17 Jan 2012 5 Comments
It’s time for the talk. It’s been almost two months into this relationship of ours. Some good times. Some tougher times. But before we go any further into the relationship, we have to have this talk. You knew it was coming as I’ve brought it up before, but I think it has reached the point where it is now or never.
I am talking about Budgets. What else did you think I was talking about? I don’t personally understand the inherent dislike and hatred of budgets. I personally <3 keeping track of the dollars and seeing what they’re doing, whether they’re coming in and staying for awhile or heading out to purchase a cupcake for me. It’s like stalking people on Facebook and seeing what they’re up to! Well, not exactly, but you get the idea.
If you have never kept a budget before, I recommend doing this for just 3 months. This will give you an idea of what your cash flow is like, and helps tell your financial story. Most people I talk to believe that budgets are unnecessary but when I ask them what they spend their money on, their guesses are WAY off from reality. With a more accurate understanding of your cash flow, you will be then equipped to answer stressful money questions such as: Can I buy a house? Am I saving enough for retirement? How much can I invest each year? Or the most important question of all: Am I spending more than I am earning?
The toughest part of a budget is keeping track of all your daily transactions. Some find that a little notebook in their pocket is the best to jot down every purchase. Some prefer to jot down their transactions on a spreadsheet similar to this Budget template. You can customize it and print it out to write down your expenses, or just track it in excel. Others prefer to use an electronic tracking tools (Quicken, Mint, etc.) to accumulate the data to make it easier to manipulate. Whatever you choose, try to stick with it for just 3 months.
Once you have 3 months worth of information, you can sit down and figure out where your money is going. More importantly, you can determine if you are spending your hard earned money on things that are important to you. Are there categories where the amount of spending surprised you? Are there categories that you are willing to cut back on? Are there categories where your spending is perfectly aligned with your priorities in life? From this, you can determine which level you are at in my Financial Well-being game. If you are at Levels 1 or 2, you can now see which spending categories you can cut back on to put yourself in a better financial position. If you are in one of the later levels, congrats! Using this information will allow you to set savings and investment goals.
If you have completed this challenge for 3 months and absolutely HATED keeping track of every transaction, there are other options. I only recommend you do this if you have progressed beyond Level 2 in the game. Until then, I believe you should still be tracking your expenses, as 3 months may not be sufficient enough for you to have a full understanding of why you are spending more than you are making and why you are being forced to use credit cards to supplement your lifestyle.
For those who are looking for other options, you can set things up automatically. The concept is basically PAY YOURSELF FIRST! You basically treat your savings and investment goals as bills. As a result, you make these payments to yourself BEFORE paying every other person in your list. This way, your goals will be achieved without too much effort and thought on your end, and you do not risk paying everyone else first and leaving nothing for yourself at the end of the month. This can be a tricky to do though without a having a good understanding of your cash flow; you DO NOT want to end up in an overdraft position with your chequing account!
Ideally, if you can put a percentage towards saving and investing at the beginning of every month and don’t run out of money at the end of the month, you are good! You can start off small, say 5% of every paycheque is paid to yourself at the beginning of the month. If you find that you have a bit of extra money at the end of the month, boost this percentage up. What’s the ideal number? Depends on your savings goals and your priorities in life. My personal saving % has ranged from zero (sigh.. although I am enjoying my current lifestyle) to almost 60%.
Do you keep a budget? Is this something you have thought about and keep meaning to do? Is the effort worth it? Is this something you can use some help on?
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