Over the last couple of weeks I have been getting a lot of questions about Budgeting, so here goes. The questions usually sound like this. “I need to get control of my money so I better figure out this Budget stuff.” The word “Budget” simply drips with disgust, fear, and do I have too???
Budgeting has gotten a very bad rap. I think it is because, most people who push budgets, don’t explain how to do them, how to use them, and how they can be a tool for getting to Financial Independence. Maybe because they don’t know themselves. I took the Dave Ramsey Financial Peace University course, and Dave’s second lesson is on Budgets. Even the advanced Rich Dad Courses include sections on Budgeting. (By the way, both courses are very good, there is a ton of excellent stuff in them.) In Dave’s course, budgeting was given to us as our homework assignment after the first class. We were told to come to class next week with a budget.
Out of the 14 people in the course, only one came to class with a completed budget. Those that didn’t have a budget, all had the same questions. I don’t know how much to put in each expense, and I’m not even sure what all of my expenses are?? This is a very typical problem with budgets. Where do you start? I have found that getting somewhere is very difficult, if you don’t even know where you are. Imagine waking up in your car. All the windows are painted black, the doors are welded shut, you can’t roll down the windows, even the GPS and On Star are disabled. Even if all you wanted to do was go home, how would you get there, if you don’t even know where you are?? That is the normal situation for most people when it comes to their Cash Flow. Knowing how much you have in the bank today is not enough. Do you know exactly how much you spent on Gas last month? On Eating out? On Groceries?
If you couldn’t answer those questions, relax, your pretty normal. Most people can’t. If you can’t answer those questions, you are realistically going to have a difficult time with doing a budget. Not because your incompetent, or unintelligent, but because you don’t know where you are, financially speaking. Every Post I have done on Budgeting starts with Tracking your money. To find out where you are, you need to know where your money goes. For most of us, this can be pretty easy. I use a “Debit” Card for most of my daily transactions, and online banking for bills. I seldom have more than $10.00 in cash on me. Cash is too hard to track. In this way, the Bank’s computer system does most of my work for me. Every Saturday I sit down with my morning coffee and simply copy and paste this week’s transactions from the Bank spread sheet into mine. At the end of the month I know EXACTLY where my money went, and how much. The spread sheet automatically uses this information to figure out my Cash Flow Plan. The Planning Sheet does all the heavy lifting (math) for me.
You have to do the tracking first, because a budget has to be based on “AVERAGES“. Very few people spend EXACTLY the same amount, on the same expense, every month. If you need a car repair his month, hopefully you don’t need to spend that same amount next month. Fixed Expenses like rent/mortgage, insurance, car loans etc will be the same. But Variable Expenses, like groceries, gas, eating out, etc, vary each month. The budgeting section was Dave’s way of leading up to his signature $1000.00 Emergency fund. An Outstanding idea. The budget was supposed to help you find the cash to put into the fund within 3 months. But if you don’t know where your money goes, coming up with a realistic budget that enables you to save $333.34 a month, is tough. It can be done, if you are in a Positive Cash Flow situation. If you are in a Negative Cash Flow situation, the 3 month dead line is a real stretch. If you do a budget based on Averages, there will be money available for emergencies.
I took it as a real compliment when the facilitator asked me to come in and teach my Tracking and Cash Flow Planning to the class. It is what we teach as part of the DIY Basic Wealth Accumulation course. It’s not complicated, it’s fun, and it WORKS. My students have found that you need to track a minimum of 3 months worth of expenses, 6 months is better, to get a real feel for how much, and where your money goes. If you have online banking, you can often get 6 months of tracking in several minutes. It will take an hour or two to set things up, and enter the initial data. But after that it should take you less than an hour a week to maintain the system. Yes, it is a little more effort, but is an hour a week worth it to get to Financial Independence??
Normal people don’t like doing chores. Budgeting can be a chore. Active Cash Flow Planning can be fun and interesting. Check out our Cash Flow Planning pages under the “Harnessing $$” Tab. If you have questions, please use the contact box. I answer every email personally.