Budgeting

How We Budget

 

buy-within-your-budget

To be honest, I haven’t always been a fan of budgeting. For the longest time, The Budget was my frienemy. It really was. It pretended that it was there for me, and was going to make my life easier, and help me achieve my dreams … but! … you know, all it really did was stab me in the back and tell me all the fun I couldn’t have – Insert Sad Face.

So, how did I become BFF with my budget?

First off, I realized what a budget actually was – it’s a plan. It’s MY plan … for My money. I stopped trying to use various formulas and budget templates, stopped expecting my budget to cover EVERYTHING, stopped trying to create a magical excel spreadsheet that never ever needed to be adjusted … ever.

Instead, I wrote a plan for my money. For THIS lot of money, which would get me through to my next lot of money. Then I wrote another plan for that lot of money & what it needed to do to get me through to the following lot of money.

Each plan had a specific purpose and a specific goal. When we started using a priority based budget, it was February … and I need to get through until March. That was the budget. We needed a roof over our heads and food in our bellies. We did NOT need to worry about Christmas in February. Our goal was to not get evicted! We needed to get current on our bills and stay current. That was the goal for February, but the goal for March was different – so March got a new fang dangle budget.

So, my Number One budgeting tip is you need to have a specific Monthly Budget, and it needs to be Goal Driven.

goals

If you want to be BFF with your budget, you need to create a basic plan for your money – AND you need to adjust it for each month, and each month must have a goal.

If you want your budget to work for you, you need to work with it. This is not set and forget, people!

Even if your income is stable and your fixed expenses don’t change, you’re slowly paying down $20,000 in credit card debt $1k at a time, you still need to re-visit your budget each month. Not all months are created equal, there will be slight variations as you go along, people often makes ‘tweeks’ after time. If nothing else – checking in, setting goals and kicking butt each month feels freaking awesome! And that is what is going to keep you on track to achieve your dreams!

Tip Number Two is – Forget all the complicated, generalized budget templates and create your own personalized budget.

budget

The main reason people give up on budgeting is because they are either “too complicated”, or “they’re too restrictive”, or “the numbers don’t add up”, or “there’s no margin for error” and the slightest miscalculation or hiccup or unexpected expense throws the whole thing out of whack, and … what’s the point?

These types of budgets don’t work because we’re trying to micromanage everything. We’re trying to cover every possible financial expenditure. We’re putting $2.67 away each week for kids undies, and $1.42 aside for yearly school photos and so one.  And it’s just exhausting.

So let’s stop that.

If you’re serious about getting out of debt or saving for a specific purpose, then a Priority Based Budget is going to be your best friend. What is a Priority Based Budget, I hear you say? It’s a budget based on Needs and Wants. Or what we class as “Survival” and “Lifestyle”.

priorities

The very first step in any budget, is to calculate your NET INCOME. That is the total amount that you expect deposited into your account. This is not your Gross amount. If you are going off your annual tax return, or your hourly rate, or anything like that that doesn’t take into consideration taxes and workplace deductions – that’s not going to work. Basically, you need to know how much money is going to hit your bank account each month – that’s the amount you need to work with.

Then we make sure our Basic Human Needs are met and covered. These are the basic things we need to survive. This is followed by any obligations we need to meet each month.

Everything else is classed as Lifestyle choices, or “Wants”. The final step in a priority based budget is to decided how much we really want all the Wants compared to our Goal.

Sounds complicated, I know. But it’s really not. I promise.

Now, as a side note – If you’re following the Dave Ramsey system and you are in Baby Step 1 or 2, we’re focusing on trimming this budget back to Essentials Only so we can focus as much energy (and money) into the Snowball as possible.

If you’re new to Dave Ramsey, I’ll post some links below, & don’t worry – this will all make sense as we go along.

For those of you familiar with Dave, you know he talks a lot about Gazelle Intensity. And The Budget is where the magic happens. You can work your butt off all you want, (second job, extra hours) but if you don’t have a working budget, your just going to make yourself tired chasing your tail. A Budget is going to tell your money where to work for you.

So, how do we make the magic happen?

It all comes down to differentiating between Needs and Wants. Or what we class as “Survival” and “Lifestyle”.

We’re going to start by listing, in priority order, the things we absolutely need to survive. Dave calls these the Four Walls.

We’re talking:

  1. THE FOUR WALLS

    1. Rent / Mortgage (The cost of having a roof over your head)

    2. Utilities – Electricity, Gas, Water

    3. Basic food and groceries (we’ll come back to this!) As a minimum  pencil in $100 per person in your family, plus $100 for the house per month. So a family of 5 gets $600 to spend on groceries.

  2. BASIC HEALTHCARE / MEDICAL COSTS

    1. Prescriptions (Generic brands) NOT lifestyle choices such as vitamins

 – – – You are homeless and starving without at least this, and your health is at risk – – – –

  1. BARE BASIC COSTS OF EMPLOYMENT

1. Min Fuel / Transport costs to get to and from work

2. Any other cost that you absolutely can not avoid in your pursuit of an income.

– – – – – – – You are unemployed without at least this! – – – – –

4. INSURANCES

Vehicle, Home and Contents, Medical in countries that don’t have free public healthcare

Only list Insurances which are paid out of your Net Income

– – – – – – You run the risk of financial catastrophe without this – – – – – –

5. LIABILITIES

1. Min Monthly payments due on each debt

2. Money you are required by law to pay other people – things like Child Support

– – – – – – Debt Collectors are calling if you don’t at least cover this – – – – – –

At this point we are going to draw a line in the sand, because everything that gets added after this, are lifestyle choices.

But wait, I hear you say! You forgot to include your phone bill! What about the internet?

I hate to be the bearer of bad news, but your internet privileges are just that, privileges. They’re Lifestyle choices. You can live without your New iPhone 7 on an $80 a month plan, even if it gives you unlimited calls. You can live without your gym membership, Netflix subscription and your “Magic Beans”. I would even go so far as to say you can live without new clothes, new shoes and getting your hair done every 8 weeks.

It all just depends on how much you want those things, compared to how much you want to achieve your goals.

So, for the math geeks in the crowd:

NET INCOME

(the total amount that gets deposited into your account – NOT Gross income which is income before taxes and deductions)

MINUS

“NEEDS”

EQUALS

“DISCRETIONARY INCOME”

If you’ve reached this point, and you have a small income and a lot of debt (or a lot of debt repayments) – your Discretionary Income at this point might be next to nothing. Fear not, ‘been there, done that’. There is hope. My advice to you is to cut everything that is not Essential and throw everything you can at your smallest debt. It will work and things will get easier. I will do some separate posts on how the Debt Snowball system works and the easiest way to get out of debt. So stay tuned, I’ve got you covered.

If you haven’t already maxed out your Discretionary Income, I suspected it’s about to be gobbled up various Lifestyle Choices.

This is where you get to play a fun little game called … “Would I rather …”

Basically, you have a goal, you now have a set amount of Discretionary Income after your basic needs have been met. Every line you add to your budget now takes you a set further away from reaching your goal.

For example:

Your goal is to save up your $1000 Baby Emergency Fund. You have a Discretionary Income of $1000. But! You also have a $80 per month bill for your phone, $60 per month for your home internet. You want to get your hair done – $190. You might also want to beef up your Grocery Budget and your Fuel allocation – $300, and it’s Aunt Betty’s birthday on Sunday and there goes another $50. Now you’re only left with $320.

All things being equal, at this rate it is going to take 3 months to save your Baby Emergency Fund, when really it should only take one. How much are you willing to sacrifice to achieve your goals? What’s more important to you?

Now is the time to either:

a) drop it from the budget

b) find a cheaper option

c) find another way to pay for it (Swap, Trade or Sell?)

d) increase your income

Realistically, you are going to add Lifestyle lines to your budget. That’s ok. But add those lines knowing that they are Lifestyle choices that you are making that are eating into your Snowball, and justify as part of your budget.

So after LIABILITIES we are going to add:

CONTRACTED LIFESTYLE EXPENSES

These are things you have signed up for, with monthly billed amounts, that are contracted and you can not get out of without paying some type of exit fee.

For example: a 24 month phone contract.

– – – – – Suck it up and pay your Stupid Tax, but when the opportunity arises to make a better choice, DO IT! – – – – – – – –

UNCONRACTED, Regular RECURRING LIFESTYLE EXPENSES

These things are month to month expense, similar to those above – HOWEVER, you can cancel at any time

Example: Netflix. It’s month to month, but you can cancel at any time.

Next list – MONTH SPECIFIC ‘Cash Flowed’ EXPENSES

Birthdays, Holidays (Christmas / Easter), Kids need new undies, School Photos.

Education expenses.

Annual expenses such as car registration (also see Sinking Funds) or Ambulance insurance.

SINKING FUNDS

Save for upcoming specific expenses which can not be cash flowed in a single month.

For example: we have car registration, CTP Insurance, and Personal Vehicle Insurance all due on the same day. We can’t cash flow that out of a single month, so we save towards it in the months leading up.

PERSONAL EXPENSES:

* Splash Cash

* Alcohol

* Entertainment

* Hair appointments

* Coffee / Eating out

 All go here

BEEFING UP

Feel like you need to add a little more to your Groceries or Fuel allocation?  Remember, you’re dipping into your Snowball amount, but if you need a bit extra – this is the spot to add it.

“G.O.K.” (God Only Knows!) Aka The Buffer

Set aside a small amount ($50 – $100) that is unallocated for UNAVOIDABLE “mini-emergencies” that would otherwise completely destroy your budget’s mojo.   FYI – Coffee with the mum’s from Playgroup, doesn’t count.

If it doesn’t get touched, that’s GREAT! (In fact that would be the ultimate goal), It just rolls over for next month.  But it helps to keep the budget on track if there is a little bit of slack in the line 🙂

SNOWBALL

This is what your dreams are made of!

No really, the snowball is what makes it all happen. Your aim should be to make as much of your Discretionary Income as possible reach your Snowball.

If you’re in B2 and paying off all your debt, this is where that money comes from.

If you’re in B3, and saving up your Fully Funded Emergency Account – this is where that money comes from.

Want to save a deposit for your first house? Or maybe your on Baby Step 6 – paying off the house in 5 – 15 years … this is where those extra repayments are coming from.

Imagine this: You have mortgage repayments of $2,000 per month over 30 years.   If you can add a Snowball of the same amount (an additional $2,000) you’re not cutting your mortgage time in half (down to 15 years) you will in fact be paying it off in 10!  That’s CRAZY!

Maybe your saving to start an investment portfolio so you can retire at 40, or retire wealthy, or just plain retire?

Or saving for a vacation, a new car, a pony for your daughters sweet 16th?

The point is, it doesn’t matter what your long term goals are, that Snowball is you’re ticket out of here! And you want to be doing everything you can to preserve that Discretionary Income and maximizing your Snowball.

This is why I love a priority based budget.

It makes you really think the true cost of all your Lifestyle Choices.  I keep a running tally on the side of my budget, subtracting each Lifestyle Choice away from my Snowball.  It hurts to see it eaten up by all these bits and pieces.

And that, my friends, is the priority based budget!

nikki-xoxo-small

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