Budgeting: it’s the first thing most people ask me about. So let’s figure out why everyone struggles with budgeting. Budgeting is like exercising, and a lot of people fail at both because they set unrealistic expectations. We plan for what we think we should do instead of making realistic plans. That’s why your budget fails, so let’s talk about what to do instead.
How most people make a budget: the wrong way
I have seen many budgets and they all look something like this:
- Write out spending categories.
- Write down how much you want to spend in each category.
- Add up the spending and make sure it’s less than income.
- If spending is more than income, lower the areas that you feel should be less.
- Repeat the last step until spending is less than income.
- Look at the budget in 6 months and wonder why your savings account isn’t filling up.
Does this sound familiar? This is the way most of us instinctually approach a budget. It’s the way I did it for YEARS. And it’s completely wrong. In fact, it’s setting us up for failure!
Walk before you run
It’s tempting to choose a goal*, then run at it, full speed ahead! The thing is, when we do that we miss a bunch of steps. Look at these two approaches:
- I should exercise an hour every day. I don’t exercise at all now, so I’ll exercise an hour every day starting tomorrow.
- I should exercise an hour every day. I don’t exercise at all now, so starting tomorrow I’ll exercise for 10 minutes every day. Then next week I’ll bump it up to 20 minutes, the week after I’ll do 30 minutes, etc.
Which of these do you think is more likely to succeed? We’ve all tried #1 at times, but I’m thinking #2 is more likely to work. #1 will lead to injury, burnout, and frustration. On the other hand, the slow and steady increase in #2 is headed towards success.
Your budget should be done the same way as #2. Slow and steady. If you’re spending more than you earn right now, don’t expect to start saving $5000 per month overnight.
“Shoulds” destroy budgets. Is it really necessary to exercise an hour every day? Do you really have to save $5000 per month? Does your grocery budget really have to be a certain amount? I can’t tell you how many times I have been asked how much someone “should” spend on groceries every month, as if there’s one specific answer. Here’s what I tell them:
It depends entirely on your situation. I can answer questions about extremes – $800 per month is too much for one person – but beyond that there are so many variables. How many people are you feeding? Do you host guests often? How expensive are groceries in your area? How much do your household members weigh and how active are they? Because an active person who is 6 feet tall will eat a lot more than someone like me, who is inactive and is only 5 feet tall.
The point is, there’s no single answer – there’s no “should.” So it’s time to walk away from your “shoulds.” Start with no expectations and you will see an enormous increase in success.
Set yourself up for success
If the old way is wrong, what’s right? Go back to the idea of daily exercise. We agreed that approach #2 made sense – to start with 10 minutes of daily exercise. But what if you already exercised 30 minutes a day? Then you would need a different approach, right? Let’s apply that to your budget.
Before you make a plan for the future, you have to know your present. Read this to learn how to track your spending and start doing it today. As in, TODAY! Yes, it’s annoying. But isn’t it worth a little annoyance to get some money saved up? Believe me, I know a lot of people in debt who, if I offered them a time machine to fix their money problems and said the only catch was that they had to spend a few minutes per day tracking their spending, they’d do it in a heartbeat. Give it a try and you’ll see that it really isn’t so hard, and it’s totally worth it. (Hint: If you can’t spend 5 minutes per day tracking your money then you’re not ready for wealth.)
Then, use those numbers to fill in a chart of how much you spend now on average each month. The “on average” part is super important. Our spending varies month to month, so you need to look at a full year of spending and then divide by 12 to know what you really spend on average every month.
Obviously, you don’t want to wait a year to do this. For now, use this shortcut, but be warned: this is not a substitute for tracking your spending. You won’t find long term success with this method. Thankfully, though, it’s enough to get you started. You can fill in more concrete numbers as your tracking progresses.
Make a chart, like the one you will probably use to track your spending (see above.) Write your spending categories across the top and then put amounts in each category. You can create more categories as needed as you go along. There should be very little in the “miscellaneous” category. Now pull out your credit card and bank statements from the last year and fill in the amounts under the appropriate categories. Then add it all up and divide by 12 to get a monthly average. This isn’t the most glamorous exercise, but it’s immensely helpful and it can be done in an afternoon. Trust me. You’ll thank me later.
Adjust, don’t cut
After doing the exercise above, now you have important information: not only how much you spend, but where you spend your money. There should be a few surprises in there. One client discovered she spent a lot more on her morning coffee and pastry than she realized. Another was shocked at how much she was spending on manicures and pedicures. As for me, I hadn’t realized how much a couple dollars here and there for snacks could add up. Oops.
The important thing is, now you know!
Make a new chart (below.) Put your categories down the side of the paper and have two columns: the first is your current spending and the next is your new planned spending.
But wait! Remember our conversation about “shoulds”? This is where it comes into play. Don’t look at your eating out spending and decide you “should” cut that in half. Instead, think realistically about how many times per month you will eat out from now on, multiply that by your typical eating out costs per meal, and put that in your new goal column.
What that looks like:
You just discovered that your eating out category is $500 per month. You’re tempted to say, “That’s absurd! I should just cut that down to $50.”
That sure sounds nice, but will it work? Look at the $500. Where are you spending it? If you eat out for lunch every work day and for dinner twice a week, then you need to make some lifestyle changes. Maybe dinners out are no big deal, so those are easy to cut, but lunches out are harder. Aim to cut back your lunches out to 3 times per week at first, then bump it to 4 times per week, then allow yourself Fridays out with the girls, since that’s a standing date. You look at your calendar and plan to go grocery shopping after work on Wednesdays and do cooking on Sunday evenings.
Now your plan is calculated, not arbitrary.
Make sure all of your new goals* are calculated. Specificity is your friend here. If you’re going to spend less on clothes, how will you do that? Will you stop shopping altogether? Will you shop your closet? Will you shop at thrift stores instead?
Nothing is off limits
It’s easy to go through the categories and say that something can’t be changed. But can it? At this stage, nothing is off limits! Consider everything. Can you save money on your cell phone bill by changing providers? Can you lower the electric bill by using a different kind of light bulb? If you’re on my email list (and if you’re not, sign up at the top of the page!) you might remember my client Rob, who said he couldn’t cut his dog’s medication (and I wouldn’t want him to!) I encouraged him to look online and he found the name brand for $50 per month cheaper than what he was paying the vet. Be realistic, but be firm. Try to lower every category.
While you will probably need to cut your entertainment budget at this stage, be sure to leave yourself a little fun money. It’s important to have that, even when it’s a small amount. An entertainment budget of $0 is likely to leave you feeling deprived and more likely to accidentally splurge.
Remember the WHY
This part of the budgeting process is hard, but it helps to remember your goals*. Why are you doing this? Are you saving up for a vacation? Getting out of debt? Planning for retirement? Getting ready to have kids? Buying a house?
Write your goals* at the top of your chart. For every expense category, ask yourself: would I rather put my money towards this, or towards my goals*? Cutting cable sucks. But cutting cable to buy your dream house might be totally worth it. Only you can decide. Go with your priorities.
Remember, you have a limited amount of money, so choose wisely where you’ll spend it. In 10 years, where will you wish you’d put your money?
Adjust your income
It is not only your spending categories that need to be adjusted, but your income categories also. Track your income when you track your expenses. You just might be surprised by the little bits here and there that are coming into your life. Next, brainstorm ways to earn more money. Again, don’t go with “shoulds” but make specific plans.
What that looks like:
You would like to make at least $300 per month, so you’re tempted to say, “I’ll to sell $200 worth of items every month and babysit for the rest.”
Instead you get specific. You figure you can post items online 2 evenings each week, and you believe you will find 5 items to post each time. Those will probably add up to about $150 each month for 2-3 months. As for babysitting, you write a list of 5 locations you will advertise your services. You ask around and discover you can earn $10 per hour babysitting. In order to make $150 per month, that is 15 hours. You figure 1 gig each week will cover that, and you will aim for a second gig most weeks to bring a bit of extra money.
Again, you now have a calculated plan instead of an arbitrary one so you are much more likely to succeed.
Be creative in coming up with other ways to increase your income. Check out my posts on the subject and join the Nest Egg Chick Facebook group for more ideas and support. Search on Pinterest and ask your friends. There are a lot of ideas out there. Just be sure your plan fits in your schedule.
Now create a chart like you did for expenses. Put in your current income and your new planned income.
Does your plan add up?
Add up your new planned income (be sure to account for taxes) and add up your new planned expenses. Is your income higher than your expenses? Is there enough of a difference for you to save for your goals*? If not, you will need to change either your income, your expenses, your goals, or some combination of those.
Keep adjusting the numbers until you have a plan that adds up, but only make changes that are realistic. There’s no point is saying you will cut out your entertainment budget altogether when you know that you really won’t. What’s the point in that? Then you’re going back to the version that sets you up for failure, guilt, and stress. Instead, make realistic small adjustments, and remember that you can make bigger changes later on.
Turning your new plan into a successful budget
Congratulations on your new plan! Now it’s time to turn that plan into reality! Because a plan on paper is pointless if you don’t take action it, amiright?
The first step is to make all of the changes to your lifestyle that you lined up for yourself. Post those babysitting advertisements. Make meal plans. Get new cell phone provider quotes. Make a list of what needs to be done and plan to do one thing per day. You’ll make slow but steady progress.
Track your income and your expenses. That’s how you will know if you’re on track. Go back to that first chart and make one for each month. At the top of each column, write down your new budgeted total for that category. As you fill in your earning and spending through the month, keep a running total to see if you’re staying in budget. If you’re not, don’t bury your head in the sand or hope it will magically work out. It won’t. Instead, make a plan and fix it.
The first month will be hard, but stick with it! Because it gets easier. I promise! And as it gets easier, you will see your debt shrinking and your bank account growing, and that will spur you on to make the harder changes that will be necessary as you continue the journey.
Keeping your budget fluid
It’s tempting to make a budget and then assume that it’s your final budget, at least until your income or rent changes, but that’s not realistic. Life changes, so budgets change. Remember that you can change your new budget at any time. The beauty of this system is that you now know how much you are earning and spending each month, so if you want to budget a bit more for eating out and a bit less for movies, you know what numbers you’re starting out with. Just make sure the totals add up ok, and you’ll do great!
It’s easy to skip a day at the gym, feel guilty, and then never go back. Then we never get into shape. It’s the same with your budget. If you mess up one day and blow your budget, don’t let negative feelings stop you from starting again. Don’t give up on your financial freedom. Mistakes suck, but they happen to all of us. The important thing is to not let them stop you. When something goes wrong, dust yourself off, get up, and get back to it. Because YOU’VE GOT THIS!
Take it to the next level
In the coming weeks (Spring 2017) I will offer a workbook to guide you through this process. Sign up below so you will be one of the first to know when it’s available!
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*If you don’t already have an emergency fund, be sure creating one is your top goal. Otherwise, the first emergency you encounter will completely derail all of your wonderful new budget plans. Aim to save at least $1000 in an emergency fund before you pay off debt. Once you’re debt free, grow that emergency fund to cover 6 months of expenses.