You may have grown up with the notion that budgets are fun-killing machines. Maybe you have tried to budget and failed, and then you have become frustrated, and made it rain dollar bills at the mall to make yourself feel better. Or you say to yourself “I know where my money goes so I don’t need a budget” but that account balance does not go anywhere. Or you just can’t figure out how to get started. Well never fear friends, we’re going to break this down in small steps, and make it easier to get the ball rolling.
I am a firm believer that every person on this earth should have a “budget” or system of tracking where your stack of cash is going every month. Whether you are rich or ‘working on it’; you can truly benefit from a budget. I’m not here to restrict you from things you want, tell you to cut back on your daily latte, or throw your iPhone in the ocean. My purpose is to show you how to spend money on YOUR priorities and goals in life. If your goal is to fist pump on the Jersey shore, buy a new car, start saving for retirement, dropkick student loans, or travel the world, then more power to you. Live your life on your terms, with less stress, the budget is just the ticket to get there.
I used to hate the word budget; I wanted nothing to do with losing my freedom to buy the things I want. Eating out, books, work out supplements, man bracelets, button-down shirts that I unbuttoned one-button too many (It’s starting to sound like my goal was to fist pump on the Jersey shore), were all purchases that I made way too often.
I would get paid and go shopping for something I wanted. Let’s say it was a shirt that was $20, I would look at my bank account and say “Hey, this shirts $20 and I have $20, so I’ll buy it”, not taking into account it that it didn’t fit my life goals. That $20 shirt was taking away $20 I could use to travel, invest, or anything else I truly wanted.
I kept up this wonderfully foolish habit when I graduated college and got my first “real job”. I didn’t know where my money would run off to. I would get paid, buy stupid trinkets, gadgets, and doo-hickeys (I’m an old soul), then come to the next paycheck with a low balance and try to figure out how I got there. It was a vicious cycle that drove me crazy; I was determined to figure out how to fix this problem.
The light bulb truly went off when I got married. I was not handling just my finances, but another person’s as well. I had two futures under my control and didn’t want to mess that up. Around that time I started researching how to budget and more importantly a lifelong system that would be successful. I also wanted to find the right tool that would not only help me track my spending and saving habits, but keep me on track. I had been using Mint for a few years, which is a great tool, but didn’t work for me as it automated everything. This led me to forget about it until my next bank statement was really low again. There was no accountability. Then I tried Excel spreadsheets, which was about as exciting as watching your Uncle Bruce take his post-thanksgiving feast nap. So I became unmotivated almost immediately.
Cue my discovery of YNAB. YNAB stands for You Need A Budget and is a budgeting software tool. It wasn’t the software that got my budget gears turning (though it is nice), but the rules associated with the tool.
YNAB has 4 rules when it comes to your budget and you adopt these rules as ways to achieve your personal financial goals.
(1) Give every dollar a job.
Don’t start off by getting paid and trying to guesstimate how you will pay your bills and go to the game with your homies, instead plan your expenses.
(2) Save for a rainy day.
Make sure you have enough cash on hand when surprises come. This includes emergency funds, car repairs, roof leaks, zombie apocalypse, whatever life throws at you.
(3) Roll with the punches.
If you blow and budget category, don’t sit there and cry that you’re a failure and will never be good with money. Roll some extra money over from another category and move on. Once you get good enough, you’ll never have to cry over spilled champagne.
(4) Live off last month’s income.
This is the coolest step as you tweak your budget to get to this point. I get paid bi-monthly (not twice a month), so this happened naturally after 5 months. It is so nice to know that the money I make today will go to next month’s bills. If you do this for 30 years, you will be ahead 72 months, that is 6 full years!!
These rules changed how I thought about money. I started to understand where my money was going before the month began.
I gave every dollar a job. I set categories for expenses I knew I would come across, then like Oprah, every category got some money. You get some money, you get some money, everybody gets some money! This also a great place to figure out what goals you have. My wife and I want to travel to a different country every year, so we have a category called travel. Every month that travel category gets cash that builds much faster than we realize, and we get to achieve our goal to take a vacation and pay with cash. We don’t acquire any debt from credit cards; the money is just there because we gave every dollar a job.
Along with building these categories was figuring out my rainy day funds. This was a HUGE advantage for me as I used to just put any surprise expense that came my way on a credit card and “figure it out later” (That story coming to a Dollar After Dollar near you). Instead, you can be prepared when that day comes. It is inevitable that your car will need to be repaired. You don’t know when, I don’t know when, but it’s going to happen.
Another aspect of planning for a rainy day is making sure you have enough cash for those quarterly or bi-annual expenses. This could be car insurance every 6 months, garbage pickup, or your quarterly dues for the crazy cat lady club. Break those costs into monthly chunks and they will never surprise you.
For example: Mr. Grouch’s garbage pick-up company bills you $75.30 every three months. Create a category in your budget and allocate $25.10 every month to paying the garbage man. It takes the heavy burden off the month when the bill is due. You just get the bill, and the money is already there.
Probably the most important step to my budgeting success was learning to roll with the punches. This is a boxing term coined from a boxer’s ability to roll their body to lessen the blow of a punch. Life is going to surprise you, and even if you plan ahead, it’s going to land a punch to the money-maker. I have yet to have a month where I planned every category perfectly. What you don’t do is beat yourself up; you just adjust your budget. You take some money from another category and put it towards the category you overspent on. The money has to come from somewhere.
So let’s say you allocate $50 a month to your dog’s expenses: food, toys, flea medicine, the whole 9 yards. Then your dog decides to munch on a tasty looking flower and gets sick. You rush the little canine over to the vet and $100 later, bada-bing you blew the budget. Then you look over at your ‘going out category’ and realize there’s an extra $50 in there. You roll the money over to the dog category and carry on without a worry in the world (Waffles the dog feels better too). You won’t set the perfect budget and you have to expect that.
The fourth rule takes a little more time than the rest. This is not something you can implement but something you strive and work towards. You want to get a month ahead on your bills so you don’t live paycheck to paycheck. I can tell you it is an incredible feeling. This isn’t getting a month ahead on your emergency funds; it’s getting a month ahead in cash on all your bills! It will take away the stress of juggling bills that come along with each paycheck and gives you a worry free buffer. Operating your finances by dwindling your account to $100 after all your bills are paid, is no way to live.
These are the steps I’ve used to gradually move forward and operate my cash flow to an ever-increasing amount. You won’t be Bill Gates overnight, but you will see success that is much easier than you thought. Overspending is psychological, under spending is logical. So if getting what you want out of life is boring, then I don’t know what fun is!
Andrew is the host of The Personal Finance Podcast, a show that is changing the way you think about your money. His primary goal with the podcast is to bring as much value as possible to his listeners.
Andrew's favorite free financial tool he's been using since 2014 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free. It has no trading fees and is his preferred way to invest without having to lift a finger.
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