Getting on the Same Page
When you tell your spouse you want to chat about the family budget, the translation is that you want to have a fight. Understand that reaction and plan for it. Don’t expect to agree on a budget in one day. This is a process and it requires trust and patience.
Divide & Conquer
To “budget” means to “divide.” Budgeting means dividing your money. Divide into what? Well, the most famous method is the use of envelopes. We have all seen this—putting cash in to separate envelopes with labels like “rent” or “mortgage” or “car payment” etc. The more modern version of this is to use separate bank accounts that are funded on payday with specific spending missions. Fund separate bank accounts on payday to pay your priority expenses first.
Payday Action Plans
The term budget is too vague. A better description is Payday Action Plan. Literally, what is the plan of action on payday? How is the paycheck to be spent? The essence of budgeting is to plan in advance how every dollar of the paycheck is spent. A budget is not a list of numbers on a sheet of paper. It is an action, not an idea. Money must Move according to a Plan for there to be a budget in existence, otherwise a budget is nothing more than cheap talk.
Bad stuff happens, always. Over time your budget should cause you to save 3 to 6 months of your living expenses in cash. That’s going to take time to save, so your paycheck-to-paycheck spending plan must provide for holding back some of your money for a rainy day. Fund your savings account every payday. At a bare minimum, you need $1,000 in savings right now!
The Importance of Payday
Here is a sad fact. You are not going to win the lottery or inherit lots of money. Your entire financial life is based on that lousy paycheck. That’s it. What you do or fail to do on payday determines your destiny. In a nutshell, that is the secret to money. If you save money each payday and execute a spending plan, your plan will materialize. If you are unfocused on payday and pay a bill here and a bill there without a master plan in place, you are just wandering in circles. If your working career spans over 30 years and you are paid twice a month, you have 720 paychecks in your life. What do you have to do 720 times in a row to achieve your goals?
Long-Term Goals Are Important
Where do you want to be in 20 years? It is important to know this in great detail. Exactly what do you want your financial life to look like in 20 years? When forced to think about this, most people say they want their mortgage paid off and they want enough money saved in a retirement account so they can slow down and enjoy life. They want to be free from financial stress. Once you know the long-term goal, then you can figure out the action you must take every payday to make that happen. Want to pay off a $100,000 in 15 years instead of 30? Then you need to know how much more a paycheck that requires. (Hint, the difference is usually less than $50 per paycheck.) Knowing where you want to be tomorrow influences what you do today. Having specific—very darn specific—long-term goals is essential. Write them down now.
You Need a Top-Ten List: Some expenses are more important than others. Paying rent is more important than paying the cable bill. Car payments are more important than dining out. Yet, I keep seeing people who are 8 payments behind on their mortgage despite the fact that they have good paying jobs and have not been unemployed. What happened? When I review their bank statements I see what happened. No spending priorities are present. They spend hundreds of dollars each month on restaurants and clothing and cell phone services, but the mortgage was not paid? Why? Because all their money went into one bank account and when it was time to pay the mortgage the account was drained. This is especially true when married couples armed with debit cards slash the bank account fund throughout the month before paying the really important bills. Here is a clue: Never let your mortgage money sit in the same account that is used to buy groceries, gas, movie tickets etc. Some bills are more important than others. Write down your 10 most important monthly expenses (i.e., your Top Ten List). Add up the list. Then, figure out how much of each paycheck you must deposit into a separate bank account so that enough money is on hand at the end of the month to pay these bills. Ideally, use direct deposit to have that portion of the paycheck put into this new account. Then, use your bank’s automatic Bill Pay service to automatically pay these Top 10 bills each month. It’s a simple system. Money automatically gets deposited into the new account each payday. Money is automatically paid out each month by the bank. This is the power of dividing your money. This is the power of prioritizing your spending. The first money you earn goes into the Top 10 List bank account, and the remainder goes into the pour-over account used to pay for day-to-day living expenses. Prioritize your money. This is the essence of what it means to “budget”.
Short-term Rewards are Important, Too
Nobody is going to stick to a diet that is all celery and no cake. You need a cheat day to reward yourself for eating right during the week. Your money needs to have some fun as well. So, while you are setting up a bank account to achieve long-term goals and to pay your Top 10 priorities, remember to set up an account to reward good behavior. Want to buy a $500 big-screen television in 6 months? By all means, fund that toy to make it happen. There is a powerful psychological change that occurs when your brain figures out that it will be rewarded in the near future with neat toys when a payday action plan is followed. Small victories lead to greater wins. Self-destructive behavior occurs when you feel like you are going to lose no matter what, but when you see quick rewards for buying into a program, you are less likely to veer off course. Budget for fun stuff and vacations and trips. We are wired to respond to rewards.
Image courtesy of Flickr and Francesco