I have had quite a busy year so far in January. So far I have kept my New Year’s Resolution to create and update a Financial Planning blog! It has proven very helpful. In the first two weeks of the year, I tackled creating a budget. It is something that I have been putting off for a while, because even as a Financial Advisor it was difficult for me to find the time to take a real look at my spending. There was an element of fear of what the end result would be. I know a lot of our clients feel this way when we recommend that they create a budget. Between that, and not knowing where to start, it is an easy thing to put off. Let me tell you though, what an incredible weight lifted off my shoulders. Now that I’ve gone through the process, and created a budget for myself, I feel so much better.
Before I delved into the process of creating a budget, I discussed why it is important. All of us have goals that we’d like to accomplish in the future, and most of those goals will require some amount of money. If we’re able to be strategic in how we spend our money, and can create a plan that we can stick to for future spending, that allows us to better accomplish those goals. It also prevents things like credit card debt, because we’ll know how much we can spend, so we won’t be overextended at the end of the month. A budget is a really important tool for all of our Financial Planning.
If you’ve been following along on our Facebook page, you saw first hand how I worked through the process of creating a budget for myself. The first step was to figure out how much money I made. Because my income is highly variable, this was a little bit of a challenge, but I was able to do it. For most people, this is the amount of every paycheck BEFORE anything is taken out of it, like taxes and retirement contributions. We account for those in the budget, because it is important to know where all of your money is going.
I found a spreadsheet through Microsoft Excel that I found particularly useful, and used that as my template. You can find a link to that here. I entered my income, and then needed to tabulate my spending. This was the part that was going to be the hardest. I didn’t want to have to pour over my credit card statements for the last several months, add up and then average out my spending, and then subdivide by category… I was really dreading it. Luckily for me, at the point I decided to give the Mint app a try, because I’ve heard such good things about it. It totally changed the game.
If you’re someone that uses their credit or debit card for most of your transactions, this is the app for you. I was able to log in to both of my bank accounts, and it tabulated all of my transaction history and did all the work for me. It only did the last few months, but that was enough data to analyze. I could see immediately that I was spending way too much on groceries and eating out, especially for someone that rarely cooks! I also saw just how much I was spending on things at Target and Amazon, and I know a lot of those purchases are frivolous. If you don’t want to use the Mint app, then you’ll have to tabulate the spending manually. If you haven’t been keeping a record of where your money goes, then start doing that now, and you can create a budget at the end of the month using those figures.
By looking at my spending, I could see where my money has been going. From there, I can make a plan for future spending. There are some expenditures that stay the same every month, like my mortgage and my car payment. Some expenses are consistent, but variable, like grocery shopping, clothes, and things my daughters need at any given time. And then finally, some expenses are one offs. Last year I had to replace my dryer AND my fridge. By getting an idea of how much I spend on each of these things, I can create a plan for my spending in 2018. Or, in other words, a budget!
I feel like the word “budget” gets a bad reputation. No one likes to be “put on a budget”. But when you think of it more like an awareness of your spending, and a framework for how you plan on spending it, the better off you are. I was lucky last year that I had the money in the bank to pay for the appliances that broke in my house. Some people are not that lucky. By looking at my expenses from last year, I know that I have to plan for those types of expenses again this year. Or, in other words, I can budget for them. Just last week, I had to fork over $750 to pay for water damage to my MacBook. These “one off” expenses are going to crop up again this year.
So, in my spreadsheet, I added together my consistent expenses with the amounts that I thought I could stick to for the variable expenses (close to, but less than, what I was spending on average at the end of the last year) and the one off expenses. This was all subtracted from my income, and voila! A budget. I’ll be able to track my expenses very easily in the Mint app, which will make sticking to my budget a breeze.
As a single mom, and a small business owner, this also provided me with something else that I didn’t foresee. How much income I would like to make. Up until now, I’ve avoided that figure, because I thought it would intimidate me. Instead it gave me a clear goal for what I want to accomplish. For our clients and colleagues that are participating in this process with me, I think you might have a similar eureka moment. We all have goals for where we would like to be financially, and this is the first step to creating a visualization of that.
The next step in our #FinancialFitness2018 journey is what to do after the budget is complete. Part of why you are creating a budget is to get an awareness of your spending, so that you aren’t spending more than you make. The other part is to cut back on spending where you can, so that you can generate savings. What we do with that savings will be covered in the next post, but I’m already exploring it if you want to follow along. It’s all about the Bucket Strategy. I’ll be adding posts to both our Facebook page and to our website, so check it out.
In the meantime, go download the spreadsheet and the Mint app, and get started. This is the first step to getting Financial Fit in 2018! If you have any questions, feel free to call Sue, Gayle or myself, and we’ll be happy to talk you through it.