The Class - The Financial Course You Wish You Had In School

Chapter 2: Budgeting

In today’s world, you have the ability to purchase almost anything with a click of a button. Spending money is easy, and most people usually enjoy it. Budgeting, on the other hand, might be compared to a root canal. Using that comparison, what happens if you decide not to get the root canal done? The pain of that tooth just gets worse and worse until it’s unbearable and you have to take that postponed trip to the dentist.

Understanding and controlling your budget may not be enjoyable when you’re doing it, but when you are in control of your budget, future fatal financial mistakes are nearly 100 percent eliminated! A budget is a critical part of your financial foundation because it ensures that your income and expenses are aligned and that you are setting aside an appropriate amount of savings for you to meet your financial goals and secure your financial future. When your expenses exceed your income, that usually involves taking on debt. That debt creates a financial hole that only gets deeper over time. A budget allows you to impose discipline on your spending and borrowing so that you pay yourself first and create a solid foundation for a prosperous financial future for you and your family.

This chapter, if implemented into your financial plan, will be the area that reduces your personal stress around money the most. So, let’s evolve the thought that budgeting is boring to the realization that budgeting is the best way to control your spending and overall finances.

Money Savvy Strategy and Budgeting

Budgeting is where you apply the Money Savvy Strategy, I mentioned in Chapter 1 to your actual spending. In Chapter 1, I discussed how it applies to debt. In this chapter, I want to focus first on how the 25 percent Donate/Share philosophy works and then how to apply the entire Money Savvy Strategy to the budgeting process.

25 percent Donate/Share

This section of the 25/25/25/25 percent plan is often the one overlooked or misunderstood by people. When mentioning donating to others, there is usually two reactions: A verbal reaction with a saying similar to something like, “Yeah, I donated too XYZ organization this last year, they seemed decent,” or “I would, but we don’t make enough money to donate.” But the second reaction you’ll see sometimes comes from the ones that understand the importance of this 25 percent to the wealth building process. This type of reaction is in their body language and facial expressions. When donating/sharing with others is brought up to them, they physically light up inside and out. They have experienced and embraced how priceless donating and sharing really is.

So, what exactly is all in this category of donating and sharing?

Donating

Over the course of your lifetime, you will earn varying amount of money. When you adopt the concept of donating or sharing 25 percent of your earnings into a financial plan, you will realize what being wealthy truly means. Donating is the act of taking some of your hard-earned money, identifying organizations you believe in and giving them a percentage of your income/money. Do not take donating lightly, as that is where we often find the first type of reaction described earlier. What do you care about? What would you like to change? Besides your money, you can also donate your time to the organization/place/people to experience the impact of your financial support. Again, to gain this vast amount of wealth by donating a portion of yours, be patient and selective in this process. Also, for full clarity, the wealth mentioned here isn’t the “monetary wealth” you might first think about. Instead, this is real wealth. When you see the impact, you can make in this world, embrace it and then work to improve upon or enhance that impact, you’ll have a “wealthy life.”

This 25 percent category also includes sharing in it. Sharing is similar to, but different than, donating, and can also make a significant impact on your finances!

Sharing

Sharing involves spending your money on others and may not always be planned in advance like donating. Think of the last time you were out for coffee or dinner with some friends or family. Did you offer to pay for someone else in your group’s coffee or dinner? Maybe it was the other way around and someone in the group offered to pay for your coffee or dinner. If this happens in your life, think about how much more often you could treat the people you care about if sharing was included in your financial plan and budget. Perhaps you’d like to pay for a portion or all your children’s or grandchildren’s schooling. If you want to pay for college, you likely set up a separate account for that planning. However, you probably didn’t identify what percentage of your overall financial plan is going into this fund. Does it have a significant impact to any other area of your finances, like becoming financially independent or retirement?

The great thing about identifying a section of your budget for sharing is that you gain control over that type of spending, creating a more manageable situation so that you can still have these highlights of spending your money on others you care about, but not at the expense of your financial independence. You can shape your Sharing budget in any way that you like. Perhaps that involves hosting dinners and drinks at your house that you pay for or paying for the entire cost of an Airbnb trip with friends or buying a second home and letting friends and family stay for free. As you can see this encompasses a large variety of potential ways to share your wealth and good fortune with the people you care about. The amazing financial impact of being able to identify where this sharing should go AND making sure it stays within that percentage allows you to manage the spending, saving and investing categories correctly.

Income and Expenses

Back to budgeting, which begins with your income and expenses. Are you employed or self-employed? If employed, how is your overall job security? What is your future income potential within that company? If you have benefits, do you understand exactly how these benefits can help you and your finances?

If you are self-employed, how do you pay yourself? Is it a consistent monthly income or does it fluctuate a good amount? Is your business growing or dying? And the big one here for business owners, are you relying on the sale of your business as retirement plan? If so, and the goal is to be done/retired within the next 10 years, priority number one involve developing a succession plan to achieve this outcome. Many business owners are so busy with the everyday items that they neglect succession planning.

Once you answer the above questions, they will contribute to building your financial foundation. If there is a crack in your foundation with income and you don’t have the reserve to fill in that crack, take control and plan to fix that immediately. If you’re employed and your financial foundation is cracked, consider whether your present job is the best fit from the income and job satisfaction perspective. If not, perhaps now is the time to begin looking for a better job.

Your expenses are covered clearly in the budgeting section. When you think about expenses, remember how important it is to consistently ensure that your income exceeds your expenses. Otherwise you end up with debt, the downsides of which we focused on in Chapter 1. While there are necessary expenses, such as utility bills, food and insurance, it’s easy to let your expenses get out of hand. For example, if you decide you need a larger apartment or house, that larger dwelling will not just increase your expenses in terms of the rent or mortgage — you’ll also pay higher utility and insurance bills.

Again, like your whole financial plan, reviewing these items, being honest with your situation and taking the time to plan a different path is necessary if you want to pass The Class of financial success.

Budgeting

Whether you use a budget worksheet similar to one displayed in this chapter or employ a spending app such as Mint, YNAB or Clarity Money, make sure it’s easy to use and that you can commit to consistently recording your expenses. Budgeting worksheets or apps should track monthly and annual expenses. Obviously, there are expenses that only occur once or twice a year, so factor in that annual cost and see what that means compared to your monthly budget.

Often, I see people lose control of their finances because they live within their usual monthly expenses, but then have three, four or five larger expenses throughout the year that they don’t budget for on a monthly basis, which sinks their finances. That’s why it’s so important for your budget to track everything as monthly average expense. The other item that seems to work well for saving time on the budget worksheet is to estimate your expense numbers but estimate up a few dollars. We all know monthly energy bills differ from summer to winter expenses, but if you can average that cost and add a $5 monthly buffer, you now don’t have to get the budget worksheet down to the penny. If you prefer knowing it down to the penny each month, that is great, just...