This is a prelude to our budget assignment next week. Chapter 3 discussed Cash Flow Statements so I wanted to introduce it here. For our purposes, we will use the term Budgeting (which is basically the same thing).
Budgeting is possibly the most important section of this entire course. Why? Because this is where we begin our behavior change, where we put our feet to the fire, start to hold ourselves accountable and impact our financial futures. This blog will introduce you to budgeting.
John Maxwell once said, “Budgeting is telling your money where to go instead of wondering where it went.” What a great quote as it speaks directly to our behavior. It’s of critical importance to control and tell your money where to go. Most people don’t know how to budget. In fact, over the first 6 years of my career I was doing it all wrong. I remember the years of me trying to do an annual budget (as businesses do and as Alice did within the textbook). To my surprise, it never really worked (see below). I had to learn things the hard way, get some life experience and learn some tips from Dave Ramsey. I am not only a big fan of Dave Ramsey, but am also one of his Certified Financial Trainers. In the video below, you will also learn about Dave’s Seven Baby Steps. Throughout this Personal Finance course, we will be covering many topics including his suggested steps.
Back to Alice….the reason that Annual Budgets do not work for individuals is because we make daily decisions regarding our use of money. Trying to plan out a budget for a whole year is near impossible as the restaurant I eat at this week affects my expenses now, not in 6 months. In other words, if you really want to win with money, you must learn to change your behavior and work a budget each day throughout the month. You’ll understand more as we go along.
For now, as we begin thinking about budgeting, here are some tips to help:
- Write it Down. Having a mental budget never works. Although the textbook has some great information, I will point out the mistakes – and this is one of them. A mental budget does nothing to help you put a purpose to every penny. While right now, your financial situation may be simple, it will get complicated and there is no way someone can keep track of a comprehensive budget in their head (too many moving parts). Would you expect a business to have its budget only in the mind of its President or CEO? No way! And after reading about an accountability partner (#3 below), having a written budget will help you both communicate better. Write your budget down on graph paper, a notepad, a spreadsheet or a paper towel (ok, maybe not a paper towel). No matter what method you use, you must put your budget in writing.
- Give Every Penny a Purpose. This is another Dave Ramsey strategy (although he calls it every dollar has a name) and one in which he “rants” about in the video below. Having lived it for many, many years, I can tell you it works. It is called a Zero-Based Budget – where every dollar of income you receive this month has a plan, a purpose and is accounted for. So at the end of the month you will never end up with a surplus or a deficit – your bottom line will be zero. If we don’t tell every dollar of income where to go, we are going to wonder where it went. Some think that if you end up with a “positive” for this month (surplus) it’s a win. While technically that is a good thing, if you don’t give those dollars a purpose, they will float away without you knowing what happened. If your income surpasses your expenses (a surplus once everything is paid out), purpose those dollars into your emergency fund ($500-$1000 initially) or pay extra on your debt or put it into a “fund” for something you will need in the future (next semester’s tuition). Just be sure to give every penny a purpose.
- Daily Oversight. This sounds tedious, but it’s not. During my younger years, I would set my budget for the entire year – knowing what income I expected and knowing what expenses I had, and as long as I was not spending more than I brought in, I would be ok, right? The problem was I never really followed my yearly budget because it never changed my daily behavior (just as I mentioned above). The thought to just “set it and forget it” doesn’t work. I wasn’t actively engaged in making my money work for me or giving every single penny, a purpose. Unless you are tracking your expenses on a daily basis, it won’t work. And it’s not as difficult as you think. There are many spreadsheet templates and even smartphone apps available.
- Get Accountable. As young children, we were held accountable by a parent or guardian – to clean our room, to do our chores and yes, even to eat our vegetables. Similarly, unless you have someone to hold you accountable, your budget won’t work. As we grow older and in all parts of our life, we have accountability. We have supervisors who make sure we complete our job duties, we have teachers who make sure we do our work, we have the IRS to make sure we pay our taxes (unfortunately). Accountability is critical to making sure you stay on track. The point is that if you do not have someone to hold you accountable and help you stick to your budget, you will try to cheat here or there. And that “here or there”, adds up quick. This accountability partner could be spouse, partner, relative, friend or even one of your parents. But it needs to be someone who has the ability to tell you ‘no’ when needed. If you are married, it should be your spouse. If single, find someone you can trust with your finances and someone who is not afraid to say no. We will use our accountability partners with our budget assignment.
- Keep It Simple. If this is your first time to budget, keep it simple. There are good “Cash Budget” forms in textbooks or you can find some simple paper forms online. Some choose to do an Excel spreadsheet. Whatever method you use, just don’t get too complicated when you first start off. This will result in frustration on your part and possibly cause you to lose hope. Keeping it simple will allow you to grow with this first budget experience and experiment with it over time. Remember, it takes 4-6 months to get really good at budgeting. These first few months, you will make many mistakes or forget events you should have planned for. So keep it simple and be patient.
- Get Started. Start by listing your expected monthly income. Then determine what monthly expenses you will have (food, rent, gas, cell phone, etc.). Subtract these items from your monthly income. If you still have a surplus, add other expense categories you expect to have this month or create an expense “fund” for future costs (tuition, books, etc.). Give every penny a purpose until income equals expenses (this is called a Zero-based budget). If you have a deficit, determine what your “needs” are compared to what your “wants” are. Eliminate or reduce those wants to get your expenses equal to your income.
These tips and lessons will help you prepare your first budget next week. Start thinking about these tips and check out the video below. Dave Ramsey says it so well.