Budgeting sucks only when you’re spending more than you’re making or barely getting by. You would rather spend without thinking whether you have the money or not. Learn to cut expenses and spend less than you make. This is called budgeting. You’ll then have money to save and make your money grow. Only then, budgeting becomes your powerful tool.
What Is Budgeting
It is balancing your expenses with your income. Would it surprise you to know 46% Americans spend more than what they make? Are you one of them? If yes, you will not be rich unless you turn this around.
Do it once. Get your spending, earning, and saving in balance. Then you can do it periodically.
Here are the simple steps to conquer the budgeting exercise.
Step 1-Create a Spreadsheet
Include categories in your spreadsheet for the following:
- Fixed expense such as rent or mortgage, property taxes, insurance, utility (cable, cell phone, water, gas, electric), and transportation (car payment, gas)
- Variable expenses such as grocery, dining out, entertainment, travel, and clothes
- Debts, such as credit card balance, and student loans
- Services such as gardener and housekeeping
- Miscellaneous or other category such as alcohol, tobacco, lottery tickets
An alternative to a spreadsheet, you can use a budgeting app such as Mint (https://www.mint.com).
Step 2-Write Down All Your Expenses
Write down all your expenses on the spreadsheet. Do it once a day at the end of the day. Include all your expenses including the $2 coffee, parking fee, and tips. Be sure to capture expenses that may incur just several times a year. These items may include car repair, insurance, taxes, vacation, birthdays, holidays. Use your credit card or bank statements to help you with this. I recommend keeping track of your daily expenses for three months. The exercise of writing it down will make you become mindful of your spending.
The exercise of writing down every penny may make you feel well, kinda cheap. But watching your dollars does not make you cheap.
Ramit Sethi, in I Will Teach You To Be Rich, had the best explanation about cheap versus frugal people. He says that cheap people care about the cost of something while frugal people care about the value of something. Cheap people try to get the lowest price on everything while frugal people are willing to spend on items they really care about. Cheap people’s stinginess affects those around them because they’re inconsiderate. Frugal people know choose where they have to spend their money. Cheap people carry a tally of how much others owe them and think short term. Frugal people think long term by cutting cost on things they don’t love so they can spend extravagantly on things they do love.
The mindset of frugal people is the key to being rich. Read the Millionaire Next Door (https://www.amazon.com/Millionaire-Next-Door-Surprising-Americas/dp/1589795474). Consciously decide what to spend your money on so that you can stop feeling bad about not having any money.
Step 3-Add Up Your Expenses and Income
Add up your expense each month. Then take an average of the three months. Do the same thing for your income. Does your expense exceed your income? If it does, perhaps this is the reason you feel crappy at the end of each month. I used to hate the “bill paying day” too. It was so depressing to find there’s no money left after working so hard.
“Budget: A mathematical confirmation of your suspicions.”
A.A. Latimer
Step 4- Balance Your Expense and Income
If you’re spending more than you’re making, you need to spend less and make more.
An average household income was $78,635 (Bureau of Labor Statistics) in 2019.
An average expense was 61,224. This is an improvement from previous years for we’re spending 80%. How do you compare to the average American household?
For comparison, here’s a breakdown of an average American household budget:
- Housing: 33 % ($18,886)
- Transportation: 16% ($9,049)
- Food: 13% (7,203)
- Pension and insurance: 11% (6,831)
- Health care: 8% ($4,612)
- Other: 7% (3,933)
- Entertainment: 5% (2913)
- Apparel and services: 3% ($1803)
How does your expense compare?
You can reduce your expense by tackling the three major expense.
Keep your housing cost below 30% of your take-home pay.
Transportation cost averages at around $750 per month. If you pay off your car and keep it for as long as the car will run, you will save a lot of money over the years. I know a couple that shares one car. Can you take public transportation?
The third major expense is food. Eating less is not a good option. But eating in instead of out and cutting out sodas or alcohol with your meal is an option. Tell yourself it doesn’t have to be forever. You’ll establish good habits and still be drinking water after you become a millionaire.
Step 5- Decide How Much You Can Save
Now that you have your financial information, decide on how much you can save. Start somewhere (10%) and strive for more (20% plus). If you are average, you can strive to save 10%. Grant Cardone, the bestselling author of 10X Rule, sales trainer, speaker, entrepreneur, and real estate mogul whose net worth is $300 million and growing says, “Be obsessed or be average”. If you are obsessed, you should strive to save minimum 20%. Analyze your expense to see where you can cut in order to achieve your savings goal.
Warren and Tyagi, In All Your Worth: The Ultimate Lifetime Money Plan by Warren and Tyagi, they recommend “50/30/20 rule.” After taxes, spend 50% of your income on what you need, such as housing, groceries, utilities, insurance, and car payment. The 30% of your money goes towards “wants” such as dining out, cable bill, unlimited cell phone service, and travel. The 20% goes towards savings such as retirement, emergency fund, and saving for a house.
Step 6: Automate the Process
Put your bills on auto pay so you’ll never be late on payments. Make sure your income covers all your expense. Automate your savings by directly depositing into an account. Use your savings to invest in wealth building vehicles.
Follow these steps and you will never hate the “bill-paying-day” again. As you gain momentum into budgeting and saving, you will never think that budgeting sucks.
“If you buy things you do not need, soon you will have to sell thing you do need.” Warren Buffet