You know that you need to make a budget. It’s been attempted in the past. The result? A dumpster fire. It resulted in marital friction, a bruised ego, and a sense of hopelessness.
It’s time to put those bad experiences in your rearview mirror. Let’s take a fresh look at the dreaded “B” word and get back on the horse.
Here are 7 easy steps to make a budget your BFF.
- Write Out Your ValuesDetermine Your Income
- Determine Your Revenue
- Calculate Your Expenses
- Think Strategically
- Prioritize and Make Trade Offs
- Don’t Forget to Pay Yourself
- Pivot When Necessary
Different Types of Budgets
There are three unique budgeting types.
The first type is a deficit budget.
I began my personal finance journey alongside Crown Financial Concepts.
Crown taught the zero-based budget concept long before Ramsey Solutions. However, my outflow exceeded my income which resulted in a financial deficit. Zero would have been nice!
Financial deficits can be cured in three ways: 1) More income 2)reduced expenses or 3) both.
The second budget type is a surplus budget. In a surplus budget, income exceeds expenses and there is a surplus of money. A surplus is much better than a deficit but both can be dangerous.
Many Americans default to the surplus budget method. Well, they don’t actually create a budget but they live as if they do. Since there is no budget the surplus is often squandered.
The third budgeting type is the zero-based or balanced budget method. In this method, each dollar is assigned a task to perform.
As such, one’s entire income is spent on paper prior to the beginning of each month.
I believe that the zero-dollar budget type is the best budgeting method.
Why Budgets Fail
Budgets primarily fail because of a lack of execution. Putting a plan on paper is easy. Executing the plan will not always be easy.
What Is The Simplest Budgeting Tool
Dough Roller has done some heavy lifting and sifted through many app-based budgeting tools. They’ve inexplicably excluded Every Dollar by Ramsey Solutions, though. Here is a link to Every Dollar.
I’ve personally used Mint and Every Dollar. I use neither now.
I was teaching a personal finance class at Cornerstone University at one time and Mint was part of the curriculum. Reluctantly, I signed up for it.
Mint is considered to be a free option. There is no such thing as a free lunch. You are the product.
Information is extremely valuable to companies. I’m not a fan of allowing tech companies unfettered access into my spending habits.
I used Every Dollar when my financial coaching practice was 100% aligned with Ramsey Solutions. It’s a popular app and is used by more than a million families.
I was not enamored with it, though. I found it clunky and not overly intuitive.
For safety reasons, I minimize the number of companies who have access to my financial information. Budgeting tools require access to checking & savings accounts, investment accounts, and other information.
Cyber-security is a big deal and hackers are legit.
I refuse to provide companies access to my records. If there is a data breach at any of these companies my passwords and other information will not be compromised.
I use a simple spreadsheet for budgeting. It works for me.
7 Steps to Budgeting Bliss
#1 Uncover Your Money Values
My neighbor recently bought an RV, a new truck to pull it, and a Dodge Charger Hellcat.
We have different values. Neither is right or wrong — they are simply different.
You and your significant other (if you have one) need to uncover your money values.
Dave Ramsey adamantly and effectively opposes debt. That is one of his core values. Millions have adopted his core values without considering their own values.
I encourage you to spend some time and think deeply about money. What are your values when it comes to money?
Be honest with yourself. Write your values down. Refuse to adopt another’s financial values unless they fully align with your own.
#2 Determine Your Income
Each month, determine all of your income sources. Start with what you truly are bringing in each month. If you have one primary revenue source then that’s what you count.
For some, their revenue will be less than their expenses. This is not the time to throw in the towel and give up on budgeting. We’re simply creating a blueprint so sauce down.
Each one of these dollars now becomes one of your employees. Are your employees taking you towards your goals?
#3 Calculate Your Expenses
The easiest way to track expenses is to look at a couple of months of bank statements. It’s easy to guesstimate expenses but that is not helpful. You want an accurate number here not one that minimizes your guilt.
It’s important to consider fixed expenses (rent, mortgage, etc.), variable expenses (groceries, utilities, etc.,) and sporadic expenses (Christmas, birthdays, clothing, etc.).
#4 Think Strategically
Now you have your income and expenses displayed on a yellow pad or spreadsheet. Do you have a surplus or a deficit?
With a surplus, you can begin plugging in some of your “values” into your budget. Let’s say that you want to eventually take a debt-free vacation. That’s one of your values. With a surplus, you can begin squirreling away some of that surplus for a future endeavor.
If a deficit has been uncovered then you must decide how that deficit is going to be met. Can you pick up a side gig or a part-time job? Is it possible to trim some expenses? Can something be sold?
Here’s a good place to think like a visionary. What are some of the things that your household will need? Stuff breaks. Think strategically so you won’t be caught flat-footed.
#5 Prioritize and Make Necessary Tradeoffs
Perhaps Jeff Bezos, Sir Richard Branson, and Warren Buffet do not need to make financial trade-offs. The rest of us will need to make them on a regular basis.
You’ve committed your financial values to paper. Now it’s time to stick to them!
If one of your values is to be a person who practices radical generosity then do it. It’s easier to stick with a budget when we are making trade-offs based on our own values.
#6 Don’t Forget to Pay Yourself First
Our budgets and expenses can easily consume every dollar. It’s imperative that you protect your future self from that miserable existence.
I recommend that you invest in your future even when you’re digging out of debt. Even if it seems like an insignificant amount, do it anyway.
This is what we did.
We were digging out of debt and intentionally strayed from the FPU/TTMM method. The first investment was only 1% of our income into a 401(k). My employer matched that 1%.
#7 Pivot When Necessary
Budgets require practice so continue to practice. The budget is for you. Figure out what works best for you. If you ever feel as though you’re a slave to the budget then reevaluate your implementation.
Importance of Budgets
Any company worth its salt budgets on a regular basis. Budgets are created and then they are executed. Most families will find “lost” money once they begin to implement budgeting.
Stop thinking of a budget as something that constricts and constrains freedom and creativity.
You are your own budget maestro. Take that responsibility seriously and have fun winning at wealth!
I dare you to profit!