The “B” Word – Part 3
This blog is part three of a multi-part series on budgeting.
In part two of the Budget Blog, I discussed the importance of tracking and review. If we don’t track our spending, we can’t build a realistic budget. If we can’t build a realistic budget, we can’t, with any certainty, save money on a consistent basis, plan for big-ticket purchases, or prepare for retirement. If we don’t know how much we currently spend and where our money goes, how can we determine our retirement income needs, or how much we can set aside for the next car, or purchase of a home? What I’m saying is this; we all have a limited amount of income to spend on an unlimited array of options. If we don’t plan, we will unintentionally spend and never enjoy true financial peace of mind.
We’ve now tracked our spending for 3-4 months and reviewed our buying patterns. We built a budget based on our past spending history and made some purposeful changes. Our budget should account for every penny that we earn and every penny that we spend. Anything less is cheating, and we’re only cheating ourselves. A budget is a promise you make to yourself.
Start fresh. The best time to implement the new budget is at the beginning of a new month. Use your budget to guide every spending decision. The figures you built into your budget are based on your previous spending and they are your choices. Stick to it. Just like a new exercise plan or diet, the first few weeks can be rough. Unless a true emergency arises (we all should have at least 3-6 months of normal expenses set aside in an emergency savings account), don’t spend more than you planned in any category…but also don’t under spend. In your budget, you planned for savings. You planned for stashing money away for retirement. So enjoy yourself, spend your entertainment budget. Go on your planned vacation. A budget is freedom because you’ve made your spending and savings decisions in advance and away from the impulsive temptations.
As the new month begins, remember to track all of your income and expenses. I use a small desk calendar as our cash flow journal. At the end of the day (or sometimes week) I take the receipts from all of our expenditures and record them in the journal. At the end of the week, I input all of the weekly totals into our budget spreadsheet (I’ve include an example here, 2014 Budget). At the end of each month, I compare our actual spending to our planned spending (budget). Does everything lineup perfectly? That depends. Certain expenses are fixed, like the mortgage and insurance. Other items vary like utilities and groceries. The goal is to stay as close to your budget as possible.
At the end of the year, my wife and I review our budget. We ask questions like: How did we do in sticking to our budget? In what areas did we spend more than we planned and why? In what areas did we spend less than we planned and why? Was anything unexpected? Did our income increase or decrease? What changes do we want to make to our budget for 2015?
As you create and then follow your budget, allow for flexibility… especially in the early months. The goal is not perfection but rather a commitment. Your budget is a critical first step towards reaching your financial goals and peace of mind. Feel free to contact me if you want to talk about your financial world.