As stated in the first part of this mini series, Budget can be a buzz-killing word. Many online articles in financial blogs will offer a “perfect formula” for your budget, with percentages to allocate for this-or-that. I wholeheartedly believe that your budget needs to be specifically tailored to you and your needs!
In Part I of Real Talk: Budgeting, we renamed the budget as Your Financial Plan and I offered you the first tool— The List. I provided guidelines for you to create your own custom list of expenses, broken down into three categories. The Need-To-Live is a category for those expenses which you deem necessary for your overall well-being, the Gotta-Have-It category is for the super important expenses that you would be willing to skip one meal per day to maintain, and the Nice-But-Unnecessary category is for the expenses that you can (somewhat) easily cut from your financial plan.
I have a list, what’s next?
Now that you have the list of things that you spend money on, it is time to figure out how much you are overspending in your budget, or alternatively how much money you have left after your expenses are all paid. Add up all your sources of income, after taxes, fees, and all the other things. I am talking about how much money actually hits your bank account each week, month, quarter, or which other frequency you are paid. How much money comes into your life that you can actually spend on this list of expenses? Once you have a number, subtract from it what you are routinely spending. If the resulting number after subtracting your expenses is positive, then you are earning more than you spend. Congratulations! If however the number is in the negative, then you are spending more than you bring in.
Rats … I spend more than I make!
Do not fret! This happens to a lot of adults; rich and poor alike! When you realize that you spend more than you bring in you have two choices:
1. You can find a way to earn more income to cover the deficit.
2. You can revisit your three lists. Start by cutting the Nice-But-Unnecessary items from your list. Move on to your Gotta-Have-It list and see if there are less expensive alternatives or if there are list items you could go without for a while. You can also revisit your Need-To-Live list. Are there items on there that you could find a more cost-effective substitute for? Perhaps even something that, on second thought, you could live without for a while? Settle in for this step; it can take an emotional toll (but it will be worth it in the end).
Huzzah! I make more income than I spend!
Congratulations, but your work is not yet finished. Some questions you can ask yourself from here include “Do you have any goals that you need some additional savings for in the future?”, or “Do you have a cushion in your bank account for unforeseen circumstances?”. Now is the time to decide what you need to be saving towards and start stashing away funds for that purpose. Perhaps it is holiday gifts for the end of the year, or a new household gadget. Decide how much of your surplus you will tuck away and do your best to stick to that plan. If you are starting to think of retirement planning and your employer offers plans, I recommend taking a peek at my Real Talk: 401(k)/403(b) Knowledge Unlocked post as well.
At this point, stop and congratulate yourself! Once you have made your list and figured out your excess (or where you can trim), you have created Your Financial Plan. Removing the items that are unnecessary, or making a plan for extra cash is honestly all the planning you need.
I have a plan! I am done now, right?
If only it were that simple! Once you have your plan in place, you need to stick to it. You now know the goal, but you need to hold yourself accountable to stay within the boundaries you have created. Does that mean that you can never splurge on a great deal? Absolutely not! If you want to spend a little extra cash in one area this month (or maybe you already did spend it) then simply adjust for the change. Cut spending on something else out of the budget to make up for it if possible, or pick up some extra shifts to cover it.
Your financial plan needs to work for your life. If you know that you tend to spend a little extra on something in particular, then build room for that in your plan. Remember, there are two ways to make room in your plan; more income or less spending.
How often should I adjust my Financial Plan?
As often, or as seldom as fits your life. Maybe it only takes three months for you to pay down your debt and free up extra cash; that is a great time to revisit your plan. Or maybe you have tried it for a couple of weeks and you still have not resisted buying that $4.00 coffee each morning (welcome to the club). This would be a good time to revisit your plan and how much of a priority that spending pattern is.
The tools provided are relatively simple, but the practice can be painful. No matter how much money you have (or do not have, as the case may be), creating a plan and sticking to it is hard, man! What it should not be is confusing, and I hope that I have helped with the process!
What budgeting tips do you find the most helpful? Do you have any topics you’d like to see covered in Real Talk? Let us know in the comments below!