I have been working in the finance industry for a while. I started in retail banking, working primarily with individual personal accounts and corporate accounts, then I transitioned into corporate finance on the analysis side. I have learned a lot in the process and here are two things I can guarantee:
- All companies have a budget
- Most individuals who are financially stable follow a budget.
It is expected for companies to run their finances according to a budget, but the same consideration is not naturally made of individuals. However, for financial stability, individuals should assume that they represent a business, an institution, a company, etc. If you were a company today looking for investors to expand or stabilize, would your finances attract investors? Look at your bank account, your cash and your investments, would you even be comfortable investing in yourself?
When I started budgeting, I was a 19-year-old student, working full time and barely making any money. Between my two low paying jobs, I had to figure out how to allocate enough money to pay for my tuition and when I bought my first car, it didn’t come without a monthly bill. I had no other choice than to manage my money responsibly, wisely and efficiently. I had to come up with a tool that would give me a clear picture of my monthly finances and help me stay stable. I then started budgeting and more than ten years later, I haven’t stopped. I claim financial stability today for me and my wife solely because of a disciplined financial life. For me, budgeting is simple. It’s at its core simply putting your money in buckets that have a rigid lid. Spending adds to the content of the bucket and when the water reaches the lid, you must not remove it. Ok Lionel, what the heck are you talking about? Patience and I’ll explain. But for me, I believe this habit came by observing the discipline my parents exercise when it came to money. They used the envelope budgeting technique, stayed true to it and it worked. In this article, you’ll learn the skills necessary to set up and follow the budget that works for you. It is not about teaching you a specific way or tool. Whether it is a spreadsheet or an app, what matters is that you understand it, that it is easily implementable and that you stay consistent with it.
When I got my first paycheck years ago, after being pissed off and wondering who FICA was, I came to my senses. Then I thought about that car that I wanted. It wasn’t some luxurious Lexus that I’ve dreamed about, it was simply a necessity in my life at that point. I easily figured that it was going to be important to save diligently and to watch carefully how I spent my money. It wasn’t rocket science. I’m telling you this to emphasize the idea that succeeding at becoming financially stable with a budget will not happen without first establishing a goal and second, knowing that saving is a non-negotiable. Now that that’s out of the way, let’s get to the nitty gritty.
So, where do you start? It starts with what’s coming in. In a spreadsheet, enter at the top your total income – for couples with combined finances, enter your combined income. You may be tempted here to write down your gross income but for the purpose of your budget, we’ll use your net income which is what’s available to you. Your total net income is all you have at your disposal.
It is easy to enter the number that matches your income if you have a consistent salary. For some, being remunerated by way of commission or hourly rate, it may be a bit more complicated. If you are paid solely by commission, is there a minimum that you’re confident of achieving every month? Maybe you’d like to consider an average over three months. Consider what might be reasonable in your case and use that number.
Below your income, we will start with your fixed expenses. These are your bills, your dues which are constant in price month over month in accordance to a contract or a minimum that you’ve set. This encompasses your mortgage or rent payment, your diverse insurance dues, gym membership, subscriptions dues, etc. You may have a credit card that you’re working on paying off, lowering the balance by paying a fixed amount monthly. Add it to your fixed expenses as well. Make sure you don’t omit anything. As you can see below, a column titled ‘Budget’ is added next to the ‘Actual’. Although these are fixed expenses, there may be times when you pay less or more for diverse reasons. At the end of the month, the difference of the numbers in the two columns will indicate whether you’ve stayed within your budget or how much you’ve exceeded it by.
Next, you’ve guessed it: the variable expenses. Variable expenses give you the option of being flexible or adjusting your money management habits. In many cases, they may be unavoidable, but their dollar amount is controllable. This list includes expenses such as groceries, utilities, shopping, hobbies, fuel, eating out, etc. It is crucial to keep a very tight lid in this category. When you’ve had a long day at work and it’s 6:30 pm and you don’t feel like going home and putting dinner together, it is very tempting to stop by the pizza joint on the way and grab an easy $30 worth of food. However, having a strict budget helps you stay disciplined. It may be ok to spend the money at the beginning of the month when your budget is $100 but when you’ve already spend $80, you would be ‘breaking the rules’.
So, you’ve set your fixed expenses and your variable expenses budgets. There is more. One of the most important step is to plan for your savings. In fact, this step may should come first; unfortunately, most people live paycheck to paycheck or very close to it and by the time they’ve paid their bills and lived their lives, there isn’t much left. For your savings, include also the two columns: budget and actual. There are months when the unexpected may happen or you simply mess up and spend too much and then miss on your projected savings.
The total of your expenses and your savings should equal your income at the end of the month. If your expenses and your savings surpass your income, you’ve had a negative cash flow month. If your income surpasses that total, great news, you’ve spent less than expected that month and now you can save even more.
Having a positive cash flow month over month is what you ultimately want. Therefore, it is recommendable to work towards that status. Although many would encourage saving and saving more, I lean more towards making enough money to solve the problem. Yes, saving is necessary, but saving pennies and cutting coupons won’t pay the bills or give you financial stability. It is important to find ways to increase your income while following a budget, by working on growing yourself.
This is the beginning of your road to financial stability, a guaranteed way to continually remove monthly financial stress from your life. It is just a template, a blueprint which you can modify to your liking. Start today and stay true to it. You will not regret it.
Money-Smart Millennials 