Today, I want to continue our dialog regarding money management and give you some practical techniques on creating a budget.
If you’ve never made a budget, this might be helpful for you. Or even if you’re a regular budgeter, you might get some additional tips here.
In our last post, we talked about the benefits of budgeting and why it’s critical for your wealth building and retirement planning transition.
Possible Reasons why People Don’t Budget
So, the question is, if it’s so important and if it’s so critical, why do most people not Why do they not have a spending plan?
Well, there could be a couple reasons and maybe just more than these,
1. They might be they just don’t know how.
2. Maybe they’d never been taught.
3. Maybe, you’ve been abused with budget. Maybe you’ve heard your parents, or your spouse or others say, “it’s not in the budget”. “it’s not in the budget, can’t afford it.”
And so maybe your mindset regarding a budget is not a favorable one.
4. Maybe you feel like you’re in a straitjacket, like your kind of being restricted by a budget.
A budget is a mechanism to control yourself. And the reality is of controlling yourself.
5. It’s to meticulous in nature. It’s detail oriented. It’s repetitive. You must continue to do it all the time.
6. It’s not very exciting. It’s not very sexy. In fact, a lot of times it’s just downright boring and that’s why some people don’t do it.
As we talked in the last post, a budget or a spending plan is the most powerful tool you have when it comes to building wealth. Because if you don’t control your money, everything else is just theory.
And the same is true for retirement planning. If you don’t have good money management skills, and know what you need, and when you need it, and where it’s coming from, everything else regarding finances is just theory. It’s not real.
Starting With Awareness
So how do we get started in creating a budget? Well, it starts with getting some awareness of where you’re already spending. So what I would recommend is to take some time, maybe on a Saturday morning, maybe on a Sunday afternoon, maybe on a Thursday evening, you basically push everything away, tell the kids to go hang out for a while, turn off the TV, put down your phones, stay off the computers, and just you sit down with your spouse, ideally and you guys start laying out some understanding of what expenses you have.
You sit there with a yellow pad and, your phone with a calculator on it, and pull out the bank statements and your pay stubs and the bills, or if you get them online on bill pay, and you jot them all down.
And the other thing that’s really, helpful, in creating a budget is a calendar because as we talked about previously, money moves.
As life moves, so does money. So, if you have events on a calendar coming up, you’re going to need to allocate money towards it.
3 Rules for Creating a Budget
So how do we go about creating a budget? Well, there’s three rules for creating a budget.
Rule number 1:
Each month gets a new budget. There are obviously high correlations between time and money and a lot of things are going to be consistent. Generally, people eat at the same places, they buy the same food, they travel to the same spots and things like that.
So, month to month, about 80% of your budget or spending plan is going to be the same.
But no two months are the same. Why is that? Because of life events.
Money follows events. Life events. So, for example, in May, you have Mother’s Day. So, you might want to buy something for your mom. Or for your mother-in-law. Or for your wife. Right? So, but you don’t have Mother’s Day expenses in September.
Father’s Day is June. So, in June you might have that expense.
There’s certain, anniversaries or birthdays that occur in some months, but not in others.
Our next post, we’re going to be talking about Christmas. I don’t know if you know this or not, but it is in December. Every year!!!
So, your October, November, December budget might look a little bit different for Christmas than maybe what you would have in May, June, or July, right?
Most people take vacations. Well, when do they take them? Spring break, summertime, or around Christmas. So those months when you take vacations, you’re going to have more expenses than the months you don’t.
So, there’s no such thing as a cookie cutter budget. Will there be overlap? Will there be redundancy? Will there be commonality between budgets month to month?
Absolutely.
But no two months are the exact same. And that’s part of the problem. People try to take this cookie cutter approach and make everything the same every month and it doesn’t work.
So, rule number one, each month gets a new budget.
Rule number 2:
Account for every dollar. You’re going to give every dollar a job to do.
You’re going to have a plan of what’s going to happen. The reason why, is because you don’t want lazy money. We don’t want money just laying around without a purpose, or a job, or a plan of what it’s going to do.
Because you know what happens? It’ll just disappear.
Thus, we want to have a starting point of where exactly every dollar is going to go.
So, we must know in the next coming month, how much money are we going to bring into the household? If you have a regular income, we’ll talk about that in some of our advanced techniques, but for now, just start with, what you think is coming in.
If you’re paid consistently monthly, biweekly, twice a month, or weekly, you know, what’s going to come in.
You put that at the top of the page and then we need to give every dollar a job.
But again, it’s just a starting plan. It may not be where it ends up.
Think about it. If you’re going to go on a drive, maybe for an hour-long drive somewhere, you have a plan of how you’re going to get there.
But something might occur on the way. There might be an accident. There might be an oil spill. There might be a road closure. And so, you must take some sort of detour around. If you hit a roadblock, doesn’t mean you stop, and you turn back home…you basically figure out a way around.
Same thing with budgeting.
You have an initial spot of where it’s going to go, but life might happen. You might get a curve ball, you might get a monkey wrench, and so you must adjust, but at least you have a starting plan of where it’s going to go.
So that’s rule number two, account for every dollar.
Rule number three:
Household first. You must prioritize the important things over the urgent things. What are the number one priority? Food – Food is the first thing that should go in your budget because if you don’t eat. You essentially die!
And so, food’s kind of important. That is one of those needs.
I get a lot of clients a lot of times about when they say, I need this, or I needed that. And they really mean they wanted it. But food is a need.
Then comes utilities, keeping the lights on water, trash, gas, sewer, maybe internet.
You put internet in there if it’s utility and you certainly need it for work and things like that.
Number three, housing. Rent mortgage payment. Things associated with that needed repairs that must be done because they’re causing issues.
Then obviously transportation getting to work car payment, car maintenance, gasoline car insurance things like that.
Those are the four walls.
Those are the most important things you have. Because if you have all those things covered, everything else you can get to everything else is secondary.
Do you want to pay for all those other things? Absolutely.
But if you’re in a constrained environment where you’re struggling to pay the bills, if you will, these are the things that must get prioritized, not the credit cards, not a new outfit, and certainly not the entertainment.
These are the core things.
If there’s money left over, absolutely, then we do all those things.
But when it comes to your budget, you take care of your household first.
First, and then everything else is secondary, right? And Timothy, it says he that provide not for his own house is worse than an infidel. So, household first, then we take care of the other things.
All right. So those are the rules.
3 Steps on Creating a Budget
How do we go about creating a budget?
Step number one.
Step number one as mentioned before is forecast your income.
Generally, it’s simple. You look at the month ahead and that’s why you have the calendar again and you look to say, okay, I get paid this day and this day, so I get paid two times or I get paid this day and this day and this day might be one of those magical three times a month.
Maybe you get paid twice a month, maybe you get paid every week and you have four or five paychecks.
And you generally know how much you get paid. And so, you put that on the paper first. A yellow paper. Or on the app. Or whatever it is that you’re using, you basically start with that.
And it’s known money.
We know this as much as coming into the house. So, if you’re in sales or commissions, things like that, if you have statements before, you know that this is coming in.
It’s not hoped for money.
It’s not money that might come in. It is known money that we know is hitting our bank account from either wages, commissions, sales, or business transfers from your business accounts, but known money.
Forecast your income. Step number one.
Step number two – Accounts for expenses.
We already talked about you start with those four walls. If you don’t know exactly how much it is for food or gas, that’s again where you look at your previous statements, that awareness that you have.
You can look at Walmart or Target or Giant or Food Lion or Publix, wherever you do your grocery shopping, add all those numbers up and they’ll give you a baseline.
Is it going to be exact? Probably not.
It’s going to take a couple months for you to hone these numbers in. But start with the awareness and get an idea.
Food, I can tell you, is always a tough category, especially for guys. Because generally, historically speaking – it’s probably stereotyping, but it’s just a fact.
Stereotypes are the way they are because of facts.
Most men don’t do the grocery shopping. Most women do. Most women do most of the shopping right there in America. The women are the main consumers of buying products. Everybody knows that!
So, if you think you need, $200 for groceries for a family of five for a month, you’re probably wrong, sir.
Ask your wife, or whoever does this shopping. They’ll probably have a good idea of what should go into that, but it’s one of those areas that’s always tough.
Things like electric bills. Hopefully you have the bills from the previous month where you can look at what it is.
You’ll know what your rent is. You’ll know what your mortgage is.
And so, your account for expenses. You started those four walls and then you, you look at the calendar. Maybe you have a baby shower coming up. Or you have this party for this at church or at work. Things like haircuts, personal care.
Those are the things that you’re going to forget about. Especially for ladies, they don’t get their haircut like every month. Sometimes guys do. So maybe every third month you’re going to get your haircut as a done as a lady.
So, is this a month for hair or is it not?
Trash is another one that kind of acts like that. Free month, free month, gotcha. Free month, free month, gotcha. So, is the trash bill due next month or is it one of those free months? Don’t forget things like that.
So, you must basically account for all your expenses.
Step number three:
Then you continue going down the list until you have allocated every dollar.
So, we have our income, and we have expenses, and we have a number it’s left. Income minus outgo should be zero.
It is called a zero based. Budget.
Every dollar has been given an initial plan, an initial starting point, an initial job. And here’s the thing. If you add up what you have coming in and what you have going out and you have negative number, that means you’re spending too much. So, you got to go back and adjust some of those things.
If you take your income, minus your expenses and you still have a positive number, that means you haven’t allocated enough. You need to go back up and reallocate it.
Now, keep in mind, just because it’s allocated doesn’t necessarily mean spending. So, if part of your goals is to save, you’re building emergency fund, you’re saving for intentional goals, you’re investing, things like that.
Savings aspects are okay, but it must be prioritized towards spending or savings where it must be given a spot to go.
Okay. So, as we wrap up today’s post, I want to help you out by giving you some basic budget forms. So, if you go to the resources page, you will find a basic budget form in two formats. One for an Excel that you can use. You can convert it to numbers if you’re a Mac person.
Additionally, there is a PDF, if you just want to print it and write on it.
Micro Action
That is your micro action for the week. If you have not been budgeting consistently, give it a try.
Use the forms I provided there.
Use a yellow pad.
Get some kind of technology tool.
But you must get control of your money and doing a budget or simply having a spending plan.
It’s a plan of where you’re going to spend money before the month begins is the best tool that you have with regards to building wealth and planning your retirement.
So, I hope this helps you on your financial journey. If you have any questions, please feel free to send me an email at Mike@truewealth.show. I will try to answer every email that I get there.
And until next time, I hope you have a great day.
