Budgeting Does Work (If You Make It Easy and Fun)—Part 1
If you didn’t skip this blog post, you’re probably hung up somewhere in your life on cash-flow or budgeting. Most of my clients are in the enviable position of not having to watch every penny. They are also, by design from birth or consciousness, not over-spenders or spend-y. They can metaphorically stick a wet finger in the budgeting air and know whether the wind is at their backs.
For many, this strategy isn’t working, either right now or ever. Those folks need to watch where their money is going. I’ve long believed the trick to getting started, leave alone getting it right, is to make it easy and fun. I think I might have found it. Now, I stick to my inclination not to work with folks on budgeting, bail-outs and bad attitudes, but I’m always willing to share strategies that work.
Think of your money in three buckets—static, discretionary, and future
I will start with an admission: I don’t actually budget the way I’m about to describe. I’m stealing this idea from a Financial Planning Association conference I just attended (my whole life is continuing education). I’m one of those freaky people that keeps track of just about every expenditure, tracks it in Quickbooks with help of my assistant, and analyzes where money is being spent, where it can be saved, etc. Most people won’t do this, so I rarely, if ever, recommend it.
What I like about this idea is that it’s easy and fun. This step should take no more than an hour. Here’s what you do:
- Get out the last six months’ worth of statements that contain your expenses (checking, credit cards, etc.). Six months is required for homeowners, in particular, so it catches semi-annual expenses. You might want to add other annual expenses.
- Add up all the expenditures and withdraws (ATM withdraws included). Divide by 6. This is what you’re spending per month.
- Now, go through those statements and identify all your “static” expenses – that is, those that happen every month as a result of passed decisions you have made. Those expenses include the mortgage(s), property taxes, insurances, car payments, utilities, other loan payments (including credit card interest), childcare expenses (not random babysitting), etc. Add them up.
- Everything else is discretionary. Subtract “static” from total expenses. Remember to keep your timeframe to monthly numbers. That’s your discretionary budget. Divide by 4.5 (or so). That’s your weekly discretionary budget.
- Now sit down and decide what you want or need to save for. These things could be a kitchen remodel or new clothes or a vacation. Some folks will add to this quarterly tax payments or annual payments like life insurance premiums.
Here’s what you’ve done. You’ve gotten a clear picture of how much money you are spending as a result of passed decisions. That’s your static bucket. You’ve gotten a clearer picture of what you’re spending week-to-week on food, clothes, household goods, extra babysitting, pet expenses, etc. You’ve gotten clear about what you want to do with your money. This may take some tweaking along the way, but you’re on your way. See next week’s post on what to do next.