Many times people say to themselves, “If I made a little more money, then I could ______.” I often catch myself in that trap of negative thinking. In fact, I think we all do at some time or another. A financial curriculum I used to teach in the past said that the first thing you should do when deciding to change your attitude towards money is to walk outside, look around the neighborhood, and yell at the top of your lungs “YOU WIN!” Who might you be yelling at? The answer is “the Joneses.”(Or insert name of your neighbor who has something you want) It is so easy to fall into the trap of looking at what others have and what you don’t, that we don’t take the time to look at our own situation and put a plan in place that works for us. It’s ok to let the Joneses win, because they aren’t the ones paying your mortgage, school loans, or grocery bill – YOU ARE. So how do we get over the hump and on our way to some better financial decision making? We begin with a budget.
Step 1: START
As you know, getting started is half the battle. For some reason, our minds need to mull things over for a while instead of taking action – and for those that know me, you know that is my natural response too. Sometimes I think the phrase “paralysis by analysis” is my life’s purpose statement. Release the activator inside of you and decide to do it. For those people that like to make lists, deciding to start allows you to check the first thing off of your list, and if checking things off of lists puts a smile on your face, you can happily to move on to step 2.
Step 2: TRACK YOUR SPENDING
We can’t decide what we want to do in the future until we know where we came from. Is $300 in groceries realistic for my budget? How much do I spend in entertainment each month? We don’t know unless we track. I would encourage you to either look back a month or two (if you keep receipts or have accurate records) or decide to take the next month or two to simply keep track of your spending. For many of us, we are certain to find some “black holes” that are soaking up a lot more money than we thought.
Step 3: DRAFT YOUR BUDGET
I use the word “draft” seriously because it’s important to realize that a budget isn’t something that is developed and finalized in a day or two and then kept in stone for years and years. It is a living document that should actively be revised and tweaked. Also, you’re not going to remember every dollar spent with a month or two of tracking. What about that auto insurance premium you might pay every six months? Or how about an anniversary or birthday present for a significant other? Those expenses that you may only pay once or twice a year still need to be accounted for and you’ll remember those over time.
Step 4: PLAN FOR THE FUTURE AND FOR THE UNEXPECTED
Life happens. Things don’t always go as we had hoped. It’s important to put some cushion into your budget for unexpected circumstances. If you don’t have any savings built up, you can start small. Even if you are only able to squeak out $25/month to save, do it. That way you have something to draw from if your car breaks down or your energy bill gets higher than expected in the winter. If your employer offers any sort of 401k match, this has to be one of the first things you plan for. If you don’t think you can afford it, the reality is that you can’t afford NOT to. It’s free money above what you make, so it would be wise to take advantage of it. You will thank yourself later when you see how that little bit can add up over time.
Step 5: USE YOUR BUDGET TO GUIDE YOUR DECISIONS WHILE SHOPPING
The joy of the budget is that you put it together before you are out at the mall staring at a nice new pair of shoes or you’re at the electronics store checking out a new home theater system for your apartment. You made the budget when you weren’t emotionally tied to the spending decisions you’re confronted with every day. If you have the money in the budget to make the purchase, make that purchase with a smile on your face knowing you can do it. If you don’t have the money in the budget for this month and you feel it’s a “must have” – then put it into your budget for the future and make a plan of what you will need to cut to balance things out. The goal of a budget is to make a plan and have you tell your money where it is going at the beginning of the month, not let it tell you due to impulses at the register.
Step 6: PLAN FOR THE FUTURE
Do you know you’re getting a pay raise in the near future or expect some money coming your way for an upcoming birthday? Plan what happens to that money now before it is on your paycheck or bank statement staring you square in the eye. Every time my wife and I know that a raise or bonus check is coming our way, I can tell what is going to happen to it before it shows up. If we’re currently happy with where our budget is at, we make sure that all or some part of that raise is going into an automated savings plan or 401k contribution. Once again, the important thing to remember is that it’s much easier to decide what you’re spending your money on when you’re at your computer working on your budget, not when you’re at restaurant deciding if you should get another drink or get that quadruple chocolate fudge cake. It’s helpful to take the emotion out of it. All the little things really do add up, and this is one of the most important concepts to learn as you plan your financial future.