Back to Basics with the “B” Word

Back to Basics with the “B” Word

It’s happening. I’m actually addressing the “B” word. I’m completely aware that this word makes some people cringe or shut down automatically, but the fact of the matter is that the first part of putting any financial plan into action is to have control over your flow of money. Having a budget in place is the first step to getting control because it allows you to track your income and expenses, and direct your dollars to where you want them to go. budgetsbacl

You can call it your Spending Plan, your Cash Flow, or whatever else gets you motivated to address it, but what really matters when it comes down to it is if you:

  1. Have one?
  2. Are following it?

Why Create One

Having a budget will allow you to see how your actual spending compares to what you thought you were spending and will show you things you weren’t aware of in your habits. Chances are, once you begin to analyze your outflows, you may find that you’re spending a lot more in some areas than you thought. Having a spending plan will enable you to make room in your expenses for the things that matter most, such as having an adequate emergency fund of 3-6 months of expenses, planning for retirement, or saving for big purchases such as a new home, car or vacation. By adding a line item into your monthly budget for these things, you’ll be able to automate your savings and make the accumulation process a lot less painful.

How to Build it

Spending Plans are easy to create and it should only take an hour max to build your own. It’s best to create a budget based on your monthly expensesso that you can obtain a comprehensive view of all of your bills. In addition, this will allow you to closely track your miscellaneous spending on items like eating out and shopping. To build your spending plan, you can link up your accounts using an online software such as Mint or You Need a Budget to get an up-to-date snapshot of different categories of your spending. First, you’ll want to address your Income. Your income will include: your salary, business income, interest on any savings or investments, government benefits, etc. The second item you’ll want to address is Expenses.  Your expenses will be divided into two categories: fixed and discretionary. Fixed expenses are those expenses that are steady, ongoing and practically mandatory to pay for. These include items such as your rent or mortgage payment, car payments, insurance, student loans, and utilities. Discretionary expenses are items that fluctuate in costs and in some cases are more optional than mandatory to pay for. These include items such as groceries, eating out, retail therapy, movies, salon outings, entertainment, gifts, and vacations. Keep in mind that not all expenses are created equal. This means that while some expenses may occur on a weekly or monthly basis, others are seasonal, like holiday gift expenses or an annual summer vacation and some are occasional, like car repairs or a trip to the dentist. It may take some time with tracking your expenses to get a good idea of what you spend on an average monthly or yearly basis. When looking at your fixed expenses, savings goals, and discretionary expenses subtracted from your average income for the same period, check to see if there is a positive number left over. If there is, you’re running a surplus. A surplus can be converted into future savings or investment. (Note: this doesn’t mean that there isn’t room for adjustment and further savings). If you get a negative number, you’re “in the red” or running a deficit. This means you’re spending more than you’re making. The only way to put yourself back in the positive position will be to either increase your income or decrease your expenses.

Going Forward

Budgeting can be a lot like going on a diet. It’s hard to get going at first, but by making small changes and taking small steps along the way, you eventually fall into an everyday lifestyle of working out and eating healthy. Controlling your spending will be the same. By taking the above steps and beginning to document and become aware of your spending patterns, you’ll automatically feel more confident about your situation and any plan you put in place to move yourself forward. From there, each adjustment that you make will put you even closer to financial freedom. Remember, a budget isn’t meant to be a list of strict rules to abide by, but rather should be seen as a set of guidelines. It takes time, commitment, and a conscious effort to stick to it, so remember to set weekly or monthly check-ins for yourself and review your progress often. By holding yourself accountable and keeping on track, you’ll likely find yourself less stressed, more organized and well on your way to meeting your goals in no time.