We’ve always lived below our means but up until a few years ago we didn’t live by a budget and we didn’t have a path to our financial goals. We each had our own ideas about what we wanted to do with our future pile of cash (assuming we could get one). It was an eye opener when we sat down together and talked about what we wanted to do with our money. For example. My SO wanted for us to pay for 100% of our children college. He felt he was at an advantage going into the workforce without the burden of student loans. I was in the ‘we’ll pay what we can at the time’ boat. Sharing your life and finances with someone is one of the keys to a serine partnership, so saving for college is now a high priority in our household.
Below are a list a steps that we took to put together our financial plan.
Step 1: What do I want my money to do for me?
The first place I like to start when we are looking at our budget is what our goals are. Break it down into what you would like to accomplish in the next 5 years and what your long term goals are. Some examples of goals would be: pay down debt, go on vacation, save cash for a car, save for a down payment, fund retirement savings, fund a college fund for your children. Always have a dollar amount associated with your goal, this way you know if you are on track or if you need to make adjustments to your budget.
My Current 5 Year Goals are:
- Pay off car loan: $15,000
- Save for replacement car: $10,000
- Save save for next house purchase: $60,000
My Long Term Goals:
- Increase retirement savings by $1,000 a month
- Save for kids college: $100,000
- Invest additional money in home improvement and funds that will provide a return on investment.
Step 2: Where does the money go?
There are many ways to go about reviewing your spending. I opt for exporting my debit card and credit card transactions into excel and categorizing each transaction that way. Look back at least over the last 3 months but if you want a more accurate view of your spending include all of your transactions from the past year. This will catch high spending months like the gift giving season or the summer when the kids are on break from school and have summer camp.
Total up each category and then get a monthly average. This was a huge eye opener for my family. Prior to totaling all of the numbers up if you asked us what we spent on eating out I would have told you 20% of what the actual number was! This means that we spent 5 times as much as I thought we did. This is huge!
Step 3: Keeping your money in your pocket!
There is no magic number to how much you spend on your cellphone or groceries there is only what you currently spend, what you could spend, and what you ultimately decide to spend. Just remember that living below our means is how we accomplish our goals.
Look through each category that you listed in your spending and think to yourself – could I be spending less in this category? What changes can I make to reduce this expense? Take one bill per day and spend some time researching other options. I always start with our cable. There are so many options out there for watching tv shows that it doesn’t make sense to spend over $100 a month on the service. We recently called up and got our cable package reduced by $26 a month, or $312 a year! All it took was about 20 minutes on the phone. Now that’s pretty good $$$ for my time! Cell phones are a scary one, you need to do a little math here to see how much you will actually save if you are under contract and have to pay fees for canceling your service. Most of the time, dropping the Verizon, AT&T, or Sprint service in favor of a cheaper plan will net you a savings even with the cancellation fees.
As you reduce your expenses in these categories make sure you update your budget. Next take the categories that you tend to overspend in, for us it was groceries, household goods, and over the counter medicines/vitamins. Set a new goal for yourself. If you spend $1000 on groceries, don’t expect to only spend $600 this month. You are going to have to learn how to shop more frugally. Start first by reducing your budgeted amount by 10%. If you are able to spend less, great! If you are still over spending in the category, you will need develop some new habits that set you up for success. Like only shopping at the offending stores once a week (or month…I’m looking at you Target).
Step 4: Follow your budget.
Now that you have a budget in place you want to follow it and see how accurate your estimates are. My first month following our budget I spent $100 more on groceries that I originally thought I would. I had forgotten to increase our grocery budget since we were eating out less. Going over in certain categories is OK while you are getting the hang of things. If you see that you are over spending in the same categories each month consider raising your budget or switching to using cash if these are expenses that result from boredom or shopping for fun.
You might also see some unintentional benefits to changing the way you spend. Packed lunches can translate into weight loss. Reducing shopping out of boredom will help you maintain a minimalist closet which always makes me happy :).
Housing, food, clothing, transportation. These are the first things you should be using your hard earned money for before a single dollar goes out to angry debt collectors, your xbox subscription, or any other financial commitment that you have made.
If your spend more than you earn every month you need to be in survival mode. That means digging yourself out of the red before you pay your credit card bill. I would discourage using debt as a way to subsidize a lifestyle that you can’t afford. If you see that credit card balance increasing every month, then it’s time to leave the credit cards at home and only spend the money that you have.
Allow yourself some wiggle room in the budget. Have a budget line for each adult for blow money. I’m not talking about illegal drugs. I first heard the term “blow money” from Dave Ramsey who explains that everyone needs a little pocket money for miscellaneous things. This is money you can blow on what ever you like without having to enter it back into the budget, and since you don’t have to account for these dollars this should always be done in CASH. Use this money one what ever you like! If you enjoy the occasional Starbucks or convenience store treat, this is where the money comes from.
Take the first step to getting your finances working for you today! All you need to do is start! For those of you that are following along, what are some of your most challenging categories for controlling your spending?