“How can I budget my money better?” I get that a lot.
I know how stressful managing your money can be. There’s never just one financial goal to work towards. There’s quite a few.
Becoming skilled with your money is like anything in your life. It have to learn it. We learn it by observing our parents growing up, through the school of hard knocks, or through a mentor.
That’s why I’m here to help.
There are many benefits to managing your money better. Those that manage it well develop financial security. They know how to:
- Pay their daily living expenses
- Keep their debts manageable
To help you budget your money better, I put together six easy steps for you to follow:
Step #1: Start with Goals
Before I can begin to budget my money better, I need some goals. What do I hope to achieve by creating a budget?
A budget will help you put your money to good use. But crushing your financial and life goals will long-term happiness.
To help you think of meaningful goals that will better your life, try this exercise:
Write down 5 things you want less of in your life. You might come up with something like:
Things I want less of in the next 12 months:
- less unexpected bills
- rushing last minute
- lack of confidence
These were some things that I came up with a few years ago. Today, I have to say that I’m pretty happy with my life in these areas.
Next, write down 5 things you do want more of in your life. Here are some things I came up with:
Things I want more of in my life in the next 12 months:
- Build my new business
- Make new friends
- More money
- to blog
I learned early in life that I could have anything I want in life —as long as I paid for it. That still rings true today.
If you want to travel more, then create a dedicated travel/vacation fund. The start building up the savings today.
Would you like $2,000 each year to travel? Set up an automatic transfer from your bank account to your travel fund. You’ll need to save $88 from each paycheck (if you’re paid every two weeks). You’ll have the money this time next year.
Stop using debt to fund your travels and don’t burn your tax refund.
Step #2: Find your starting point
Have you ever been so lost while driving? I do. I’d be driving — paying attention to the road — but my mind drifts off. Before I realize it, the route doesn’t look familiar.
Has that ever happened to you? I’m sure I’m not alone.
When you’re lost (in travel or money), all sorts of emotions start to crop up: fear, anxiety, anger.
People feel similarly towards money when you don’t know how much you have in the bank. They’re scared that purchases will get declined. They get anxious when they don’t know how they’re going to pay the bills. And they feel angry (at themselves) when they make a mistake.
This all could have been avoided if they only took the time to understand how much they make and spend. I talk to a lot of people about their money. Very few know exactly what they make in a year.
For this reason, your income is your starting point.
To find your starting point, download my Monthly Budget Sheet.
Download and print it. List your income on the worksheet (bottom left of the page). If you have a side hustle or income from rent, add it in.
For most people, this is simply your take home pay from your job. If you’re business owner, add what you pay yourself. Add in all the cash that I know you probably don’t claim as well. (Please note that I don’t support not claiming cash).
If your income is variable, take your average. If you don’t know your average, break out your tax returns and figure out what you claimed for the year and divide by 12.
Step #3: Add up your typical monthly expenses
Using the same worksheet, start filling out your typical monthly expenses.
Let me share with you how I have my students fill out their expenses. First, I have them write down what they think they spend. Put that in the “Budget” column for each item.
For instance, if I think I spend $100 a month eating out. So, I’d put that in the “Budget” column of “Eating Out”.
Got it so far? Great. Let’s move on.
Next, break out your monthly credit card and bank statements. We’re going to find the real numbers.
Review every transaction. Circle the transactions that aren’t routine monthly expenses. Enter the rest on the the Monthly Budget worksheet. Compare what you thought you spend to what you now know you spend.
How close were you?
My students are surprised to find that they spend twice as much as what they thought.
Complete the rest of the Monthly Budget worksheet. While you’re reviewing your transactions, add them to the Finance Calendar worksheet (pg. 18). Add all your fixed expenses like your student loans, rent/mortgage, and utilities.
Step #4: Add it up
Take your income and subtract your expenses. What does it look like?
Are you making more than you spend? Spending more than you make? Or are you breaking even?
If you’re making more than you spend, that’s awesome! You have some money to save. But hold off on the high fives just yet. You may still have room for improvement. Start putting some of that extra money to work. Review your financial goals in Step #1.
If you’re breaking even every month, this could mean that you’re getting too comfortable. You’re doing what’s called, “Lifestyle Inflation”. It’s where you take the extra money that you earning and spend it.
Revisit Step #3. Break out those statements again.
If you’re spending more than you make, you’re leveraging debt to make ends meet. You’ll need to run a tight ship for a little while until you figure out where you’re bleeding money.
Print out your bank and credit card statements for the past 3 months. Go over each transaction. Circle transactions that weren’t necessary for survival. Focus on transactions under $20. Purchases under $20 tend to bypass our buying filter.
Add up all those purchases. If you can cut those out of your budget next month, you can redirect it to savings.
For most people, there is always money to save. It just requires a little treasure hunt through those statements.
Step #5: Put Your Budget into Action
Next, you need to put your budget into action. You’ve identified and set goals. You know what you make and what you spend, as well as a tip on how to free up some cash.
Now you need to set up automatic savings for each of your goals and monitor your cash flow. Make sure that you’re not saving in one area of your financial life at the loss of another area.
It might take a little while to get used to managing your money this way, but it’s worth it. Stick with it and you’ll start to see some great results.
Step #6: Monitor and Adjust
Every good plan involves monitoring, periodic reviews, and the adjustments. Your budget and spending plan is no different.
It can take two or three months for you to feel confident with everything you’ve set up. You’ll learn to trust the automatic transfers to fund your dreams and goals.
Sometimes you need to make temporary changes to your budget. A situation may come up that you couldn’t foresee or avoid. You might be invited to attend a wedding —or asked to be a member of a wedding party.
When these events come up, don’t panic. Give yourself some flexibility. Give yourself permission to make changes. Make the adjustments to your budget and monitor the change.
On the other hand, if you know that you cannot commit to being in a wedding party, decline the offer. You might regret saying yes, to find out that you have to throw in a lot of money.
I remember speaking to a group about saving money. One lady in the crowd told me, “That might work in theory, but in real life —at the end of the month — there’s no money to save”.
She told the group this as she was holding a large specialty coffee from Starbucks.
I asked her how much that drink was. It was $4.75. I then asked her how many cups she buys in a day. Her girlfriend laughed and answered for her. “Two — sometimes three”, she shouted, chuckling.
Let’s round it up to $5. She was spending $10-$15 a day.
I broke out my financial calculator and punched in the numbers.
$10 x 5 days a week = $50 per week
$50 x 52 weeks = $2,600 a year
If she only invested that money, assuming a 10% return (investing in low-cost funds)… Over 30 years… she could have
And that’s not including the coffees she most likely picks up on the weekends.
Her jaw dropped.
“My coffee is costing me $427,000?”
Now I’m not saying that you can’t have your specialty coffees. Just be aware of what they’re really costing you. In this situation, that lady’s coffee is costing her a beautiful vacation home on the beach.
What about you? What would budgeting your money better help you to achieve in the next 12 months? 24 months? What about in the next 5 years?
As a financial mentor and coach, I can help cut the amount of time and money it would take you to achieve your goals. Schedule a free coaching session with me.
I want to hear from you
Do you have a money question? If so you can drop it in the comments below or ask me privately. If it’s good enough, I’ll answer it and mention you on my next Q&A Tuesday on TommyTV.