Want to take a sweet trip to Venice to ride a gondola guided by a singing gondolier in traditional Italian garb in five years? 
Maybe you want to retire a millionaire long before you hit minimum retirement age? Want to adopt a child in four years, but $20,000 is a lot of money and you don’t know where you are going to come up with it? Have you visualized yourself at the exact moment you are out of debt? What does it feel like? What does it smell like? All of these wishes can be solved with a commitment to a budget.
I see you sneering. Stop that.
You’ve gotta quit thinking negatively about the b-word: Budget. Even rich people have budgets. Most wealthy people have budgets. If it helps, you can call it a spending plan. Or a FInance MAp (Your very own FIMA! Like FEMA, but you don’t need a disaster to get your benefits started.). I need you to buy in to this process (it won’t cost you a cent!) and see the end result very clearly in your mind.
Looking at what you’re spending is KEY to determining just how you will get to where you want to go financially.
So, no more trash-talking budgets. Budgets are your friends. They’re just maps. Imagine trying to get to Chicago from Monterrey. I’m sure you can do it by following road signs, but I’d rather be SURE by following a (Google) map.
Let’s get started.
Step 1 – Document
For one month, I want you to write down, notate, and log every cent coming in and going out of your life–cash, debit, credit, checks, auto-payments. That’s too much time? Nonsense. You’re creating a plan for your life. It’s important and I insist. I recommend getting receipts and noting how much was spent in each category below. If this sounds like too many bits of paper, fine, get a notebook, but make this happen if you really want to take charge of your money. At least take a picture of every receipt or transaction.
Actually, I can make this easier.
If you’d rather go electronic, Gail Vaz-Oxlade has a great one. She’s out of Canada, but still totally relevant (and no-nonsense).
We will start with basic spending categories that you can flesh out and expand later if you wish.
- Debt (Student Loans, Personal Loans, Credit Card Debts)
- Housing (Rent/Mortgage, Insurance, Taxes)
- Living Expenses (Food, Utilities, Entertainment)
- Savings (Retirement, Emergency, Goals)
- Transportation (Auto Loan, Maintenance & Repairs, Fuel)
What’s your biggest budget buster? Do you already know? Going to the movies with the reclining leather seats and the vending machine of wine? Maybe you spend too much on clothes, or your car, or housing, or travel. Maybe you can’t figure out what the problem is, but you’re sure there is one because there’s so much month still left when the money runs out. What about that car insurance or tax bill every year?
If you don’t know exactly what the problem could be, you need to make a budget, pronto. Even if you think you know what’s causing your money woes, a budget will help you identify other issues, and it could be just the thing to get you back on track.
…One Month Later…Step 2 – Maths
Can’t wait? You could pull your bank and credit card statements for the last month and use those, but they won’t include your cash expenditures and may not provide a very complete picture of your finances, but it’s a starting point.
Now for some simple math. Let’s head back to the worksheet. Total up your income for the month and write it in the space provided at the top of the sheet. Tally up the totals for each of our categories and circle it in the appropriate block. Take a deep breath and total all the money you spent last month.
Make an observation: Is it more or less than last month’s income? Don’t panic if it was more. Knowledge is power.
If your income is greater than your expenses, this looks like a good situation. But I want to ask you the following questions: Are you sure you have accurately estimated your income? Are you sure you have listed all of your bills? What about the quarterly, semi-annual and annual bills? Are you putting money away for retirement, emergency savings, life insurance? What about savings to replace the refrigerator or washing machine when they inevitably croak?
Now divide each of the category totals by the total amount spent to get the percentage of your expenses each category takes up. (Just move the decimal point two spaces to the right.)
Step 3 – Draw
Okay, now it’s time for some original art! Complete your pie chart using the percentages you calculated in the prior step.
Go on.
I’ll wait here.
Step 4 – Analyze
There is a budget pie chart from Oprah’s Debt Diet, advised by Jean Chatzky in your worksheet and to the right.
It shows the recommended percentages for each of the five categories we’ve been using. Of course, they aren’t set in stone and you can flex five or so percentage points either way, while still adulting responsibly.
Let’s compare your pie chart. Does anything appear unusual or excessive? Maybe your food expenses make up half your expenditures for the month? Maybe it’s your transportation expenses?
Since I can’t see your pie chart, I’ll show you mine to get an idea about how to use the data we have collected.
Here’s my Financial Pie
Bills 14%
Debt 9%
Food 10%
Housing 40%
Miscellaneous 28%
Savings 24%
Transportation 7%
Total 132%
I realize this is blurry. It just hurt my feelings to make it. You can’t see the tears that made it blurry, but maybe you noticed why. Yeah, Our expense are 132% of our base income, which doesn’t include extra work, overtime, or side hustles.
Basically, we’re going in the hole each month. And you can see exactly why. We own two homes (but one’s on the market–someone please buy this great townhouse!) so we are maxed out in the Housing area. I would like to point out that we did not choose a mortgage outside of our price range. After that townhouse sells, we will be hovering around 23% of our income for housing expenses, which is very desirable. Also, we are working our butts off to increase our income and eat into as little of our savings as possible each month.
Here’s another Pie Chart for you to review:
Bills 10%
Debt 15%
Food 5%
Housing 20%
Miscellaneous 10%
Savings 10%
Transportation 30%
Total 100%
I promise, I’m going to learn how to import pie charts from open office into wordpress. But not today.
Look at this budget pie chart. If your transportation costs are anywhere close to half of your income, you have a serious problem that needs to be addressed immediately. You are not on your way to building wealth. Same goes for the food category.
Now look at your own chart again. Is this what you want? Is this going to get you where you want to be? Does it meet your goals and priorities in life? If not, let’s choose one area and start there making changes to turn things around. Start with the most obvious difference between the charts. Try to determine why it is over average. Then we can figure out ways to reduce your spending in that area.
In some cases, you absolutely might not make enough money. If this is your case, it’s time to consider applying for assistance until you can get your income up and your debt down. Local food banks, utilities assistance, food stamps, and many churches will be able to put you in contact with those who can help you get on your feet.
For my irregular income folks, pull your bank statement for the same month last year. We can estimate based on that income or, more drastically, I recommend that you get one month ahead and start using the prior month’s income to pay this month’s bills. This will require a rapid savings, no-mercy approach to save one entire month’s income. But I promise, budgeting this way will save you so much worry for every month afterwards–you’ll know exactly what you have to work with toward your living expenses and goals, be it savings or debt repayment.
No matter what you discover about your situation, we are not going to panic. We will not get overwhelmed. You and I are in this together and we’re going to reach our financial goals.
Step 5 – Take Action
All right. So now we know what needs our attention most and we’re going to address it with the quickness. We will identify and plug your money leaks in each category by priority and then we will seek to increase income. If your income is less than your expenses, we need to act especially fast.
What can you eliminate now from your budget?
Think especially about all the purchases you have on auto-renew, auto-refill, auto-delivery. Here’s a list of suggestions to eliminate immediately:
1. Gym Membership – C’mon. You’re not going anyway. Cancel it. Walking is free.
2. You’re cutting out booze and smokes now, too.
Do you NEED them to survive? No. Do you know how much you are spending on those every month!!? If you drink and/or smoke, I’m sorry to tell you, the party’s over. Those are not necessary to function, accomplish nothing toward your goals, and are to be eliminated immediately. Seriously, your job now is to get out of debt. Redirect that money toward your debt reduction or savings goals. I have a friend who created a NICE setup in her backyard with the money she saved from quitting smoking.
3. Do you participate in birthday clubs? Not anymore. You cannot afford that nonsense. Take those dollars and put them to work for you.
4. Magazine and newspaper subscriptions you don’t even have time to read. Quit saving them. Cancel the subscriptions and put your refunds toward your debt reduction. You can probably catch up online. I’m sure someone on Facebook is giving their opinion on current events anytime you log on, am I right?
5. Dollar Shave Club? No, you can use coupons to buy razors on sale when you need them. Sometimes drugstores have such great sales, you can get them for next to nothing. DSC will just fill up your toiletry drawers with razors that you now have to store.
6. Home Phone service. Get rid of it!!! Who has this anymore? If you still do, take the plunge and eliminate it. Put that money to work for you.
7. That SUV? Sell it. If it’s costing you too much to drive it, if it’s getting in YOUR WAY to Financial Freedom, even if you have to take a loss on it, get rid of it. You can recover so much faster without that albatross hanging around your neck.
8. Eliminate Sh!t Collecting Missions.
That’s what the dad called them when mom and I went (ahem!) Hunting for Easter Eggs. Do you do this? It’s also known as Recreational Shopping. We would just go shopping everywhere, combing over the clearance aisles, buying up all the super cheap stuff, never knowing where we would put it or if we would use it, never minding that we already had a PILE at home just like it. Of course since we saved all that money, we’d treat ourselves to a nice lady lunch somewhere fun. We’ve cut it out.
9. Play for free. Refuse to pay to play games on your phone. Delete your payment information so that it’s inconvenient to set it all back up again. We’re adults and that’s a juvenile impulse we are going to have to control. Believe me, I’ve wanted to get rid of the ads on my scrabble game for months, but I’m not paying to play. Oh, sorry, “Words With Friends.” Whatever. It’s Scrabble. You can change the name to whatever you want; I’m still not paying to play it.
What can you reduce immediately?
1. Expensive Pet Food – Unless your pet is earning income to cover his feed, it’s time to replace the expensive chichi pet food for some basics. Don’t feel bad for Fido and Mittens. You’re not exactly going to be eating caviar or drinking champagne in front of them. I promise, they will still love you (or despise you) the same.
2. Significantly reduce your restauranting frequency. I’d say eliminate it altogether, but if you’re pulling a double and have twelve minutes to grab a bite after you were up with a wailing toddler all night, and ended up oversleeping so you didn’t have a second to make your lunch, by all means grab you something to eat. But you and I both know, dollar for dollar, you get more food (and more nutritious food) by brown-bagging it.
3. Call your utilities company and ask for budget billing. Most utility companies have some version of this, but mayrequire you to have been there a year so they
can determine your average payment. It’s so much easier to budget when you know what to expect.
In addition to having a
more regular amount, turn that thermostat down to save money on the regular.
4. Call your credit card companies and ask for a reduced rate. Ask for a no-fee or low-fee balance transfer with reduced rates. Even six months at 4.99% is better than never trying and having to pay 21.49% forever. This is just another one of those instances where paying on time and at least the minimum payment will make a company more amenable to dropping your rates. Don’t be afraid to ask to speak to someone else (nicely). Ask specifically for what you want.
5. Shop your insurance around. Do you know they figure your rates based on your history and likeliness to just take a rate hike without question? If When you bundle your auto, home and life insurance at most insurance companies, expect bonus discounts. Remember to compare apples to apples.
Now let’s talk about increasing your income.
1. Big Impact:
A. Can you work overtime or more hours to earn extra?
B. Have you picked up a second job?
C. How about that side hustle? Sell the pinecones from your yard to crafters on Etsy. Get set up on Fiverr.
D. Sell your unwanted stuff on Facebook Yard Sale sites! Kids’ outgrown, but still in good shape, clothes and toys are very popular.
2. Small Impact (but still worth it):
A. ThredUp – Order a Bag now! They’ll send you a bag, self-addressed to them, postage paid. You just fill it up with clothes and name brand items. When they sell them, you get money in your account that you can cash out at any time. That’s more than I would have gotten for that H&M shirt at a yard sale!
C. You’ve got to use Checkout 51,
Ibotta, and Favado or Flipp for grocery store rebates.
Hmm. I told you there were seven steps but this is becoming a pretty large post.
6. Revisit your budget regularly
Things change. Be sure to revisit your pie chart regularly to drill down to your priorities.
7. Adjust as needed.
Rinse and repeat.
Hey! Send me your pie charts and tell me what your first priority is!
I read every email!!
Erica at Owning Burton Farm
