fbpx

Budgeting: How to Take Your Finances from Mess to Success

by | Nov 28, 2018 | Budgeting

What’s your first thought when you hear the word “budget?”

For me, the first thing that used to pop into my head was a straight jacket. Like the one worn by Hannibal Lecter in Silence of the Lambs. The thought of not being able to spend money on the things I wanted, when I wanted to buy them actually made me angry.

The word ‘budget’ may not elicit the same feelings in you as it did in me but it’s safe to say that most people don’t like the idea. Budgets imply limitations, and we Americans hate limitations!

Here’s what’s been interesting for my family: living on a budget has been the exact opposite of a straight jacket. It’s freedom. This might sound strange but it’s true. I’ve discovered we get more joy and contentment out of using our money when we are purposeful about where it’s going.

Budgeting wasn’t easy at the beginning. It took months to get the hang of it. And took a couple of years to get on the path we wanted to be on. But it was 100% worth it.

Let me share with you how you can achieve the same.

Getting into the right frame of mind

By far, the most important thing about budgeting is to allow yourself some GRACE. I meet a lot of people that feel guilty about the way they’ve handled money. Maybe it was wasted. Or they could never “get ahead” no matter how much their income had gone up over the years.

I know how it feels because that’s exactly where my wife and I were when we first decided to budget. No matter how much we were making, we always seemed to be spending more than we made. It was crazy.

But you have to put those feelings aside if you want a fresh start. The past is in the past. There may be some spills to clean up, like paying off old credit card debt. But the key is to forgive yourself and make the decision that today is a new day in your life.

Spend, Save, or Give? What’s Your Priority?

Let me first help you visualize how prioritizing your money leads to success. If you’re anything like I used to be, the first thing you do with your income is pay the bills and other day-to-day living expenses. If you have some funds left over, you might be saving a little in your 401k or a 529 college savings plan. Finally, if there’s any room left in the budget, you might give to your church or a charitable cause you care about.

Here’s how a typical family’s money “flows” each month:

The thing you’ll notice is the circles get smaller and smaller. Statistics support this. According to the government, the personal savings rate is around 6% while the giving rate is about 2%. This means that on average, Americans are spending about 92c of every dollar they make on living expenses.

Here’s the problem. If Saving and Giving are not priorities, then what’s available to save and give each month is a function of what’s left over after you’re done spending. Put another way, your level of lifestyle spending determines how much you can save and give.

What if you flipped the chart around? Here is what it would look like:

Notice how Give and Spend changed places. In this example, specific Giving and Savings goals are set in stone. Then, what’s left over is used to support your lifestyle. The cost of your lifestyle fits within your giving and saving goals, not the other way around like the previous example.

This is how you win with money.

Budget Your Way to Freedom

I’ve created budget forms which you can download below.

There are two important parts to the forms.

First, there is a Monthly Budget Form. This is where you put your monthly income and expenses in one place. I designed these forms to give you a detailed picture of where your money is going each month.

The best way to get started if you’ve never budgeted before is to download the last 3 months worth of bank and credit card statements. Go through all your spending and sort it out by category. You can enter the numbers into the budget as you go.

Once you have an idea of what your monthly expenses look like, this will be your “baseline.” Every month, you will fill out a fresh Monthly Budget Form using the expenses from the prior month as a start.

You want your Monthly Income – Giving – Savings – Living Expenses to = $0. That’s called a balanced budget. If you struggle to get your budget to = $0, that means you are spending too much.

Your IDEAL Budget

The second part to the form is what’s called your IDEAL Budget Month. This is where you dream.

Answer this question: “If I could snap my fingers today, how much would I Give and Save each month?”

The numbers don’t have to be achievable today. In fact, they probably won’t. But I want you to open your mind to what’s POSSIBLE.

How much would you give to your church or favorite charity each month if money wasn’t an issue? How much would you be saving for retirement and the kid’s college education?

Enter those numbers into the IDEAL Month worksheet. The worksheet will subtract those numbers from your income. The result is what your monthly Living Expenses should look like.

[Note: if you need help estimating how much you should be saving for retirement or for your emergency fund, check out my recent posts on the subject HERE and HERE.]

Reality check: your current living expenses are likely higher than what your IDEAL living expenses should be. That’s exactly what happened to me when I started to budget. I was like, “How the heck am I going to cut that many expenses?!?”

Here’s the cool thing my wife and I learned. By having clear Giving and Savings goals, our spending patterns almost immediately changed. As I poked around our budget, we were spending hundreds of dollars every month on stuff we never used. Subscriptions. Gym memberships. Easy fixes like that.

As we gained experience with budgeting, we were able to identify more areas where we could save money. Pretty soon, we talked about every major spending decision (over $200) we had. “Should we buy XYZ or is that money best given away or saved?” To this day, we still do this.

In Conclusion: Moving Your Money from Mess to Success

I’m not going to lie…budgeting isn’t easy at the beginning. You’ll forget some lumpy expenses. Or overspend some categories. Things will happen, I promise. But I’ve found that people usually get the hang of it after 3-4 months.

Having your IDEAL Month filled out is key. It’s impossible to take your finances to a better place unless you have a clear picture of what that better place looks like. You wouldn’t take a road trip without knowing what city you’re going to, right?

Here’s one more key suggestion for you married people out there: do this with your spouse. In fact, this is critical to having success with budgeting. If one spouse is a budgeter and one is a spender, problems will surface. Sit down and talk about your big Giving and Saving goals. Get on the same page and then work together to find ways to achieve your IDEAL Month.

Budgeting strengthens marriages. It reduces stress and anxiety. But more than that, budgeting increases confidence which leads to real empowerment. Give it a try!

P.S. In a follow-up post, I walk you through how to use a Sinking Fund. This is a key tool to your budgeting success. Check it out.

2 Comments

  1. Edna Carson

    Super good advice

    Reply
  2. Erika Jaime

    Going to put much of this needed advice into practice. Loved the article.

    Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

CONTACT INFORMATION

Phone: 224-633-9290
[email protected]
21660 West Field Parkway, Suite 118 in Deer Park, IL
(Office Hours by Appointment Only)

Serving clients in local communities, such as Arlington Heights, Barrington, Buffalo Grove, Lake Zurich, Libertyville, and the Greater Chicagoland Area. We also provide virtual services to clients nationwide.

GET YOUR FREE FINANCIAL FITNESS CHECKLIST