In the world of personal finance having controls over your cash outflows is the first step to being in control of your cash inflows.
Many folks get wrapped up in investing, seeking higher paying jobs or trying to control income by selling loads of their extraneous shit. If you want to get on the road to financial independence (those that have read Your Money or Your Life identify as FIers) budgeting is a must.
Before we get started, I must add a quick note about those who don’t agree with budgeting. These people tend to say things like “I look at the aggregate”, “I’m in control of my own spending, and it’s all in my head” or something stupid like “my revolving credit utilization is never more than 50%”… Ever heard of being “Pound wise and penny foolish”? I’ll show you how to manage your cents efficiently and be surgeon-precise with where you spend your hard-earned greenbacks.
There are plenty of tools and strategies to budgeting, some you’ll like, and others that won’t fit your lifestyle and dreams. Before we get too far into the fancy spreadsheets, reports and mobile apps, you must change your mindset about budgeting and spending.
How I came to budget
My first job was at a home-grown rental shop called Chardon Rental, part of CCM Rental. My then boss, a man who’s had influence on many aspects of my life, was asking me about some “gazingus pin” I was about to buy. He looked at me and asked how much it would cost, I told him some dollar amount, to which he responded “How many plate-tampers would you have to load into the ass-end of customer trucks to pay for that?” That’s when I realized that I’d end up having to recover all that money I was about to spend by loading these heavy-ass tampers into lifted-truck ends for over two weeks just to recover the costs of that gazingus pin. FUCK THAT.
Since that day, I typically view a non-security cost not in terms of the price tag, but in how many hours of work I’d have to put in to get it. Find the spending metric that means the most to you.
Another mental prod that can help turn your spending mindset into a budget-oriented one is viewing yourself and finances as its own business. No business would ever be successful unless they are in charge of their spending. This applies the same to you. See your spending as pure outflows on the books; is that spending in the best interest of the firm? If not, choose a new spending strategy, say, spending on a retirement portfolio v. that shiny,new gas-guzzling four-wheeler or that 12” tablet to match your 10” tablet, “so you can see that extra 2” of your budgeting spreadsheet”. COME ON!
If your still can’t get yourself into the right head-space, check out the following books.
Both of these are favorites of mine.
Lets get to it
Now comes the hard part, actually creating your budget. Complaining already? Relax. This is a painless and penniless process. There are loads of tools you can use, I’ll show my method, then you can transform your technique and tools to find the configurations that work best for you.
The way I see it, you’ve got two budgeting philosophies. The Zero-Sum budget or one that is percentage based (Pie Method).
Allocating certain percentages of your income to particular expense categories is the Pie Method. Imagine you have your “Income Pie” and from that your slice your income into expense categories. 20% to your Roth IRA contributions, 10% to home improvements, 30% to debts and 40% you can spend as you please. I don’t have a problem with this methodology but prefer the Zero-Sum since I can easily see straight figures and then get any percentages when I do my month-start/end reconciliation.
The Zero-Sum Budget
The Zero-Sum budget is a simple concept. At the beginning of the month, take your projected cash inflows (income) and allocate all of it to an expense category of your choosing. The crux of the Zero-Sum being that at the end of the budget session, you’ll have spent it all so that your free-cash is at $0.
Here’s an example:
|Home Maint. & Improvement||-300|
|Flowers for Mom||-20|
The beauty of this method is two-fold. First, during the month, all your expenses are already decided. When your friend asks if you want to go see Blue Man Group, you can go. If that concerts puts you over-budget in the concerts category, you can tell him “No, sorry, not in the budget”; nothing more to be said there. Second, you can then track and modify your expenses month over month and change your amounts and costs centers as your get a better grasp on your spending needs (notice how I said needs) .
You can also fold in these budgets into your investment plan to better determine proper expenses (just wait until you start looking at transaction fees), can look at your rent and decide if you should renew your lease or try to find a lower-cost place or even decide that you need to spend a bit more on your hobbies. The Zero-Sum budget helps keep your spending on-track and rigid, essentially providing all that tough self-discipline at the beginning of each month!
I first started budgeting with a spreadsheet, something simple that would let me easily see what-if analysis and I continue to use it. However, for my day you day I’ve found tools like Mint.com and You Need a Budget that allow for easy tracking as you can quickly apply an expense directly to a cost center, that way you can check your remaining balance for each cost center on the go. I’ve also noticed the trend of big banks releasing online-only banking apps, like Virtual Wallet that allow you to see and track your budgets and spending directly from your bank accounts. The issue with these being that they don’t hook into the rest of your accounts like Mint does.
As with everything in personal finance, the idea is not to have a perfect setup at first, but to build a budget you can fine tune to your life, expenses and investment strategy over time. Don’t worry about getting your budget correct the first month, second or even third, it will take time! Be iterative, try different categories, add and subtract others and let your budget help guide you to save for big expenses, cut costs and bring you financial peace and independence.
Let me know how this post helps you in all your financial endeavors. If you already budget, show your methods and what works for you so others can have success!
In the words of Dave Ramsey, “budgeting helps you live like no one else, so later you can LIVE like no one else.”