include your car payment, insurance, gas and maintenance. If you do not own a car, but use Uber or public transportation, be sure to include those costs.
—Utilities (5 percent) - Utilities should include amounts paid for electric, gas, water and trash. Also include the what you pay for cable, cell phone and Internet.
—Insurance/Health (10 percent) - This includes amounts paid for life/health insurance and medical expenses, such as co-pays/deductibles.
—Savings (10 - 20 percent) - Ideally you are saving for retirement, your emergency fund, and other financial goals.
—Miscellaneous (10-15 percent) - This is a catchall category for discretionary items such as entertainment, bank fees, clothing or items not listed above. You can also create subcategories if you want more detail on your spending.
If you discover a category exceeds the recommended percentage, use it as an area of opportunity to cut out some expenses to save more.
This exercise is usually an eye opening experience. As you review each category do you notice any trends? Any surprises? How much are you spending on entertainment and dining? What about bank ATM fees, non-sufficient fund fees? Late payment fees on your credit cards? It is surprising how those little things add up fairly quickly.
Your spending should be a reflection of your values. What does your spending say about you? Are you on track towards financial independence? You want to build wealth, but may determine that you spend 25% of your income on entertainment. It’s time to adjust your spending so that it is in line with your values.
Carl Richards of the New York Times (https://www.nytimes.com/2015/07/07/your-money/your-spending-choices-often-reflect-your-values.html) states that our financial statements are “Unintentional Personal Manifestos.” If this sounds like you, don’t beat yourself up, take control of your money today, make your spending habits intentional.
Which is exactly what a budget or spending plan achieves. Create a budget that will make you rich. Rich in spirit, health and wealth. Direct your money towards things that matter to you, such as, experiences with family and friends. If you value time with your family, create a budget that includes an annual family vacation. If you have concerns about having enough money for retirement, make sure your budget includes a line item to make contributions to a retirement fund.
Budgets are not statements of limitations, it is a declaration of what’s important to you. It aligns your spending behaviors with your values and allows you to live the life you desire.
There are a number of tools you can use to establish your budget and monitor it on a regular basis.
I use mint.com. It’s very straightforward, it only took minutes to connect my bank accounts and set up my budget. It also provides due dates for bills and a net worth statement. The only thing I do not like is the annoying ads and promotions. But its free so that is the trade-off.
There are a number of money management options available. Many fellow money nerds lean towards You Need A Budget (YNAB) and Personal Capital. Check out the features of all three to determine which works best for you.
Having a budget does not mean you have to give up all the good stuff life has to offer. But you do have to make choices between an endless cycle of consumption or having a peace of mind because you know you have a plan for the future. It takes some wisdom, discipline, commitment and action to live a rich life, but it is definitely possible and so worth the effort.
Make conscious choices with your money and remember that a budget is merely a tool to help you plan well to live well.