It's New Year's Eve! This marks the occasion when everyone decides on their New Year's resolutions. According to statisticbrain.com, the top resolution is to "lose weight/eat healthy" followed by "life/self improvements" as number two. These are great but I want to focus on the third most popular resolution which is "better financial decisions". I assume you are here because this is where you want to improve. What if I told you that by focusing on this one goal you can positively impact the other two top resolutions? It has been proven that money issues cause stress and stress causes health issues. That knocks out number 2! But, how is "better financial decisions" linked to losing weight and healthier eating? Allow me to explain! One of the cornerstones of being wealthy is budgeting. Most of the time eating unhealthy (fast food/junk food) is something that can be cut from your budget or minimized. Therefore, it's a win/win for you! Cutting just one fast food meal a week equates to about $364 a year! So, without further ado, let's hop into this week's topic BUDGETS!
Budgeting is a necessary evil when it comes to long term wealth building. Without a budget, you will end up in a rabbit hole over overspending. Some people, like myself, use spreadsheets. Others use apps on their phone. Others don't budget at all! Regardless of what method you decide to use, I will give you some of the basics. Go get a pen and paper and let's get started!
First things first! You have to know how much is coming in. Write down all income you receive on a monthly basis. This can include pay from jobs, cash gifts, income from business ventures, child support, alimony, pretty much anything that hits your bank account as a credit. Now that you are looking at these numbers, do you feel this number is enough to sustain your current lifestyle? If not, you may have an income problem but we will see as we continue through our process.
Next, let's write down any and all monthly expenses (not including debt - more on that later). Start with items that are a necessity such as rent, mortgage, water, electricity, groceries, etc. As you work down the list, start adding the non-necessities like that gym membership you rarely use and recurring expenses like Netflix. So, at this point you may be getting a little nervous but we aren't quite done yet. Now, I want you to check out your percentages. Break out the expenses into categories. As a guideline, I have charitable (10-15%), savings (5-10%), housing (25-35%), utilities (5-10%), food (5-15%), transportation (10-15%), clothing (2-7%), medical/health (5-10%), personal (5-10%), and recreation (5-10%). The percentages are your spend in relation to your income. (For instance, let's say you make $3000 a month. You spend $845 a month on housing. This includes rent/mortgage, insurance, repairs, and home decor. That would land you at about 28% of your income going towards this category ((845/3000) * 100). So, you are still within the recommended limits.) These percentages are just estimates/guidelines. You may need more or less depending on your circumstances.
Now, let's write down all of your debts. I don't know about you but this section gives me the most anxiety! Debts would include credit cards, student loans, personal loans, car loans, overdue bills that have made it to your credit report, etc. A good rule of thumb is if you can see it on your credit report, it is a debt. (Don't know what's on your credit report? Download Credit Karma as a good starting point. There will be a separate post on the topic of credit). You may be feeling a hint of depression after completing this step but don't fret! This is why we are doing this! You have to be aware of your current situation to know where and how to make the necessary adjustments. That is the power of budgeting!
Putting it all together
Now that all of your numbers are laid out in front of you, you can start planning your method of attack! Let's go back to the expenses section. Starting at the bottom, is there anything you can start cutting back on? Maybe eating out, Netflix, the gym? Start trimming the non-necessities first. You may be saying "But Tiffany, I can't go without binge-watching my favorite TV shows or seeing my favorite fast food workers that have become like family". My question to you is how bad do you want it? Sometimes, we have to live somewhat uncomfortably in order to create the life we want to live. I promise, once your finances are under control, you will find the sacrifices were well worth it.
If you get through this exercise and find that after cutting all non-necessities you are still in the negative, you have a bonafide income problem! It may be time to find a new job, get a second part-time job, or pick up a side hustle.
Once you have a budget for the following month, stick with it! It may take a few months to get it just right but you have to start somewhere! All of the money left at the end of the month should be thrown at savings or debts (we'll talk more about that later). At first, you will be amazed at how much money was going out the window just by not tracking your finances. Then, it will start becoming a habit. Again, these are just the basics. As we progress throughout the year, I will break down these topics in more detail.
Budgeting questions or tips to share with other readers? Feel free to comment below!