Dude, Where’s My Money?

By January 10, 2017Finances, Planning

Do you ever find yourself with more month than money left? Hopefully not, but if you do you are not alone. This is how most people live. But this tragedy can be avoided. How, you ask? Well today we are going to discuss the “B” word…

If the word “Budget” makes you cringe and conjures notions of no fun and no money, don’t worry, I thought that way too. But there comes a point when doing the same thing over and over, while expecting different results, just doesn’t cut it anymore. (Insanity, anyone?) Do you want progress? Do you want to move forward, pay off debt and start building that bank account so you can have fun, support your family and give to others?  Then it’s time to get on a monthly written budget. Luckily for you I’m going to spell out how S-I-M-P-L-E it is to do. So sit back, R-E-L-A-X and enjoy learning how simple it is dominate your finances.

Do I Have To?

I get it. I feel your pain. You get up early and work hard all day to earn a living and what does it matter if you have a budget? Here’s why it matters. If I asked you where every dollar you earn goes, what would your answer be? Would it be: “I don’t really know where it all goes.” If that’s your answer I have one reply. C’mon man! What if the president of your company were to say that? That company would probably be headed for financial meltdown; same with your life. To succeed with money and build wealth, you must know where it all goes.

Keeping It Simple

My favorite type of budget is a zero-sum budget. It goes like this. You start with the amount of income you have coming in each month. Let’s say for example your household has a monthly income of $10,000 (for ease of numbers sake). Before the month begins, you start with $10,000 at the top of your notepad or spreadsheet. Then, you spend that $10,000 on the paper. Spend it, you ask? Every single dollar has a home to go to. It’s that simple! Let’s break it down even further and finish with how it leads to wealth building.

  1. What’s Coming In?
    • Figure out what you expect your income to be. If your only income is your job, then you know exactly what to expect. If you’re married, add in your spouse’s income and you have your total household income for the month.
    • Your income could consist of other things as well, including bonuses, rental property, royalties, freelance work, investment interest and dividends, alimony and child support, unemployment, Social Security, annuities, disability or gifts. Add it up!
  2. Where Is The Money Being “Spent”?
    • Spend your income on paper before the month begins. Give each dollar a home. It can help to start with categories. Start by looking back 3 or 4 months at where you spent your money. You can get this information by looking at your checkbook, bank statement or online debit account. Some general categories that should apply will be charitable giving, savings, housing, utilities, food, transportation, clothing, medical/health, personal, debt payments, fun money and recreation.
    • These categories will be listed underneath your income. Estimate how much you’ll spend on each category.

Add all “expenditures” (this includes savings and debt payments) and subtract them from your income. The result should be zero. If it’s negative, redo the budget until you end with a zero sum. See the pattern here? By “spending” all your money on paper you are able to say that you know where it all goes.

Making Changes & Sticking To It

The hardest part of a spending plan is undoubtedly sticking to it. Don’t expect to get it perfect right away. You will make mistakes, it’s okay! As you move forward in building your strong financial foundation you will see areas where you are overspending and be able to allocate more money towards paying off debt or savings. Winning at the game of money is a marathon, not a sprint. I know when starting off I did not stick to my spending plan to the “T” but month after month, I got used to it and now it is much easier.

If you find that you are overspending on one category during the month, adjust another category lower so you aren’t going into debt. Our goal is to pay off and stay out of debt forever. One easy way to avoid overspending is by using the cash plan. For categories like groceries, shopping, gasoline, fun money, etc. put the cash amount you have allocated in an envelope. Once the cash is gone, so is the spending! Keep that debit card put away! It’s way too easy to swipe and overspend.

The Bottom Line

In their book The Millionaire Next Door, Dr. Thomas Stanley and Dr. William Danko found that one common trait of all millionaires was that “they allocate their time, energy, and money efficiently, in ways conducive to building wealth.” What’s conducive to building wealth? Staying out of debt and knowing where it all goes. Spending money on paper, giving every dollar a home, now that’s efficient.

Putting together a zero-sum budget isn’t easy at first and it probably isn’t all that fun (at first). But doing things the old way, over and over, will continue to deliver the results you don’t want. Take an hour before the beginning of each month to put together a budget, your future self will thank you.

All The Best,

John

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