This is the fifth article in the My Second Million series.
You’ve tracked your spending. You have categorized your expenses so that you have an idea of where you spend your money. Hopefully, you also have an inkling as to how you spend your money and maybe even why. The more you understand your own habits and are honest about those habits, the easier it will be to make plans that work.
My vision of a butterfly is a creature that changes into something free and beautiful. The metamorphosis from a caterpillar into a winged beauty. The cocoon is made by the caterpillar to protect it while it goes through its transformation. The cocoon that we often find ourselves in is usually a cage of our own making. It is cage that is locked from the inside. I know that I buy too much food and snacks. I attribute that to an existence of lack when I was young. My mother did a wonderful job of making sure we had enough, but I knew that we could have more. My father severely restricted my mother’s budget for food. So that is why I like to have lots of food and snacks around, it is a comfort to me. Sounds like an excuse, and it is. I know I do this and it is up to me to be honest and logical about it. Do I always win? Not at all, but I am trying.
There is no perfect budget. Life will happen! The car will break down. A child will be sick. You have an emergency home repair. The budget is a spending plan. It should reflect your goals and your values. How do you expect to emerge a butterfly if you are not working towards your goals?
If you are with someone special, it is important, vitally important, that they are part of the budgeting process. What are your dreams? Not just yours alone, but what is the goal that the two of you have together? Is it to be debt free? Is it to have a bigger home? Is it a safe and comfortable retirement? Do you want to travel? Your goals as a couple will determine the important aspects of the budget. It is, however, important that your goals be realistic. Make several smaller benchmarks that lead to your ultimate goal, that way you will know that you are gaining ground and succeeding.
One of you may be better with finances or figures, the other more aloof or even uninterested. But it is important to at least know the direction you both want to move in. Money and arguments about money can bring incredible strife to a relationship, but working together with your partner in respectful and thoughtful discussion can move couples closer. If you live alone, do not dismiss your future. Where do you want to be in the future? How do you want to get there and what do you want for that someone special that may come into your life?
The mechanics are simple but the implementation takes conviction. Begin with your income, your net income. If you tithe, that should come off the top, if not automatic. Know what you owe. Know when your bills are due. This simple information will create the basic structure of your budget. Define bills that are stable, such as mortgage and car payments. These are fixed amounts.
Then define your bills that are variable, the ones that change each month, such as energy bills, grocery bills, etc. These bills are usually somewhat controllable. You can find some savings here.
Then decide what your discretionary spending looks like. Much of your savings can occur here. Subtract your bills from your income. This is your discretionary funds. Your savings and goals come from here, as well as bills that can be cut or reduced. Don’t be afraid to set up multiple savings accounts. Maybe one for vacation, another for gift giving, but the priority should be a well maintained emergency fund. Or maybe some of the discretionary funds become extra principle payments on other bills. The choice is up to you. It won’t work if you don’t decide and follow through.
You should be able to take these amounts and decide how much you can save. Once you decide a reasonable amount for saving, then mark that amount a fixed liability. Pay yourself first! Your first goal should be to have an emergency fund. It is best to have an amount automatically withdrawn from your checking to an online savings account that pays higher interest. Once your emergency fund is fully established, you can concentrate on other goals. Knowing that your emergency fund is there for life’s little surprises will relieve a great deal of stress and worry.
Your first few budget months will probably not seem to work as you like, but this is normal. It takes time for the budget to be made reasonable, and it takes hard work on your part to make it work. Soon, there should be a balance between the needs and wants of today and the responsible planning for tomorrow. Some people like others to create the spending plan and provide structure. If that is what you need, then find someone you trust that you know is already financially responsible. If you have the courage to do it yourself, then establish an accountability partner, whether that be your partner, your kids, your parents, your friend or even a professional to keep you on track and hopefully give you lots of guidance and encouragement along the way.
I hope that at least in this area of your life, you emerge a beautiful butterfly from a restrictive cocoon into a comfortable nest from which to take flight.