7 STEPS TO A PERSONAL BUDGET
EXECUTIVE SUMMARY
Part 1: Build your Budget
1) GET REAL – don’t lie to yourself, realize that this is a process that will take work, but will be empowering and fundamental to you transforming your life and achieving your dreams!
2) Track expenses – start looking at 3-6 months of spending to develop “average” monthly spending
3) Look for one-time or quarterly items – things like property taxes, insurance, Christmas and Holiday Gifts etc. need to be budgeted for and set aside in advance
4) Set your income - whether you are employed with a steady income stream, commission based, or self-employed, be sure to set a reasonable (after-tax) income assumption
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Part 2: Optimize your budget and DESIGN your Future
5) OPTIMIZE – FLIP THOSE CUSHIONS until you SPEND LESS THAN YOU MAKE
6) Take the extra cash from Optimizing, or from just spending less than you make and set savings targets – home purchase, pay off mortgage early, retirement – its completely up to you!
7) TRACK YOUR SPENDING AGAINST YOUR BUDGET – look at the differences and Repeat steps 1-6 (starting with #1 – BE REAL, serves no one to pretend you are hitting your budget, MONEY DON’T Lie!).
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1. GET REAL
LET’S FACE IT! Unless we are real with ourselves (in any area of our lives), we are going to struggle to get to the root of the problem, and therefore drive change to improve our lives. Of course, this principle applies for budgeting. Before you even set pen to paper and start writing things down, take ownership. Be transparent with yourself about where you are at and take accountability – decide IN ADVANCE that you are going to change and decide that you are going to face your challenges and obstacles head on. Believe it, and YOU WILL DO IT!
If you cannot commit to BEING REAL with yourself, then stop reading this article. You will be wasting your time. GET REAL, take accountability, and DECIDE YOU WILL CHANGE!
To be REAL, you need to look at what you are telling yourself? Here are some typical examples:
1) Debt is a part of life
2) I can’t be successful
3) I have to work a 9-5 job to have security and stability for my family
Look within, look at the stories you are telling yourself!
2. TRACK HISTORICAL EXPENSES
Now that you have committed to yourself (and everyone else) that you ARE going to tackle your financial obstacles and take the challenge head on, its time to start doing the work. So often, we have an idea of what a budget is, but how do we create a good one? Start by tracking ALL your expenses. Look back over the last 3 to 6 months and classify everything into major categories (food, housing, entertainment etc.), then average the total to get a monthly amount. It is important to take an AVERAGE, as we may have a good month (or bad month), but over time, we will get a better “read” on our true spending, and also catch some of the one-off items that may not hit in a certain month.
3. IDENTIFY AND THEN PLAN FOR ONE-TIME/IRREGULAR ITEMS
While it would make life so easy if everything came on a routine basis, where we received bills in the same amount, on a routine basis each and every month, it would make life oh so easy. Unfortunately, that isn’t reality! So what do we do about it? Well, its simple…we put in the work. Start by identifying those items that we receive on an irregular basis (and also that are sizeable enough to warrant planning ahead for – 80/20 rule). Typical examples of these are: property taxes (annual or quarterly), insurance, and medical items. Gifts and home repairs are also considerations for this.
After identifying the irregular items, start to plan. How you ask? Well, take the total expense and determine what you would need to save on a monthly basis to ensure you have enough. So if your property taxes are $2,400 annually, then you should have $200 per month in your budget for this. There are some great budgeting apps out there that can help you create “funds” – in months where you don’t have the expense. Using funds, you can set the money aside, then when it comes time to pay the expense, you pull money from the fund and pay it in full. If you aren’t into technology as much, then you can aggregate all these irregular items into one monthly amount, and transfer that amount each month from your main “operating” account to another savings account (ideally with a higher interest rate). Yes, this is a bit tedious and will take a bit of time…but ensuring you plan ahead for these expenses is critical to achieving your goals!
4. ESTABLISH YOUR (AFTER-TAX) INCOME
You may be asking…isn’t this backwards? Shouldn’t I set my INCOME first? Well in a way yes as you should never spend more than you earn. I have found that by first looking at your expenses and focusing on what you are actually spending, you ensure you are REAL with yourself. What you MAKE, and what you SPEND are two completely different items. While it is important that you SPEND LESS THAN YOU MAKE, remember #1 GET REAL. If you are subliminally trying to hit and “get under” your income, you may not be REAL with yourself on what you are currently spending…this is sabotage at its finest and you may not realize it! Worse yet, when the actually spending comes in, your true behaviours will be revealed and you will be back to square one (or actually behind slightly), as you will be in a deficit.
To set your income, focus on your after tax amounts. For those who work in commission-based jobs, or are self-employed, do your best, but set a number you are 80%+ confident you will hit (hint: use averages and history). It is always easy to spend more, but its not so easy to spend less, especially when we don’t realize until the 20th of the month that we aren’t going to bring in as much as we thought.
I would also note that whenever you have a significant change in income, you should revisit this number and adjust. In some cases, you can look at this on a monthly basis, but in general, I try to look at it on an “average” basis, and adjust only when there is a significant shift in the source of income (eg) going from a full-time job to 2 days, then 1 day a week!).
5. OPTIMIZE YOUR BUDGET – FLIP THOSE “CUSHIONS”
This next step is where the real work gets done. We start to look for new ways to do things, new ways to do more with less, or even get more with the same/the same with less. That being said, remember #1 – as you look at this point, you have to be REAL with yourself, and ensure you can implement the savings ideas you brainstorm. If you can’t sustain the change for the long-term, you will just miss your budget again and then have to revisit later.
When working with clients, I call this step “flipping cushions”. Essentially, you are looking to flip cushions in a couch looking for change. Leave no cushion unflipped…take a look at every area of your budget and see what you can find – even $20 a month that is sustained over the year is $240! Remember you can look at ideas for generating extra income as well as reducing expenses.
This area will be different for everyone, but some thoughts and idea starters:
- Monetize your passion or hobby (Income)
- Secondary rental income by renting out a room or basement? (Income)
- Cut unnecessary expenses such as switching from cable tv to streaming, or dining in (Expenses)
- Buy food in bulk, but be careful to not increase your consumption (Expenses)
As you work through this process, and then after as well, always ask: HOW CAN I DO THIS BETTER? By building a mindset for continuous improvement, the big things will take care of themselves and you will generate velocity in your savings plan, and reach your goals much sooner!
6. LINK YOUR SAVINGS PLAN TO YOUR BUDGET
After completing Step 5, you should be in a position where you have a surplus (your income is over your expenses). If not, then I would suggest you revisit Steps 1-5 (but particularly 5). With the surplus, you have built, you should then allocate this back into your budget as part of your SAVINGS PLAN. Where should I put this exactly? Well, you should start with an emergency fund (3-6 months of expenses), and then ensure you are saving for other goals you have such as retirement (suggested amount of 15% of after-tax income), or children’s education fund. It is critical that you set a long-term plan and vision for your (and if applicable your spouse’s) life – ensure that you link your savings goals to your budget. This will ensure you hit what you are aiming for, and you can transfer the funds to a separate savings account on a regular basis to ensure you hit the target.
7. TRACK YOUR SPENDING
Once you have set your budget, and linked your savings plan to the surplus you have built, you have your BUDGET! With your budget now set, the most important part is set to begin. In reality, even if you spend very little time on steps 1-6, but do this step, you will eventually get to the same place. This is not recommended though as you will waste a great deal of time, and quite likely cost yourself money in the process (so invest the time up front and do your best, it will payoff!). To track your spending, review your expenses (and income!) at least on a monthly basis until you get stability and a “feel” for your expenses. Ensure you are tracking expenses against the budget that was set in advance – and measure differences as one-time or ongoing. Ongoing means you need to adjust your budget. One-time may just be a “one-off” expense, or may mean you need to look at #4 again and adjusting accordingly (look for one-time/irregular items).
Building a personal budget takes time, and dedication. Just remember when you face an obstacle, or start to lose motivation that it is worth it to persevere. By setting a personal budget, you are deciding to TAKE CONTROL of your finances and ultimately your future. By understanding your spending, optimizing your budget to create a surplus, and then turning that budget surplus into a savings plan, you will ensure that you best set yourself up to transform your life and achieve your dreams!
Want more info? Check out the September HOPE Sessions (September 8th and 22nd), register here: www.eventbrite.ca/e/395891079877
YOU CAN DO IT! TAKE CONTROL OF YOUR FUTURE!
EDUCATE. MOTIVATE. INNOVATE.
IN YOUR CORNER.
