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April 23, 2020

How to Create a Budget When You Hate Budgets

Budgets are one of those things that most folks “love to hate.”  Yet, the annoying thing about budgets is…they work, so we have to keep them around.  Well, there are also a ton of reasons why you would WANT to make a budget too, but we covered that last week.

Do you want to know the real secret about budgets?  Creating a budget is not the problem.  Sticking to the budget is the problem.  So, rather than think about creating a budget (complete with ball and chain), we are first going to talk about…

Your Dream Making Machine

Stay with me here.  Good budgets are just a tool to help you make your dreams and goals come true.  Since pie-in-the-sky dreams are the only ones that require no time and no money to come true, you need to be able to set aside money and or time in order to achieve most of your dreams. 

The budget just helps our money flow to the right places to help our dreams come true.  Since budgets are about making dreams come true, we are going to start with a step you don’t normally see when making a budget. (Side note: there are sample budgets at the end.)

Step 1: Write Down All Your Dreams

That’s right. Get your bucket list down on paper.  Whether they are financial dreams (retire by age 50) or dreams that take time (learn to cook great food); time & money dreams (get a college degree) or impossible dreams (become a king or queen of the real Narnia), write them all down.

The temptation will be to finish your list in one or two sittings.  A better idea is to write out everything that comes to mind, then leave your list and a pen out near you at all times so you can add to the list for the next two weeks.  Your mind will work in the background to think about more dreams you have and you can add to the list.  Warning: if you stop your dream list too early, you may add a dream later that will cause you to restart the whole process again, so don’t rush this step.

If you have a spouse or long-term partner, get your lists together.  Any shared dream should go on a combined list and get removed from your personal list.  Now look at your list again.  You may have added a few things you can chalk up to “brainstorming,” and you may not really want them on your list.  Think about things like “is this really my dream or is this someone else’s dream for me” and “I may want to watch that Monte Python movie till I can quote the whole thing, but I don’t really love it that much to be on my list.”  When you have a solid list, go to the next step.

Step 2: Prioritize Your Dreams

Some dreams are more important than other dreams.  Put your dreams into three buckets: dreams that are super important to me, dreams I would like to achieve, and dreams that would be nice to come true.  Start with your shared list if you have a special someone and when you are done with your shared list, move on to your personal list.

Again, let’s not rush this step.  In fact, you may want use a pencil for this step as you think about the list and keep moving a particular dream from one bucket to another.

Plan on taking 1-2 weeks to work through prioritizing your dreams.  Even if you set your priorities in one sitting, let the list sit for several days and then read it over again.

Step 3: Estimate the “Investment” to achieve the dream

For every dream you have, take a guess, even if it is a wild guess, of what it will take to achieve each dream.  Your biggest dreams will often take the greatest amount of time and money, but that is alright, because the things of greatest value in life often take more time and money to acquire.

Step 4: Figure Out Your Current Income and Outgo

Get all your current income (after tax withholdings) and expenses together.  Make sure you write your base pay separate from commissions and overtime.  When you think of your income, make sure you include all sources of income you can count on, such as investment income, pension income, child support, alimony, etc., income that will come every month, guaranteed.  Also, write down what your actual expenses are and not what you think they should be in the future.  We are just collecting information at this point; we are not actually making the budget yet. Finally, when you write down your expenses, put them into two buckets:

  1. Essentials – Stuff you can’t live without
    1. Housing (mortgage, rent, utilities)
    1. Basic Food (does not include eating out)
    1. Basic Clothing (what you need to live and work, and not a thread more)
    1. Transportation (car loans, gas, maintenance, repairs)
    1. Insurance (Auto, Home/Renters, Life, Health, Dental, etc.)
    1. Phone Bill
    1. Regular Medical Bills
    1. Minimum debt payments (not including your house payment or car payments)
  2. Everything Else
    1. Charitable Giving
    1. Entertainment
    1. Eating out
    1. Fun shopping
    1. Vacations
    1. Investments
    1. Any other expense that is not an “essential”

You likely get at least two paychecks a week, and most of your bills probably roll in monthly, so a bulk of the numbers you can get by just looking at the last month. Yet remember some things such as Christmas presents, some insurance premiums, and property tax bills happen yearly.  Finally remember you have irregular expenses, such as car repairs, that can have big swings from month-to-month and year-to-year.

Step 5: Put Your Numbers Together

Feel free to get help on this step and use a spreadsheet or a budgeting app if you would like.  You probably have a friend or family member who is good with numbers and is technology savvy, so feel free to ask that person for help as well.

We are going to walk you through the old paper and pencil method which will also work with a spreadsheet.  We are also going to break it up a little differently than some budgeting programs, so you think about your funds a little differently.

Put Your Base Pay At the Top of the Page

Using your take-home pay, put at the top of your sheet only what you know for 99.9% sure you will make every month.  Do NOT include overtime, commissions, or anything else yet you can’t count on.

If a majority of your income is commissions, then please use an amount you can always count on receiving monthly from your commissions as part of your base pay.  If you have commissions that have wild swings from month-to-month, you can still make a budget work, that is just a situation that is beyond the conversation for what we are covering in this blog post.

Put Essential Expenses Next on the Page

Write down each essential expense in small buckets (like mortgage, utility, food, etc.) in one column and in another column keep a running tally, subtracting the expense from your take home pay.  Add minimum debt payments last.  You should have a positive number in the running total column when you are finished adding all of your essential expenses.

For expenses that don’t come every month, figure out what they would be if you paid for them monthly, and use that number.  An example would be taking your yearly insurance bill and dividing that number by 12.  As we use the budget, you will set aside a month’s worth of every irregular bill regardless if it is due that month or not.

What happens if your running total goes negative after you go through your essential expenses?  That’s a great question, because we definitely have a problem since your guaranteed outgo is bigger than your guaranteed income.

First, verify your numbers are correct.  Double check your take home base pay.  Double check your “essential” expenses really belong in the essentials bucket.  Double check your running total.  If all the numbers check out, then we have a hard conversation coming.

You May Be Living Beyond Your Means

If we hit a negative number too early in the process, you are at risk of not paying all your essential bills when the economy is down and all you can count on is your base pay.  So, now, before we get to the rest of the budget, you should figure out how to make your base income greater than your essential expenses.

While being in this position really stinks, it is better to know where you are at so you can make changes now leading you to a better financial position.  Without knowing, you are just on a crash course with trouble coming your way.  Let’s talk about some potential changes.

You Can Decrease Your Expenses

You may be able to live in a more modest house or apartment.  You may be able to trade in your vehicle for something with smaller payments.  You may be able to negotiate down some old debts.  It is usually easier to reduce expenses than it is to make more money.

You Can Increase Your Income

If you make more money, you may solve your problem.

You Can Go See a Financial Counselor About Your Budget

If you make as much money as you can make plus if you have decreased expenses as much as possible, you will need to do something drastic, but it will be better to make those changes with the experience of someone who can walk you through the process of making those drastic changes.

Write Down Your Expected Monthly Non-Guaranteed Income

This is where your overtime, bonuses, and any other income you are likely to receive gets written down.  Enter in your likely monthly average.  It is alright if this changes from month to month, we will cover how to handle the monthly swings.  Add this income to your running total.

Write Down Your Remaining Expenses

Keep writing down the rest of your expenses along with the running total.  Start with your regular monthly expenses first, such as your cable bill, video streaming service, and everything else you are locked into a set monthly amount.  Then list all of your monthly expenses that have more flexibility from month to month.

If your running total goes negative, that’s alright, write it down.  At this point, we just want all the facts.  If you write down all your expenses and you still have money left in your running total, write down “To Be Determined” and write what is left so that your running total is zero.

For reference, we are doing what is called a “zero based budget” because we are telling every penny you receive where it is to go with nothing (zero) left over.  Any penny not assigned tends to magically disappear, and since none of us like disappearing cash, we are going to give every penny a home.

Step 6: Before You “Fix the Budget,” Review Your Dreams

This is an incredibly important step, because if you don’t review your dreams, you could “fix your budget” in a way that makes you feel miserable.  Do you want to have a “balanced budget” that has you in a luxury car but eating rice and beans three meals a day?  Probably not.

If you are doing the budget as a couple, make sure you share your dreams with one another again, both your shared dreams and your individual dreams.  Review which of your dreams are the highest priority and be ready to sacrifice some of your less essential expenses to help support your partner’s dreams…after all, all good relationships require some sacrifice on both sides, even if you are just roommates or friends.

Step 7: Start Horse Trading

We need to get both the “essentials” part of the budget above zero and the end of the budget needs to equal zero.  We may need numbers of what will be, rather than what is today.  As an example, if you have $1200/month in car payments, you may realize you can get that payment way down with some more modest vehicles.  Write down what you think you can get your vehicle payments down to within the next two months.

You and your significant other (if you are on your own, those two people may be your “fun me” and your “responsible me”) need to honestly discuss how to make the numbers work.

Most of us can reduce our expenses by 10-20% almost immediately if we just pay attention to what we are doing with our money.  Many people are shocked to realize how much they are spending going out to eat, shopping for clothes, or buying electronics.

Step 8: Work On Making Your Income and Expenses Match Your Budget

Here is a secret to making your budget work. 

Know you are going to fail at it the first month. 

You will find expenses you forgot.  You will have a moment of weakness.  Something always comes up.  Month two will go better.  Month three will go better still.

Just knowing budgets come naturally to no one and that every one of us needs to practice with our budget means you can forgive yourself for a rough start and keep working the budget. After all, struggling with your budget makes you normal, so just know it will take a few months until you feel like a budgeting winner.

Be sure to write down any expenses you forgot during the month.  Also, make sure you also account for expenses that aren’t the same every month.  The easiest way to account for expenses that change for month to month is to use a cash envelop system.  Here is how a cash envelop system works.

At the beginning of the month, take out the budgeted amount as cash

Let’s say you have $1000/month for food and supplies.  Take out $1000 as cash and stick it in an envelop labeled “food.”  Do the same for your “eating out” budget, your “movies budget,” and anything else you can pay for in cash.

Pay for irregular expenses out of your cash envelopes

When you go to the grocery store, pay out of the “food” envelope.  When you eat out, pay out of the “eating out” envelope.

Adjust at the End of the Month

If you are always running out of money in one envelop, either increase your budgeted amount or decrease your expense.  If you have money left over at the end of the month, roll it into the next month’s budget.

Using the envelop system is a ton easier than going back trying to figure out how much you spent from each budget line using a credit card statement.  The figuring is already done.  If you have cash left, you were under budget.  If you had to steal from another envelop, you were over budget.  If neither happened, you hit your budget perfectly!

What to do with Irregular Income

The easiest thing to do with irregular income is to get together once a month with the irregular income number in mind, look at where the budget said you were going to apply that money, and assign a home for that money for that following month.  In other words, look at your extra income received in April and apply it to your May budget.

If you look at the sample sheet, we drew a line where the base pay no longer covers the non-essential expenses.  You only need to figure out how to fund those budget line items “below the line.”

There are all sorts of fancy ways to figure out what to do with the money, but we will talk about two ways. 

There is the “line method,” which means you have a list of items this money can go to in order of priority, and they all have a set amount.  You send money to each priority until you reach the line where you run out of money, and that’s where you end!

Another method is the “percentage method” where you add up all of your non-essential expenses and figure out how large a percentage they take up.  When your extra money comes in, you multiple each item’s percentage by the amount of extra money you received, and you send that amount of money to each budget item.

Many people will have a combination of the line method and the percentage method.  They may set aside $200 for vacation, $50 for Christmas, and $50 for going out to eat.  Then the rest is split as a percentage into each bucket.  They may put 50% into mortgage payoff, 30% into retirement investments, 10% for the “new furniture fund,” and 10% into the “new fishing boat fund.”

Step 9: Have a Full Budget Review At Least Twice a Year

Obviously, you want to check how you did every month, but you also want to set aside some time to see if your budget is still in line with your goals.  Expenses change, incomes change, and even dreams change over time. 

Always start with reviewing your dreams and goals first before you talk about numbers.  Again, your budget is there to help you achieve some of your dreams, and if you don’t keep your dreams at the beginning of the conversation, then the budget may keep your income and outgo balanced, but you won’t feel like you have gotten anywhere in life.