DJC#008 – The B-Word: Go Ahead & Say It

Son of A Budget

After becoming aware of your income and expenses and then moving on to figuring out your money dials, the next step is to create…dare I say it…a budget.

There are plenty of people out there (including that smart guy I mentioned last week who came up with money dials) who say you don’t need one of these budget things. For some of you, that might be the case…eventually. But if you’re embarking on this exploration of becoming financially fit, then creating and following a budget is a must. This Dad here has been keeping some form of a budget for 15 years easily. It’s evolved, it’s been in the red plenty of times, but I’m always aware and making adjustments when able.

A budget is really just a financial guide helping you along your journey. Setting up rules and guardrails to keep you from blowing your paycheck on everything that the marketing teams of the world can throw in your face. It’s not there to scold you for spending too much this month. It’s not there to cause a fight with your partner (although it can). It’s there to make you aware of how much you spent this month so that you can know it’s all good, or if you need to make adjustments going forward.

Have you ever heard of the 50/30/20 budgeting rule? It is a budgeting suggestion where:

50% of your income goes to needs
30% of your income goes to wants
20% of your income goes to savings/investing/debt repayment

It can definitely be a good place to start and then customize to your personal situation.

Having a budget can do so much more than just tell you that you only have a fixed amount of money to spend on certain categories. It can:

Track your income
Track your expenses
Track your savings
Track your investments
Set financial goals
Notice trends
Set aside fun money
Know your net worth

Now let’s dive into these and see exactly how a budget can help with each one.

1. Track Your Income

Having a budget will keep your eyes on how much money is coming in each month. If your paycheck is a fixed amount, then you should easily be able to forecast how much money you’ll have made by the end of the month. If the amount is off, then you know you need to take a look at your check and figure out what the issue is.

If you income varies because you’re commission-based, then this could be a little more challenging to figure out. If you’ve been at your job a while and the sales vary seasonly, then you could take an average of the past few years to forecast each month. Or maybe average the past few months and that works better for you.

The point here is to know what should be coming in and making sure it does come in. This can also be a way to determine if you want/need to start a side hustle. Looking at your income versus your expenses will paint the entire picture and from there you can make those decisions.

2. Track Your Expenses

Now here’s where the real fun begins. No, really. You’ve already put in the work so now you’re aware of how much you’re spending on average each month. Now it’s time to set an amount for each category at the beginning of the month.

A few things to keep in mind here – each month can be different. Is there a birthday gift you’re going to be buying this month? Perhaps an anniversary gift? Maybe you have family coming to visit, so you’ll know you’ll be hitting up all the spots around town. Are you going on vacation? Hopefully you’ve already saved up for this (see #5). Maybe this month is the month you need an oil change? Each month varies, so this is not a set it and forget it approach…especially not when you first start.

Depending on your personal financial situation, this approach of tracking will vary as well. Those on a tight budget and just trying to make ends meet will need to track every penny. If your financial situation is a little more comfortable, and your spending habits don’t vary much, then maybe you can get away without having to know where every penny has gone.

3. Track You Savings

On your financial journey, saving money is an integral part of the equation. Again, depending where you are on your journey this can vary. Maybe you’re focused on paying off student loans and paying your bills on time and don’t have much money to save. I would still challenge you to try to find an area where you can potentially cut back to save at least $50 month. Now maybe that’s not doable right now, but $25 is. Then start with $25 and make it a goal to increase it $5 each month. Don’t get discouraged. I’ve been there a few times in my life as I’m sure many other have been too. Do what you can, when you can and ride out the wave until you find a better one.

If you’re fortunate to be able to save more than $25-$50 per month then you should be doing so. Have short-term and long-term savings and get to know your savings rate. Include your savings as a category in your budget so you track it and make sure you’re paying yourself.

A very important lesson about the last statement – always pay yourself first. Set your savings as a category in your budget and pay your savings accounts like they’re monthly bills. Don’t do the thing where you tell yourself you’ll save what ever is leftover at the end of the month. Come on, you know that never works!

4. Track You Investments*

This benefit comes with an asterisk because ideally you want to set your investments and let them be for the long-term. Unless your job is a day trader, then you really shouldn’t mess with your investments.

However, having your investments as part of your budget can be fun to see when you have dividends paid out, or your stocks/funds go up. It can also be quite the opposite when you see them dropping like your stomach on a rollercoaster. The glass half full way to look at that situation is that you’re now buying them on sale!

5. Set Financial Goals

A major pillar of personal financial success is setting financial goals. Being able to pay for something in full should always be the goal. Then why don’t we do this as regularly as we should? We buy things on credit knowing we can’t pay off the credit card statement in full when it comes next month. We are a society of we want it now. Remember the character Varuca Salt from Willie Wonka & the Chocolate Factory? “Daddy, I want a golden goose and I want it now!” Yeah that’s most of us.

If you know you want to buy something that’s outside of your normal monthly spending, then I urge you to set a savings goal. I also recommend opening a savings account (some banks may have sub-savings accounts) for each goal. This way it’s in its own cocoon turning from a monthly contribution caterpillar to one day reaching the goal and becoming the purchase butterfly.

Here’s one that I think most people can relate to – Christmas gifts. You know you’re going to buy them every year, right? Do you save up for them throughout the year, or do you find yourself scrambling in December? Do you then end up putting them on a credit card that’s going to incur interest because you can’t afford to pay it in full?

Do this instead – set a budget on how much you’ll spend on gifts this year. Divide that amount by 12 for each month (or however many months are left in the year when you start this practice). Now open a savings account and name it Christmas Spending and then set up an automatic transfer each month to that account. When the holiday shopping season comes around, transfer that amount into your checking account either in full or as you buy gifts. December scrambling averted!

The great thing about this method is you can literally do this with any financial goal you set: new car, house, family vacation, wedding, event tickets, anything – you name it. My wife and I even have a savings account for house maintenance. We transfer money into that account each month, and when we need to fix something related to our house, we transfer that money back into our checking account to pay for it.

6. Notice Trends

By staying on top of your finances throughout the month, you’ll quickly be able to notice any trends. Woah, we’ve spent a lot of money on eating out this month. Maybe we should scale it back the rest of the month. Or what’s this charge I’m seeing on my bank statement? I need to look into that. And on the flip side it could be – oh wow we’re actually coming in under budget every month. What should we do will the extra money?

If you are not paying attention to your finances, you’ll never spot the trends until you’re well into the trend. By that time you may have been spending too much, paying for things you shouldn’t, or wasting a change to spend or invest some extra money.

7. Set Aside Fun Money

Find a way to set a budget category for fun each month. This is something to look forward to for your family. This can be to an event for the whole family, just Dad and the kids to give Mom some time to herself, date night with you and your partner or with a person you’re getting to know if you’re single. Maybe it’s taking the family out for ice cream night once a month. The point is that it doesn’t have to be expensive. It’s your money dials and your budget, so you decide what you value and what you can afford. Whatever it is, make an effort to spend that money and have fun.

8. Know Your Net Worth

Another part of budgeting is that it allows you to keep tabs on your net worth. This is a total of all of your assets (checking accounts, savings accounts, investment accounts, retirement accounts, real estate, vehicles, etc.) less any liabilities or money you owe (loans, credit cards, etc). While it’s not something you necessarily need to regularly know, it is kind of fun to keep track, especially when it goes up.

This Is The Way

So now that you understand the importance of creating and maintaining a monthly budget, it’s time to start. You can do this with a pen and a pad, an Excel workbook might be your jam, but there are some great tools out there that really make this exercise easier for you. Here are a few I want to focus on :

Mint
Empower
YNAB

My favorite go-to is Mint. It is a free service that allows you to pull in all of your accounts into one place and view all of your transactions, while setting up a monthly budget and seeing your progress throughout the month. There is a ton of standard categories, but you can also customize your own along with sub-categories for all you data tracking nerds like myself. Mint tracks your net worth, upcoming bills, alerts if you’re over budget or have a higher spending trend in a certain category. It will also show you weekly breakdowns of your spending. My favorite feature might be the goals. Create a goal, set a due date, set an amount and Mint tells you how much you need to save and will track it. The easiest way to do this is link a separate savings account to this goal and then goal get it!

Two others that are also very good are Empower (formerly Personal Capital) and YNAB (You Need A Budget). I used Personal Capital a while back before I really went all in with Mint. It is free as well and has a lot of same feature, but doesn’t have the deep dive features for budgeting Mint does in my opinion. It does have some cool charts and graphs though so if you’re into charts and graphs, it might speak to you. YNAB is a paid service ($8.99/month billed annually or $14.99 billed monthly at the time of this newsletter), but does have a free trial period. I’ve read and heard on podcasts about users who love YNAB. It’s based on a methodology of budgeting and assigning every dollar a job. Definitely could be useful for some of you to check out the free trial and see what you think.

Budget Better Have My Money

Knowing how and the why along with the benefits of budgeting plus some tools to use, you’re now on your way to tracking and making great financial decisions and adjustments.

But budgeting is boring you say? Then gamify it! Things are more fun when you gamify them, so why not do the same with your budget? Can you hit your numbers each month? Each quarter? Maybe you pay yourself a bonus to spend if you hit your goals (budgeted of course!).

You are the CEO/CFO of your household with your partner (if you have one) so run your personal finances like you’re running a business. Meet weekly or bi-weekly to see where you’re at. Make adjustments when necessary, and don’t forget to celebrate the wins!

Some people find setting weekly budgets easier to manage and stay on track, especially when just getting started. Experiment with different techniques and tools to find what works for you (make sure to write it down in your journal!). But most importantly though – start budgeting today!