Every household that has achieved or will achieve financial freedom must have a sound financial plan. It is the roadmap to your success and your home.
It is also a great example to set for your children that money isn't infinite and must be managed appropriately.
Having to follow a well-planned budget will help to hold you accountable. While it isn't always fun, I promise you will love the extra money that is being saved, and you might even see an improvement on your credit score.
In this article, I will show you how I budget and what has worked for me. These are tips and a strategy I use so feel free to adopt it. It is also how I still manage my money to this day. Let's get started!
1. Start with Income
Some financial planners like to start with calculating your expenses, but when building a plan for your budget, you must begin with a positive net number. This number is your income because you have to start somewhere.
For example, think of your budget if building a home. While you can start picking all high-end fixtures, appliances, and furniture for your new home, you have to know where to start (your top-line figure). If your budget is $200K, the options and developer may be very different than if your budget is $1.5M.
Therefore, start with your net income and look at your paycheck deposits, stubs, or checks and write down (or put in a spreadsheet) how much you make monthly.
Your budget plan isn't finished yet. Next, you need to calculate any additional income you might be receiving. Are you getting cashback rewards regularly from your bank or credit cards? Are you earning dividend income from your investments? How about side jobs or allowance?
This will be added to your net income. See below for an example. Now that we have a definite number of working from, let's move on to expenses (Yuck!)
2. Track Your Expenses
Tracking your expenses will be the most tedious and time-consuming part of building your budget. You will find that going through recent bills, paper, and online statements isn't a quick feat. But YOU MUST DO IT!
There is nothing worse than getting into Day 10 of your budget tracker only to find a $30 deduction hitting your bank account because you didn't take a few extra minutes to pay attention (Brutal but Honest Truth!). It throws everything off. If this does happen, brush yourself off, grab a cup of tea or coffee, take a deep breath, and adjust your budget for the next month.
Write down every single expense for this month. At this point, don't worry about the order or organization of your bills. You are working on a rough draft for your budget and attention to detail is of fundamental importance at this stage.
Next, you must double-check your work. A great way to ensure you haven't missed overlooking any expenses is by looking at previous transactions which may require you to dust off those bank and credit statements to review any potential bills that may post this month.
Once you feel confident that every bill and debt are listed out, start organizing it. Organizing your bills can be done in several ways. I've seen budget list debt by categories such as Housing, Insurance, Investments, Debt, etc. Another way to organize your expenses is by the due date. Pick a method that works for you.
Finally, once all of your debt is listed out and organized, determine how to reflect your dollar amount. What this means is do you write down the exact dollar amount or round to the nearest dollar.
As a fan of several trendy financial planners, I don't follow the rule of budgeting every dollar. While this rule does work, I find great joy in having some extra cash left over at the end of the month. I use this "extra" leftover amount as a reward to do what I want with it. It entices me to save over the month.
Either way is excellent but stay consistent with it and recognize that bills do fluctuate based on interest rates, taxes, fees, usage, etc.
3. Pay Yourself
You might be thinking, "I can't afford to pay myself!". You must! While three-fourths of American households have little to no savings, you must get into the habit of saving money (and not touching it!).
By paying yourself first, you may be forced to cut some expenses. If this proves too painful, think of the long-term impacts of building a net worth or pile savings can mean. Also, this may be a great way to start building that emergency fund finally.
A typical savings goal is to set aside 10-20% of your net income. If you genuinely can't afford to do this yet, start smaller with plans and a goal to increase it later (but not 10-20 years later).
4. Cut Expenses
Now that you've identified all of your expenses and your monthly savings target, it is time to slash costs. This may prove to be more complicated than you think because some bills have emotional ties.
For example, as a hobby, I take photographs because I love traveling and nature. Most photographers use Adobe Photoshop to adjust coloring and lighting in photos. When I first started, I was subscribing to Adobe's service for $59 a month. I was getting a lot of value of it, but it just got to be too expensive during the months I wasn't able to photograph.
I had to cut the emotional tie, and something incredible happened when I did. Because Adobe didn't want to lose a customer, I got a drastic reduction of $19.99 per month. Sold! By taking action to cut ties, I earned a considerable discount.
Remember cable TV? What was once a typical $100 monthly expense, now many homes have cut their cable ties to pay for online streaming. Determine where you can slash some costs in your budget.
Taking an honest effort to reduce expenses can afford new opportunities to renegotiate bills. When was the last time you priced your auto insurance or life insurance? Technology is making services more affordable, and if you haven't received a new quote in over 12 months, it is time to discover savings.
5. Track Your Progress
Tracking your progression has several benefits. The first benefit is you can visually see positive steps being taken in holding your money accountable. Every dollar is being told how to work, and it identifies if gaps exist in your budget.
Next, it creates an opportunity to adjust your budget. Let's be honest. Not every expense is consistent every single month. Your budget may require some adjustments and tweaks. Perhaps you couldn't save enough, or maybe you can save more than you initially thought. Tracking the progression of your budget helps you to take those actions.
While we won't get into the topic of debt payments, it is essential to set realistic goals and targets of paying off your debt to include ensuring you are paying off your bills.
When I build a new month's budget, I put a checkmark box beside each expense. As the days progress, I monitor my bank account to see which bill was paid. Once it posts in my bank account, I place a checkmark beside that debt.
Having a similar process in place will help you monitor closely and determine if a payment was missed.
6. Final Thoughts
Having a sound budget in place keeps your money accountable. By telling your dollars where to spend, save, and pay down debts, you will achieve financial freedom faster than without a plan. I promise.
Start taking action immediately to help meet your financial goals and plans. Let me know if you have any questions and be sure to check my Instagram page @dollarotter_blog.