You know you need a budget to manage your money. Right? Well I think you have to start by asking the question what exactly is a budget and what does it mean to have one?
This is the first of a three-part mini course on budgeting. My goal is that by the time we are done with all 3 parts, you will not only have a budget laid out that works for your life but you will have a new, less intimidating way to think about what it means in your life.
This is the first of a three-part series on budgeting. If you want to make sure and know when the next 2 parts are available, CLICK HERE to go to a sign up page and I’ll make sure and shoot you a note when the next part is available.
Today I’m going to start off by talking about why we had a crappy attitude about budgets, how a budget is in your past as well as in your future, and the specific pieces that make up a budget. In that later section, I’m going to give you a worksheet that you can use to come up with the pieces that should be part of what your budget should look like. In the next 2 parts of this mini-class, we are going to start filling in the numbers and assumptions based on the pieces you’ve identified that work in your life.
“Budget” is a bad word
Let’s start with the word “budget”. I think we all cringe at the very word. Looking at your budget feels like an exercise where you beat yourself up. The word makes us feel bad. There is the anticipation that no matter what we do, it’s not going to be right, or not going to be good enough and we will find out we are broke or don’t have enough money. You don’t want to deal with something that makes you feel bad.
Think about it. Does anybody in your house or your office say, “Hey guys, this is so exciting! Today we are going to bang out that budget for next month!” I’m thinking not. You’re more likely to see everyone suddenly volunteer to take the trash out.
But it doesn’t have to be like that.
Let’s talk about what a budget is and what it can mean in your life, and maybe we can create a new way to think about budgeting. First off, a budget is only part of your personal financial plan. It lives along side debt management, saving, investing and retirement planning. Creating a monthly budget will include aspects of all these five things. I think sometimes people think that a budget is another word for a financial plan which would make it a very big ‘thing’.
Your budget should be a tool that helps you make your personal finance plan work. It’s a tool, like your kitchen mixer. Not good. Not bad. But definitely helpful.
A budget is the tool that looks at all the money that comes into your life (other than through investments) and it looks at where it goes. You can have a ‘past’ budget of what happened before today, and a ‘future’ budget of what you would like to happen tomorrow.
So when you break it into those two pieces, maybe it doesn’t need to be so cringe worthy.
A budget can be in your past or in your future
Your past budget captures what has already happened – what’s done is done. Let’s face it. This is usually the way we look a budget (when we look at it) and we beat ourselves up because things didn’t go the way we had hoped or planned. You may have had control over some of your decisions, but you may not have had control over all of them. You can’t change what has happened, but you CAN look at the decisions you made and decide which ones you want to change in the future. Can you feel bad or guilty about some of the decisions you made? Absolutely. Or you can focus on the good decisions you made (and congratulate yourself) and use the not so good decisions as momentum to work towards your future budget. The past budget is where most of the negative emotions come from. It’s also really important to look at what your past budget looks like on a regular basis
Your future budget outlines where your money will come from after today and where it will go to create the plan you have set for yourself for the next year(s). In your future budget, you set goals for yourself of where you want to get to and what you want your life to look like. This is where you lay out what you want your day to day spending to look like to support whatever life style you want for yourself. You get to lay out and see when your debt will be gone. You also get to set goals for when you can retire and know what you need to do today to get yourself there.
Your future budget hasn’t happened yet, so it hopefully doesn’t raise the same feelings of anxiety as you may feel about your past budget. It can give you feelings of hope and confidence and excitement for what your life is going to be. Your future budget is where you plan your way around any landmines that are in front of you. It gives you the opportunity to make the outcomes successful.
What I’d like you to do is to think about splitting your thought process into two parts. Past budget and future budget. As part of this, I’d love for you to focus half the time on the positive, exciting things to come, and the other half (or less) on the things you think you need to beat yourself up about because you made bad decisions in the past. This is a fundamental shift in thinking. I’m not asking you to make your money thinking all hearts and roses; just shifting it a bit in that direction. Over time, you will find yourself in a much better mindset.
The pieces of a budget are practical things.
Let’s get a bit more practical. What are the pieces of a budget? I’m including a link to a worksheet that will help you lay out the parts of a budget that work in your life. CLICK HERE
Your budget has two sides. The first is where your money comes from and the second is where it goes. The money going out will be used for 3 thing:
- day to day needs,
- managing your debt
- saving money so you have enough money to life the life you have planned for yourself in retirement.
The important thing to remember is that the money coming in should balance with the money going out.
For budgeting purposes, money coming in is any money that comes to you on an ongoing, consistent basis. It may include things like:
- wages (paycheck after taxes)
- business profits (after taxes)
- child support
- government funds such as social security
- money from a side hustle or part-time job
I generally don’t include things in my budget that are one-time events. That would be things like a bonus, tax refund, money from a yard sale, or anything else that isn’t consistent in nature. I reserve those as pleasant surprises that I can use to do wonderful things like pay down debt faster, or when that’s done, take a fabulous vacation.
I’d like you to take a minute and create a list of the places money comes from in your life. As I mentioned before, I created a worksheet that you can use to get started. It lists a bunch for you and there is room to add others that I might have missed. You can find a link by CLICKING HERE
If you go to the worksheet you can make a list of the things that apply to your life. You don’t need to worry about number right now. We are first focusing on the right categories. Where does your money come from? Because we think about both future and past budgets, I want you to think about where your money comes from today, as well as where you would like it to come from in the future.
MONEY GOING OUT
Monthly budget expenses include money going out for your daily needs, debt management and saving for your future. Let’s break that down a little further.
Money for your daily needs
Money for your daily needs is broken into two pieces. There is mandatory spending and discretionary spending. Mandatory spending is for the things you need to pay for, for your basic survival. Let’s call them your ‘Must Haves’. It includes things like:
- Child care
- Car expenses
Discretionary spending is for the things you buy that are not necessary for your basic survival. Let’s call them your ‘like to haves’. It includes things like:
- Eating out
Discretionary spending can get interesting because it could also include things from your ‘Must Have’s’ list. Maybe your mortgage is for the three-bedroom house when you really only need two, or you regularly buy gourmet food to entertain friends or your phone is loaded with apps with monthly fees. Depending on how tight you want your budget to be, you can break some of those expenses out in your budget.
Discretionary spending is a first place you cut back if you need to trim spending. It’s frequently a place where you have to make difficult decisions. Let me tell you though, if you have to trim it’s nice to have them on a list somewhere. If you are in trimming mode, it’s not the time to be deciding what’s discretionary and what’s not. If you have a time you need to do some trimming, it’s probably an emotional moment in your life and not one when you need to be deciding what things in your life are must haves versus extras. So during this planning time, it’s a perfect time to put these two lists together.
I want you go to the worksheet, and list the things in your life that for you, are mandatory and discretionary spending. (CLICK HERE it you need a copy). Again, list both the things that apply today, and the things you would like to be part of your mandatory or discretionary spending in the future. It’s good to dream a little when you are budgeting!
Do you see where this future budgeting thing can get to be kind of fun and exciting? You get to imagine adding new and cool things to your life.
Money for debt management
The next section of your budget is money that you need to spend to pay down debt you owe. This could include things like:
- Credit Cards
- Alimony/Child Support
- Student Loans
- Personal Debt
I want you to go to the worksheet and list out your debts that you know you need to plan for. Include the total amount you owe and the amount of your monthly minimum payments. (this is the only place you will do numbers this week)
One of the important steps on your budget journey is tracking your debt and your progress in paying it off. “Debt” is another emotionally loaded word that never seems to have a positive connotation. It usually doesn’t show up overnight and it certainly doesn’t go away overnight. The trick is normalizing it into your financial plan. It has its place. Have a plan to tackle it, follow through on your plan to pay it down (or add it and pay it down when that’s appropriate), and don’t let it consume you. There may be times when it’s appropriate to add it. Maybe that’s a new house or a new car. As long as it fits into your plan, all is good.
The only bad debt is debt you can’t afford.
For the record, I have a mortgage on my home. I don’t stress about it because the payments fit nicely into my budget, and I love my house. I don’t have any negative feelings when I pay that bill each month. In fact, I always pay a little bit more so I feel pretty darn good when that check goes out the door. It’s all about the balance with the rest of my personal financial plan.
Money for saving
The last section of a budget is money you save. This includes things like:
- Retirement (401k, 403b, SEP, IRA)
- Emergency fund
- Anything you have a special savings fund for
Go on over to the worksheet and list out the thing that you save or would like to be saving for.
The saving portion of your budget may be a bit more challenging to figure out. My FAST Management System helps you nail down what your savings plan needs to be for your life. We can’t cover all that material here, but no worries, I’ll give you some general guidelines in the third article.
Congratulations! You’ve just finished the first step to creating a budget for yourself. There are a couple of things I would like you to take a minute and notice.
This wasn’t hard. You have just created an outline for your current and future budgets and I’m betting you didn’t sweat very hard. Take a moment and savor that feeling of confidence that you just took the first step to laying out your plan. Did you struggle with coming up with a list, or was it pretty obvious when you went down the list?
If we go back to where we started, that word ‘budget’ has so many negative emotions associated with it. You just associated a new emotion with your budget. That just made this a really good day.
One final thought. Your budget is an incredibly personal thing. It’s not like your sister’s, your neighbor’s or your best friend’s. The best way to budget is for you create one that’s as individual as you are. It will also change over time. No worries. Once you know how this works, you will be able to let it flow in a way that works just for you. How to budget better will become a no brainer.
If you want to be notified when the next article in this series is available, CLICK HERE and I’ll take you over to a sign-up sheet to be notified.
See you in Part 2! of our mini-course!