This is the third post in a series to help us regain control of our money and get that money working for us so hopefully someday we won’t have to work it anymore. If you missed the first two installments, click here for part 1, and click here for part 2, to bring yourself up to speed.
Our minds are cunning creatures. When we think about all this cutting back on spending stuff often it tells us things like; “hey, you work hard, you deserve that soda every day” or “inflation is running rampant, better spend it now while it’s still worth something.”
Now, both of those may hold some validity, and you do deserve to enjoy things, but wouldn’t those things you buy be much more enjoyable if your finances were under control? If all your bills are paid, the car’s maintained, you’ve got six months income for a cushion for emergencies, you are building a retirement account, you are putting money away for short or long term goals, and are spending money that is actually designated for fun…don’t you think you might enjoy the expenditure a whole lot more?
Now that you’ve freed up some money the million dollar question is…”what do I do with it?”
Not so fast, sorry but now I have to bring up the “B” word. It’s time to figure out what you have ‘coming in’ each month, and how much you have ‘going out’ each month. You also need to know your expenditures by category. You’ve probaby guessed the “B” word is budget. Yeah, the word gives me a pang when I see it too, but in reality it’s not that hard to do for a household or even a business though, for a business you may want some help from your accountant.
Truth be told, most of us put this off or neglect it completely. We think we have it ‘all in our heads’. I used to think that, that I had a grip on it. Bottom line is that this thinking is a subconscious head-in-the-sand trick to keep us from facing the fact that we overspend. We know we overspend, we just don’t want expose ourselves from our bliss of ignorance.
If this sounds like you and you’re struggling financially, or not struggling but have that nagging frustration that, even though you may make a nice income, you are not progressing year to year. “Where does it all go?” you ask. Well until you get it on paper…You will never know where it all goes!
It doesn’t have to be a long-winded affair. Pull out your bank statements, checkbook register and credit card statements for the past 12 months along with your current paystubs and/or business draws if you’re self-employed. Get a columnar pad or use the computer program Excel and make columns for sources of income and categories of expenses, and then go through your bank statements, checkbook register, and credit cards and list each expense under it’s category. Note: use the credit card statements for charges, not your checkbook register for the payments. It’s vitally important to know what you charged, not just the payment.
Be as detailed as you can while not being too specific. For example, use a category called Groceries and Household Supplies, rather than Vons, Ralphs, Costco, etc. You may if you wish breakout Groceries from Household Supplies. You can go here for a free Excel template, just scroll down to where it says Download Now: http://www.vertex42.com/ExcelTemplates/personal-monthly-budget.html
This will help you out with categories and when you tally your income and expenses, you can plug the numbers in to see where you’re at now.
The next step is to be brutally honest with yourself on the numbers. Some expenses are absolutely necessary for survival, food, clothing, shelter, getting to work, certain insurances, etc.
Some seem necessary but really are not necessary like, cable tv (yes, it is not required for survival), health club memberships (essential to stay fit but one can workout at home), holiday gifts (we’ve had some bad years where we bought absolutely nothing, and lived through it), etc. We’re just identifying things here so don’t be afraid to be honest.
Some are just not necessary like, movies, booze (that hurts me too), cigarettes, eating out, the daily coffee at the coffee shop…you’ll know what these are.
Again, the idea is not to cut all of these things out. It’s just vital to know what’s coming in and going out, and which can be sliced, diced, cut up, reduced or eliminated. If you find you have to cut something out completely today, once things are squared up and fixed, you have the choice to pick it up again as an expenditure. It will be your choice and the joy that you know you can afford it will make it much more enjoyable than before.
This whole budget thing is so crucial and you may decide you want some help in getting going on this so if you need assistance, I offer a service for this, so do give me a call at (805) 264-3305.
Good luck and happy hunting.
Robert W. Craig, E.A.