That Dreaded Word - Budget
Budget is a word you hear a lot when it comes to managing one’s finances. It does not matter what financial goals you are trying to reach; the answer always seems to be “create a budget”. I want to be debt free, create a budget. I want to manage my money better so that I know what is coming in and going out, create a budget. I want to have an emergency fund, go on a family vacation, build wealth … create a budget.
While this is not incorrect, I do not feel it is helpful advice. Yes, a budget is the foundation on which financial independence is built and it is undeniably one of the most important ingredients to reach one’s financial goals. At the end of the day, we all know that creating a budget is the answer, but if it was that easy, we would never hear that advise and be thriving financially.
I am budgeting, right?
I opened my first bank account my senior year in high school. I was part of a program called Junior Achievement where we had to create a company, develop a product and sell it. It was a lot of work and required us to deep dive into every aspect of how to bring a product to market, including how to finance it. My group and I won the Company of the Year award and because we actually made a profit on the product we created, all of us were paid a salary. I took my first paycheck from that and immediately opened a checking and savings account.
With this being my first bank account, I really didn’t know much about it. Mostly I knew that it was important to keep track of how much money was in the account at all time so that you didn’t bounce a check and get charged the very large overdraft fee. Smart phones were yet to be invented and there was no bank app, so I had to track my money the old fashion way using the checkbook register and savings bank book.
Back in the day, when you opened a new checking account, you would receive starter checks and a checkbook register. This is where you would keep a log of your transactions so that you knew how much money you were spending and how much you had left. You can probably guess that I was one of those people that was very strict with the register. I wrote EVERYTHING down in it and I could tell you down to the penny how much I had in the account and how much I had spent. Then at the end of each month I would reconcile it against my bank statement.
This to me was money management. If you had asked me back then how I felt I was doing with my finances, I would have said I was on top of my money and doing everything I am supposed to. I was a simple Person and I only purchased the stuff I needed. I was making my money last and I wasn’t bouncing any checks. I was doing all of this without ever having heard the word - budget.
It was not until I took my first accounting class in college that I started to learn about budgets and budgeting. Even then, it still did not cross over to my personal life. When you are doing budgets for companies in your accounting class you are talking about twelve-month forecasts and using data from previous years.
You are doing credits and debits, which I want to note are terms used oppositely in the register. So even though I was going through the motions and learning everything about budgeting, I still wasn’t making the connection between myself and my bank account.
The little money I had from my work study and working as a part time security guard was barely enough to cover the books that I needed each semester. Budgets were for people with lots of money and large companies. You need to have money to do a budget, right? I honestly never thought to create one for my personal finances. Obviously, this did not apply to me or so that’s what I thought.
When I realized I was doing something wrong
It was not until I graduated college and started working that I began to get the sense that maybe I should be doing more than just keeping track of my money in my register and reconciling it every month against my bank statement.
How did I come to this ah-ha moment? I was talking to a coworker and she said that she “knew how much money she was going to be short for the year and that she was making plans to cover that short fall.” I looked at her in disbelieve and asked her how she knew that. She said it was all in her budget. I remember thinking wow, that is amazing. I would love to know that level of detail about my money as well. Naturally I asked her to send me a blank copy of her budget sheet which she did.
It may as well have been written in an ancient language. I could not make heads or tails of it. So, I went and tried to find a free template that was more user friendly for me. This task was daunting because there were so many different kinds. I would start to plug my information into one only to find it got messy and I was lost. I did this through a few versions until I finally settled on one that I could get all my information in but then I could not figure out how to make it carry over on a monthly basis without starting from scratch.
Frustrated, I decided to do some research and through that research I came to the realization that you do not need anything besides a pen and a piece of paper to start.
Start here: budgeting by paycheck
Before you start to think about budgeting you need to understand your money situation. The best way to do this is to start with budgeting by paycheck.
Budgeting by paycheck allowing you focus on one paycheck at a time, making it more manageable. You know when your bills are due and you know when that paycheck is coming in.
Grab a pen and a piece of paper and do this exercise:
Paycheck (income) - Emergency Fund (always pay yourself first) - Bills (expenses) - Gas/Bus and Food = Remaining + Next Paycheck
Congratulations, you just created a budget!
Remember the goal is to figure what you need on a monthly basis to provide for your family. It will take about sixty to nighty days to get a true grasp of what that is because bills can fluctuate and there may be times you need a little extra for groceries or something unexpected.
If your paycheck does not cover your expenses that pay period or for the month then you know you have an income problem and you need to find ways to reduce your expenses or bring in more income.
If you still have money left over at the end of the month you need to put that money to work. Every dollar should have a purpose. You can add the money to your emergency fund or use it towards debt. You can even temporarily leave it in your account as a buffer until you feel comfortable covering all of your monthly expenses. Just make sure that you are not letting it sit there month over month.
Budgeting does not have to be complicated. You can make it as simple or as complex as you like. It is a reflection of you and your financial situation and goals. It is up to you to decide how you will spend your money.
Pay yourself first - set up an emergency fund
It is so important that you set yourself up with an emergency fund. Whether you are putting in $5 a month or $100 this should be made a priority. No matter what financial situation you are in you should always pay yourself first!
Having an emergency fund is vital to obtaining financial stability. It is your buffer/safety net. It keeps you financially afloat when a storm hits because there is always going to be a storm at some point. Financial experts advise that you should have enough to be able to cover three to six months of expenses.
How do you know how much that is? Add up all of your expenses for the month and multiply that number by three and six. That is how much you should target to save in your emergency fund. If you have been budgeting for a while you can look back three or six months in your budget and add up all of your expenses to get a more accurate number.
Most people who don’t feel they are in a position to save that up may start to panic and then abandon the idea completely. Don’t do that! If you feel you are not at the place where you can cover three to six months of expenses or start saving up to that do not give up on the idea. Start small and make your goal to build up your emergency fund to at least one thousand dollars. This should be enough to give you some breathing room. It’s more doable than you think!
Your emergency fund should be in a separate account from your other money. I always advise my clients to put their emergency fund in a credit union or a different bank all together. I find that if the money is in the same financial institution with their other accounts, it is very tempting to transfer between accounts or come up with a reason to use the money. You want to make it inconvenient to get to, but still readily accessible. If you are disciplined enough, you can do the cash system. My grandmother always has her emergency fund stashed somewhere safe in case of an emergency.
Once you get a grasp on your money coming in and out and building your emergency fund, you will need to start looking at working toward becoming debt free. (Watch for a blog post coming soon) This was the best thing I did for myself and my family. Being debt free allows me to keep more of what I am bring in and to stop throwing money away. Full disclosure, I am still working on paying off my mortgage.
It gets easier, I promise
For me budgeting has become second nature but that is because I have been budgeting for years. It takes me a much shorter time to do my budget than when I first started. I personally do a zero-based monthly budget. My income is the same every month. I know what my bills are going to be month over month and my budget has a lot more categories now than when I started out.
You too will get there as you keep budgeting. You will find what works, where you need to cut back and what habits you need to break. The key is to start small and to stick to it. There will be some setbacks and challenges along the way but it is worth it and before you know it you will have a handle on your money.
If you find that you are still leaking money or your money is getting mixed up, try the cash envelope system. (Watch for a blog post coming soon) Sometimes keeping your money separate is a good way of gaining a better understanding of what is happening to your money.
If all else fails ask for help
There is no doubt that the advise of “create a budget” is going to continue to be tossed around, but it’s important to realize that there are other components to becoming financially stable. There are a variety of platforms and opportunities from which you can obtain information to help do this. Whether you try to navigate the hundreds of templates out there to find the right one, or hire a financial coach, the tools are out there to get you on the path to financial well-being.
Becoming financially stable is not impossible and you do not have to have a lot of money to do it. What you need to do is be intentional and focused. Start where you are and do not look at what other people are doing. Only you know your family’s circumstances and remember that no two people have the same situation. Just know that you got this!
I would love to hear from you. Did budgeting come naturally to you or is it something you had to work really hard at? Were you just as confused as I was in the beginning? Leave a comment.