Everyone claims they want to take control of their finances.
Nothing is as empowering as knowing your numbers. All your numbers. It makes you feel so grown up — no matter what your age — and so in control.
So why does control feel so challenging to achieve? Because it means preparing a budget. (Or a ‘spending plan’ if that’s somehow easier to say.) Without a budget, how else can you know how much money is coming in, how much is going out, and how much is left for you to use to build that stable financial future you’ve been dreaming about? The answer is that you can’t.
The Four Greatest (Non-) Reasons Not to Budget
The most significant stumbling block is that budgeting is loaded with emotion. And that emotion is what leads us to budget phobia. It’s not that the process itself carries any emotion. Rather, it’s that all kinds of emotions have been laid on it. Here are four of the most common:
Self-Worth Issues: Some people are just too harsh on themselves. They avoid budgeting in case their numbers are messier than they think they should be at this stage in their lives. It becomes a reflection of whether they are ‘good’ or ‘bad.’ But that’s a confusion between net worth and self-worth. Having money has nothing to do with worthiness. Your financial picture is a simple snapshot of a moment in time. It reflects events and decisions made in the past — choices you can change in the future. In fact, a budget is exactly the tool needed to make those changes effectively.
The Blame Game: Blaming someone else for your situation is easier than taking responsibility, whether you blame the economy, a nasty boss, or Big Government. But, the moment you start putting numbers down on paper or into an app, it becomes clear that those numbers reflect the actions and decisions you took. Who ate out five times last week? Who just had to have those ear pods? Once you accept that you made the decisions, you can make more financially-sound ones going forward.
The Shame Game: As long as you don’t know your numbers, you can hide from what you suspect is your financial situation. People attach judgment to money behaviors, using words like ‘irresponsible,’ ‘out of control’, or ‘compulsive spender’, not to mention that having too much debt is looked down upon. So, you hide by not checking bank or credit card statements. While they say, “Ignorance is bliss,” that bliss feels pretty lousy.
Mortal Fear: Fear is nothing other than discomfort about the future. Money fear is discomfort about not having money in the future, whether it’s next week, next decade, or at retirement. And making a budget could show you just how off track you are. But an even greater fear results from being ignorant of your real financial situation. When you don’t know something, you always go to the worst case. Almost everyone is surprised to discover that they are better off than they expected — or that they can get things under control more easily than expected (you can’t fix what you don’t know.) So, ironically, budgets are actually fear-killers.
How Do You Bust Through Those Emotions?
So, how do you get beyond budget phobia? For one, remind yourself that budgets are just numbers. And they can be the life preserver you need to gain control of your financial life, not what’s causing you to drown.
Ironically, knowing exactly how much is coming in and how much is going out will bring you an enormous degree of control — and peace of mind. It doesn’t matter if you are someone who seriously struggles with a very low income where every cent counts, or if you have a higher income but have some crazy spending habits you’re barely aware of.
The process starts with getting open-book honest with yourself and not hiding anything. If you are a cash spender, it may require a 30-day exercise of recording everything you spend, then adding that to information from bank statements, credit card statements, and any other record of spending. If you’re not a cash spender, it’s just a data-gathering exercise.
There are endless reasons why people get themselves into financial trouble (if that’s where you find yourself). From a divorce, to a sudden job loss, to major medical expenses … to a long history of living beyond your means. The reasons aren’t important. What is important is calling today ‘Day One,’ and starting over with a clear picture of the real numbers.
Five Steps to a Basic Budget
Step One: Find an online budget app, or create one on an Excel spreadsheet. The key is to be thorough, so find a detailed laundry list of possible income sources and possible expenses. That way you won’t overlook something.
Step Two: Enter your information. Don’t forget credit card payments, where you’ll use minimum payments in this first exercise. Also, be sure to spread annual payments such as property tax or homeowner’s insurance evenly over 12 months, even if you pay them yearly.
Step Three: Add up your income sources, then all your expenses separately. The minute you see your inflow and outflow numbers, you’ll know how much work you have to do to get them into alignment. Don’t let a significant shortfall scare you. Somehow you made things work in the past, and you now have all the details you need to correct the imbalance.
Step Four: Separate your money outflows into two groups: needs and wants. If you have to cut expenses to get your finances on track, you’ll find the easiest ones to cut in the ‘wants’ list.
Step Five: With this knowledge, create a target budget, one where you’ll have money left over at the end of each month, so you can save and invest in whatever is important to you.
Then the Magic Begins
Something magical happens when you see the numbers in black and white, whether in a sophisticated app or on a piece of paper. Those numbers lose their power over you; they’re just numbers. And, more importantly, they are numbers that you can control.
Suddenly the month isn’t just flying by with money appearing in your accounts and then magically disappearing. You will be surprised how aware you become of your spending, especially if you decide to check your numbers regularly during the month to see how much progress you’re making towards your target budget.
Fine-tuning your budget will mean choosing a model to follow that gets your spending categories in line for a stable financial future. One model is the popular ‘50/30/20 Balanced Money Formula’ that divides your expense categories into just three: ‘must-haves,’ ‘wants,’ and ‘the rest’ (Google it.) It works for all income levels and allows you to live comfortably (but carefully) while you build your financial security.
It may be hard to believe, but going through this budgeting process — however formal or informal you make it — will have you watching your finances like a hawk. Not being cheap about how you spend money, but being deliberate, instead.
Spending money within the structure you create for yourself takes on the extra pleasure of knowing how to save at a healthy rate, which also brings you peace of mind. Knowing you are in complete control of your finances is pure empowerment. Congratulations!
*This article is for informational purposes only and should not be considered investment advice.