When you build a house it always begins with a solid foundation. The foundation is made of very strong material, solidly assembled in order to support the walls, ceilings, roof and the rest of the important elements of the structure. The foundation to being financially successful is getting a handle on your budget and spending. These two items are what create the foundation for success in all financial matters. The true value of a budget is it allows you to segregate monies for specific obligations as well as to begin to save on a regular basis. It takes some practice and you need to pay very close attention as you are establishing your foundation. Over time, this process will become second nature. I also find when you are budgeting you are much less likely to spend on items you really don’t need. In order to build your financial foundation you need a source of income. For most people this is some kind of employment. Getting work is beyond the scope of this book but again, the key point is you must secure a regular income. Once you have established a source of income you can begin the process of developing a budget.
A basic budget is made up of ‘Take Home Income’ and ‘Monthly Expenses’. I have included a budget worksheet for your use although you can use whatever method works for you (See Appendix A). There is no real magic formula to budgeting. It is easy to determine your take home income. Simply add up the money you receive for work rendered and from all other sources. To get a handle on monthly expenses, monitor and record your expenses for several months. There are ‘fixed’ expenses such as rent, car payments, student loan payments, etc…(any recurring payment that is the same amount every month) and ‘variable’ expenses such as electric, phone, gas, entertainment, etc…(payment amounts that fluctuate each month). Start a log with your fixed expenses then begin to estimate and monitor closely your variable ones.
If you hope to have a balanced budget controlling ‘variable’ expenses is essential to your success. Sure the electric bill will be higher in the winter but I’m talking more about expenses where you have a choice. For instance, if you purchase a gourmet coffee everyday that’s about $3 a day times 30 days and a $90 monthly estimated expense. If you like to go out to dinner and/or have a drink once a week that might amount to $20-$25 dollars per week. $25 times four weeks equals a monthly estimated expense of $100. Monitor all of your expenses every day for two months and you’ll have a good idea of what your total monthly expenses might be. The question is: do you make enough to support that lifestyle?
I said there was no magic with budgeting and there isn’t. As you monitor and record your monthly expenses you may find that you don’t make enough or just barely make enough to pay your bills. This is when you should take a more critical look at how you’re spending your money. If you could keep that special coffee to three days a week that’s twelve days a month times $3 which equals $36 thus saving $54 when compared to daily coffees ($90 minus $36 = $54). This leaves that money for something else.
The primary idea with budgeting is to have enough to pay your critical bills yet live and save the way you like. A budget is also a very efficient method to save for specific expenditures sometime in the future. For example, let’s say you need a new car but can wait another two years to replace the one you have. The new car you want costs $15,000. To buy a new car you might consider putting 5,000 as a down payment and get a loan for the remaining balance. Two years is twenty-four months, $5,000 divided by 24 equals, approximately $208 a month. In your budget you will set aside $208 for your new car fund. Hopefully you get the idea here. Make your best estimates and begin to form the foundation for You, Inc.
Online Budget Programs
There are several very good on-line budget programs you can use and many you can get started for no cost. Most will integrate your personal finances and help you to budget your money. Many provide reports that also help you to save more and spend less. These are quick and simple to get started and I highly recommend you give them a try. The ones I list below have data security levels comparable to major financial institutions like banks and brokerage firms.
One of the most popular choices is mint.com. They are supported by advertising so there is no cost to use their program. They have received very good reviews from reputable reviewers such as PC Magazine, NY Times, etc… To integrate your bank or other financial institutions you’ll need to give them your account numbers and passwords for those accounts. This allows them to download your information very quickly and provide you budgeting reports etc…
For those of you who really want or need something very simple then check out budgetsimple.com. This also gets very high marks and does not require you to download bank or password information to start with. As you get more comfortable with the program you can add that later on.
The point here is to DO SOMETHING that helps you to track and record your expenses and savings. By automating this process it takes away much of the hassle and diligence needed to stay on track. Remember this is the foundation of your entire financial process so do whatever it takes to get established.
Conscious Spending – Need versus Want
As you go through your day today I’d like you to begin to think about why you buy certain things. As Americans we are the greatest spenders on earth . . . by far. Why is that? There are a lot of factors of course but most of it is our perceived feeling that we ‘need’ something. What are the material items you absolutely need? The truth of the matter is what we ‘want’ overwhelms what we really ‘need’. Our minds have a remarkable way of creating a need from a want. I really want the new iPhone but do I need it? Probably not. However, as those around me get the new model iPhone I begin to think of it as a need. I want to fit in with others and I want to feel good like all of them. However, if you are willing to be more purposeful and conscious in achieving your financial goals it’s easier to make good choices that allow you to live within your means.
When we buy things we want it makes us feel good…temporarily. These positive emotions are created every time we buy something we want – in some ways it’s like a drug addiction. The problem is the good feelings don’t last. We bounce from one material item to the next. In the short term it feeds our desires to ‘keep up’ or ‘belong’. Ultimately this is simply about our ego taking control of our emotions and buying decisions. After the new sweater gets worn a few times its newness fades and so does its value in feeding our ego. Shortly it just becomes part of the unused wardrobe waiting for the next trip to Goodwill.
Our ego has a curious way of being satisfied but it is not without hope. As we establish financial goals which encompass things like, a house to live in and providing for our families, it becomes easier to resist that ego banging on the door of our conscious mind. We no longer dread opening that credit card bill knowing we do not have the money to cover the expense.
Recently I attended a meeting of people where we were sharing some of our life experiences. One participant related how he had landed a wonderful job just out of college and had rapidly advanced within his chosen field. He became the administrator of a large medical facility and all was well with the world. He married, had a couple of wonderful children, bought a big house, added a sports car and other expensive items as his income rose. He was living the dream and enjoying the perceived comforts of life. One day, out of the blue, he was fired. It was a financial decision made by his employer. He was a casualty.
Over the course of the next twelve months he was unable to find sustained employment and began the painful process of downsizing his excesses. He sold the sports car, cancelled the deluxe cable TV package, sold unneeded items and basically cut back the family’s budget by reducing costs wherever he could. An amazing thing happened as he worked through this process. He, and his family, felt happy. They spent more time together and everyone pitched in wherever they could to ‘save’ the family. They found their interactions were rich and special. As time went by they realized they didn’t miss all that ‘stuff’ they had once had.
Fortunately after this one year period he was able to find another good job. His situation stabilized and he began to rebuild the family savings. In addition the family decided that all those material items really didn’t add to their quality of life. To this day they have not replaced many of the items that were purchased out of emotion. They found happiness by living within their means and were all taught a very valuable lesson.
The point here is to become keenly aware of where your money goes so you can make positive choices, based on your financial reality, rather than letting emotions control the day. It’s okay to have wants – make a list. When you feel you are financially protected fulfill your desires.
The reality is we need to include some ‘wants’ in our budget. As humans we really do require some things that just make us feel good. If you like that $3 coffee every day then so be it – just make sure it fits in your budget. The objective is to have money left over every month to save. This starts with having a clear picture of what income you take home, what your critical expenses are and what expenses you can do without. Awareness of what you spend goes a long ways towards living within your means and creating wealth over time. Write a budget every month, or use any of the excellent online resources mentioned previously, and begin to refine your personal budget as time goes on. Soon you’ll be getting what you want as well as managing your money efficiently.
- Create a monthly budget
- Keep a record of your spending every day for at least 2 months – write down everything or better yet enlist an online budgeting system
- Be consciously aware of need versus want and how it impacts your budget
- Begin to make choices according to your personal financial goals
- Like any good habit it takes practice practice practice to develop