If you’re wondering how spending and getting rich can exist in the same sentence, the answer is contained in one monthly discipline: a budget. A sexier way to say it: cash flow planning.
When I talk about a budget with friends, I often hear, “Why do a budget?” or “That sounds horrible,” or “I don’t want to be restricted,” or “I don’t have enough money to budget.”
The word budget conjures images of laced up corsets and strict rules. That’s why I love the term “cash flow planning.” I first heard that term at Dave Ramsey, it’s the name of one of his videos as part of his Financial Peace series. Words are powerful and undoubtedly affect us on a deeper level that we’re not even aware of. When you consider the word budget what do you think of? How do you feel? What if I tell you the definition is both a noun and verb, n. 1. A report of estimated expenditure and income, 2. The amount of money assigned to a particular purpose. v. 1. To make a budget, 2. To allow for in a budget. Thank you Webster’s II Dictionary.
When we read those definitions, it connotes an action, “I make it, I allow for it…” Do you see that? We’re the boss. We’re in charge, we tell our budget and hence, our money what do. Now instead of being restrictive, it’s our servant. A budget is there to serve us, to be a planning tool for how we’re going to keep more of the money that comes through our fingers in a lifetime.
So back to cash flow planning. That naturally conjures great imagery. Cash is now a moving, flowing, easy come item that we are going to plan for. This is the answer to “Why budget?” We budget because a lot of money is going to flow through our fingers and bank accounts in a lifetime. And the last thing I want for us is to get to the middle of our life and start to wonder, “What have I spent my money on?” “Where is it?” “When can I afford to work less and put more time into my pet projects?” “Why do I have so much crap?” Listen to our podcast on decluttering here.
And next time there’s an emergency, like your radiator gets punctured, I want you to be like, “No problem, I planned for the unplanned. This will come from my emergency fund.” These conversations with ourselves don’t happen unless we’ve done some sort of planning, and this planning is best done with a monthly budget. Read about how to make a simple budget here.
My newest favorite phrase that I heard during a Ramsey podcast is, “You can wander into debt but you can’t wander out.” It’s the same with building security and wealth. I want you to picture yourself as a wise steward over your money. Money that flows into our lives, primarily through our work and incomes, is a blessing. If we manage it well, I believe we’ll be blessed with more. Money can be spiritual in nature if we use it to be self-sufficient, nurture our families, and practice tithing and generosity.
So a budget is done each month. I’m in charge of the budget for our family, but I’ll go to my husband and ask, “Is there anything you want included in the budget next month?” Sometimes he’ll say, “I need new shorts.” I make him sit down with me too, but his review of the budget is perfunctory at best. He’ll be the first to tell you though that he loves our budget. His worry factor is minimal because he knows what to expect and we have a master plan.
What’s Coming In: Net Pay
Before I got married five years ago, I had been doing a budget for four years prior. And I keep it super simple. It’s college-ruled lined paper on clipboard. A cute clipboard. At the top I write, “October 2018.” I write my income. Speaking of income, do you know that the majority of people I talk to, those with classic W-2 jobs, cannot tell me how much money they take home, after taxes, in a month? They can tell me their annual salary, but they’re never quite sure what their take home pay is. Money comes in, bills get paid, money goes out. The average American could not go two months without a paycheck before they’d be in serious trouble. So another reason to do a budget is so you know exactly how much you bring in each month, or you can start to determine an average if your income is irregular.
Figure out your Bills
The next part that makes a budget great is you really get to dive in and see what your bills are, what is an absolute necessity each month. Then you get to decide what your “allowance” (and I recommend a straight weekly cash allowance) is for the week, the amount you’ll spend on miscellaneous items, coffee runs, magazines, eating out. When I was single, my allowance was $100 per week, but that included all my groceries too. Now that I’m married, our grocery budget is separate and our individual allowance per week is $60. It’s cute because he still pays for dates out of his allowance and I use my allowance for beauty products at Target or lunch with the girls or colleagues. I keep a separate “Beauty Budget” account for things like Botox, but often the spouse will say, “Can the beauty budget pay for my hair gel?” because he doesn’t want to use his allowance. Then he wants the grocery budget to pay for it. We’re talking $8 bucks. Finally I just take it and put it with my products. Such a baby!:)
Less Arguments about Money
Another benefit of a budget is that there’s less reason to argue over money. Maybe all men are not like this, but once we agreed on the weekly allowance, we both take our cash and it’s ours to do whatever we want with. No one uses a credit card unless it’s for gas, and it’s all on the same card. Gas is a safe bet for a gas, because you can’t spend “27% more” in your tank.
Less Guilt on Splurges
Hey, it’s your budget. If you have allocated the money for a new Tory Burch handbag, and you have the cash for it, spend happily. If you’re taking from your grocery budget and are going to eat Ramen for the next month, it’s all about trade-offs and priorities. My mother learned my priorities in college. She would send money and I would go to the Gap. One week she drove down to college and took me shopping. Major grocery shopping, cart overflowing-type shopping. I asked what the occasion was. She said, “When I send you grocery money I know you’re spending it on clothes.” Well, duh. A girl’s gotta look good to get the right opportunities and hence, better jobs later in life.
Fewer Surprises
If you’ve taken the time to do a budget for three months in a row, and gotten most of the kinks ironed out, you probably have taken those bigger ticket items into account and prorated them into your monthly budget. One example of this is car insurance. Many people pay car or house insurance every six months or every year. And when the bill comes it’s like bam! –a big hit to the month. But if you divide it equally, and move the money each month to a connected savings account with easy access, you’re ready to write that big check, no sweat. Also, it ensures that you’re being more realistic about what your monthly expenses are, not just jotting down the bare minimum essentials and thinking there’s more spare than there really is.
Plan Implementer
Whether your goal is to get your debt paid down in lightening speed (a strategy I highly recommend) or to start stashing away to build a 6-8 month emergency fund, your budget helps you account for all your dollars and make sure they are working to their highest best good.
The highest best good is our necessities of food, shelter and utilities. The next highest best is getting out of debt except for our house. The next highest best is savings—short and long term. If those three items are attended to, then it’s fair to start looking at what experiences we hope to enjoy, things we want to purchase, and what we want to give.
When I graduated from law school, I really wanted to buy a house. Even though I was making good money for a new grad, I lived like I was still in college sans roommate. I found a studio to rent for $600 in Laguna Beach. Even though everyone asked when I was going to buy a BMW, I kept my paid off Toyota Corolla. Each month I set aside $1000 for a down payment on my future home. In one year, I put 5% down on a little condo in Laguna Beach for $210,000. (No, it was not the 1950s, it was 2000.) The surprise came when they mentioned “closing costs.” “What are those?” And I had no money for that expense, just the down payment. My mother graciously loaned me the $3,500.
I wanted to say I was thrilled with my new purchase, but the reality was it was February, and the condo was bare and chilly. There were black garbage bags all around I used to load up my clothes and the minimal items that I owned. I drew a hot bath and cried in the tub. All I could think about was the $.08 cents left in one account and $.11 cents left in the other.
Moral of the Story
The moral of story is, delay gratification for the bigger goal. That moment of being scared and having 19 cents to my name paid off years later in huge profit, and tax free capital gains. The other moral is to have more of a cushion than 19 cents. Although I got a $30,000/year raise after the purchase, I ended up selling it because I lost my tech job after 9/11 and didn’t have an emergency fund to keep afloat once my severance ran out. And rather than hire professionals to help get it rented, I ran one ad, got frustrated and decided to sell. That was a fear-based decision, and decisions based on fear are rarely good ones.
If only I had a budget back then. Rather than spending $1,000-2,000/month decorating it “just right” over the first year of being a homeowner, and buying a new BMW with a loan from my credit union, I could have put at least half that money into an emergency fund. Then, when the storms hit, I would have had severance, unemployment, and an emergency fund (and no car loan). No fear, only peace and security until the next right thing came along.
That condo is now worth around $8600,000. Final moral of the story, hang onto beach real estate.
A Budget Helps You See Money Pits
When you take the time to do a budget, you are forced to look over past credit card statements, bank statements, online bill pay, and checkbooks to see what you spend your money on, so you can now pretend to be doing it on purpose.
This exercise is a shocking eye opener for some. Here’s an example. Sitting on the grass talking to fellow Bar exam goers, I met a guy. He asked me out and we started dating. I had only one rule: no drinking on dates with me. My reasoning, “If I’m not enough entertainment for you, maybe you should be dating someone else.”
He agreed. We never drank on dates. He’d take me to super nice restaurants, which was good because I love to eat amazing food. Every time after the server would hand him the check he’d exclaim, “That is so cheap!” Then he’d look at me and say, “You’re such a cheap date.” Okay, buddy, easy. We didn’t date long but stayed in touch. After several months he called me and said, “I’ve quit drinking!” He clarified, “Unless someone else buys it for me.”
He Drank his Mercedes
He went on to explain that after dating me and our awesome “cheap” dates, he decided to go through his bills and see how much he was actually spending on alcohol. It was $600-$700 per month! “That’s as much as a new Mercedes payment!” he exclaimed.
Yet, he didn’t have a Mercedes, he had a lot of money that slipped unconsciously, unplanned, and unaccounted for through his fingers. And now he was going to capture it and use it for something he wanted more than boozing it up with friends. I don’t know if he did a budget per se, but he definitely got intentional about digging into where his resources were going and made a significant shift.
So next time you’re asking, “Why do a budget?” Ask yourself if you’re using your financial resources to their best highest good, do you need a raise, do you want to be the boss? You can do all those things through cash flow planning. Further, it may be time for the reality check you know you’re avoiding. Either way, create your budget, tell your money where it’s going, and be the boss of your life. Money is a beautiful servant; debt is a terrible master. Keep your life simple and live below your means. That’s where wellness and money dead center intersect.
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