Money 103: Setting Goals & Budgeting

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Money 102: A Hard Liability

You need to include your partner in the planning

  • Teamwork is absolutely necessary to make any budget work
    • Money disagreements will naturally happen, the important part is to have the hard conversations
    • One of the biggest necessities is the ability to compromise with your partner
    • If your partner isn’t someone you’d trust with your money and you’re not married to them, you can still save yourself
  • The ability to communicate money matters and get on the same page takes time and practice
    • Start with the “why”, not the “what”
    • Openly share any strengths, weaknesses, concerns and ideas
    • Hold each other accountable about managing the money as it happens
  • There will always be one of you who doesn’t like budgeting
    1. The one who wants to do the budget will make it
    2. Set it in front of the other one and shut up
    3. The other one is required to amend it
    4. Have a mutual agreement and wrap it up in 15 minutes
  • If you have kids, involve them in the meetings as well to teach them their role in your financial life

Start with the big picture and set goals and expectations

  • If you come from parents who managed money well, you have only seen the end results of their efforts
  • These goals should be realistic and challenge you to do better than you have in the past
    • Expect unexpected events, since you never know what may happen
    • You have other people in your life who are affected by your financial decisions, most importantly your family
  • Keep the far future in mind when making your goals
    • You’ll need about 90% of your income for every year to sustain your lifestyle after retirement
    • Though the average lifespan is around 90, the typical retirement is around 65
      • The government will help you stay alive, but not much else
      • Needs and wants will not be taken care of
    • Someday you will die, and you will need to have 10-12 times your income to take care of your family
  • To get to your long-term goals, you then need to create short-term ones

Make the big goals into measurable ones for the month

  • Monthly goal-setting is also known as “budgeting”
    • Budgeting is done in order to “feel” the impact of money
    • There are four major reasons people hate the word “budget”
      • It implies poverty
      • It has been used to abuse someone they know
      • They’ve never had a budget that actually worked
      • They’re fearful of what they may find
    • Any budget only works if you
      1. Actually make it, as opposed to wanting or hoping you make it
      2. Have realistic goals that can be achieved
      3. Have enough categories in it to understand where the money goes
      4. Not have so many categories that it’s confusing to look at
      5. Actually live on it, adjust it and stick to it as life happens

Budgeting is not hard, even if will sometimes become complex

  • The idea of budgeting is to spread your money around in the right proportions
    • Tithe some, assuming you have a religious belief
    • Spend on the Four Walls
      • Food
      • Shelter & utilities
      • Basic clothing
      • Transportation
    • Save some
    • Invest some
    • Give some away
  • The simplest and best budgeting is called Zero Based Budgeting
    • Income – Expenses – Everything Else = $0
    • In other words, give every dollar a job
  • You will never get a “perfect month” to track your spending
    • Like any other skill, you will fail the first few months you start doing it, but you will get better
    • You need to get a feel for it over several months
    • The less-than-perfect months are an opportunity to learn and adjust for future months
    • It is a lot easier to use software, but for the first few months do it by hand or in a spreadsheet to understand how it works
    • Give “fudge room” to account for the odd things that will come up

Break out a monthly budget before the month begins

  1. Add all of your household incomes together
    • Standard paycheck(s)
      • If a paycheck amount varies, make an average from several months’ pay
      • It can be helpful to budget each paycheck individually or start the budgeting period on the paycheck date
    • Make an averaged-out estimation of sporadic incomes
      • Self-employment and business income
      • Refunds/reimbursements
      • Temporary jobs
      • Interest and dividend income
      • Gifts received, income tax return, etc.
    • When coming across a windfall, always change your budget to accommodate the income
  2. Assign all the fixed or near-fixed amounts (~50-60% of income)
    • Shelter (~25-35% of income)
      • Rent/mortgage
      • HOA dues
      • Homeowner’s/renter’s insurance
      • Property taxes
    • Utilities (~5-10% of income)
      • TV, internet, phone(s)
      • Electricity, gas, trash, water
    • Debts like credit card payments, student loan and car payment (~5-10% of income)
      • After paying off debts, this should become investments
    • Health and medical (~5-10% of income)
      • Health, dental, vision insurance
      • Medications
      • Over the counter drugs and supplements
      • Gym membership
    • Child care
    • Household supplies
      • Cleaning supplies
      • Toiletries
      • Lawn & garden
  3. Assign all of the variable expenses that fluctuate up and down
    • Entertainment and fun money (~5-10% of income)
      • Movies, music, books, toys, games, electronics
      • Social expenses like barbecues, parties, concerts, church functions, outdoor recreation
      • Hobbies
    • Education expenses
    • Food (~5-15% of income)
      • Groceries
      • Dining out, which should include tips and tax
    • Transportation (~10-15% of income)
      • Fuel
      • Mass transit fare
      • Registration fees
      • Parking fees
      • Repairs and maintenance
    • Household fixtures
      • Appliances
      • Tools
      • Furniture
      • Office supplies
    • Personal care (~5-10% of income)
      • Cosmetics
      • Haircuts and salon services
    • Pet expenses
      • Toys/supplies
      • Food/treats
      • Veterinarian fees
      • Grooming
      • Carrier bag/crate
      • Flea and pest treatment
    • Clothing (~2-7% of income)
    • Charitable donations (should be 10-15% of income)
      • Tithes
      • Giving account
      • Charities
      • Spontaneous giving
    • Children’s allowances/commissions
    • ATM withdrawals
    • If you want to be extremely powerful in tracking your money, do not include a “miscellaneous” group
  4. Have the remainder go into whatever big expenses you’re saving for (~10% of income to start, but should eventually go as high as 30%)
    • General rainy day fund
    • Auto repairs or your next car
    • Christmas, birthday, anniversary and special occasion gifts
    • Vacations
    • Big parties
    • Home repairs and improvements
    • Weddings
    • Retirement
    • College for your kids
  5. “Tweak” your budget
    1. Find things that can be completely removed or cut down on
      • Get creative in finding new ways to do it
      • Look in the following sections for ways to save on practically everything
    2. Shave off a few dollars for each category, which can total a large amount to go to something more important
      • Start by examining spending in just one category to see if there are ways to change your lifestyle
    3. Analyze or dig deeper into any of the details of a budget to see if you’re overspending
    4. Your first sign of success with your budget will be when you start living on last month’s income

Track your cash flow as well

  1. Start with your cumulative net worth as of the beginning date
  2. Show all of the money coming in, broken down by date
  3. Show all of the money going out, broken down by date
  4. The amount available will go up and down, but if you’re managing it correctly will climb over weeks and months

Break out any other plans and worksheets that you feel you may need

  • Allocated spending plan
  • Business budget
  • Charitable giving plan
  • Christmas gift budget
  • College funding plan
  • Debt reduction plan
  • Detailed cash flow plan
  • Emergency funding
  • Home repairs plan
  • Insurance budget
  • Project budget
  • Retirement funding
  • Tax reduction plan
  • Travel budget
  • Wedding budget
  • Will or estate plan

After making the budget, track your finances as they happen

  • Visual aides can help show your status and make it tangible
    • Use milestones with incentives marked at each one
  • Put money in an envelope or use a prepaid card to manage some of the more easy-to-overspend expenses like food and entertainment
  • Always keep a mental track of how much you have
    • Use a spreadsheet or grab a template
    • Try free online software like Mint that can automatically import the financial data
    • Track your online purchases with an app like Slice
  • Use at least 2 bank accounts for tracking
    • One will track your regular monthly expenses
    • One will track bigger purchases
    • Optionally, you can use a third one to track your variable expenses like food and gas
    • Use a “three pot” system between you and your partner, with a shared account and at least one for each of you
  • Get a bank that doesn’t charge any fees outside of overdraft fees
    • Bank overdraft fees are a sign of living in a crisis and are caused by sloppy and lazy money habits, and budgeting correctly avoids them
    • Sign up for real-time text alerts that show purchases and the remaining balance if it gets low
  • Use automatic payments and pre-authorized transfers to move money to where it needs to go before you “feel” it hit your spending account
    • Use direct deposit for your paychecks
    • Pay your bills online on a calendar to prevent forgetting to pay

If, for whatever reason, you fail to hit your budget goals or spend money on something inappropriate

  1. Own your own mistake
  2. Forgive yourself and move on
    • Think about having a “spending freeze”, where you don’t spend any money for a set period and devote it to your goals instead
    • Try using a rewards system if it will help you
  3. Let the mistake motivate you to do better next time
  4. Find out what you did wrong and make it a story to help others
Next: Money 104: How To Have The Mind Of A Millionaire