Money 103: Setting Goals & Budgeting

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Money 102: A Hard Liability

Include your partner in your financial planning

A budget will only work with teamwork

  • Money disagreements naturally happen, but the important part is to talk through the hard-to-discuss conversations
  • The ability to compromise with your partner is one of the most critical skills in money discussions (more on this later)
  • If you can’t trust your partner with your money and aren’t married to them, you can still save yourself (more on this later as well)

It takes time and practice to communicate money matters and come to an agreement

  • Start with the “why” and not the “what”
  • Openly share any strengths, weaknesses, concerns, and ideas
  • Hold each other accountable about managing the money as it happens

One of you won’t like budgeting as much as the other, so set guidelines

  1. The one more eager to make the budget will create it
  2. Set the near-final draft budget in front of your partner and shut up
  3. The Budget-Receiver must amend it in some way
  4. Come to a shared agreement and wrap up the meeting in 15 minutes

If you have kids, involve them in the meetings as well to teach them their role in your financial life (more on this later)

Start with the big picture to set goals and expectations

Your 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, most importantly your family, who are affected by your financial decisions
  • If you come from a family that managed money well, you have only seen the results of their efforts, so don’t expect the same effect

Make your goals with the far future in mind

After retirement, you’ll live at about 90% of your yearly income to maintain your lifestyle

Though the average lifespan can be as high as 90, typical retirement is usually around age 65

  • Consider your career when deciding a reasonable retirement age (more on this later)
  • The government will help you stay alive, but not much else
  • Needs and wants will not be taken care of

Someday you will die

  • Your family will need 10-12 times your income to take care of your family after you’re gone

Your long-term goals should follow to short-term ones

Make large goals into measurable monthly goals

Monthly goal-setting is also known as “budgeting”

  • Budgeting helps us to “feel” the impact of money

There are four major reasons people hate the word “budget”

  1. It implies poverty
  2. It was used to abuse someone they know
  3. They’ve never had a budget that worked
  4. They’re fearful of what they may find

Any budget can work, but only if you follow a few rules

  1. Legitimately make it instead of merely wanting it or hoping to make it
  2. Create realistic, achievable goals
  3. Create enough categories to understand where the money goes
  4. Not have so many groups to where it’s confusing to understand
  5. Live on the budget, adjust it as needed, and stick to it throughout life

Even if it can become complicated, budgeting is not difficult

The idea of budgeting is to modify spending to appropriate proportions based on your income

  1. Tithe some, assuming you have a religious belief
  2. Spend on the Four Walls
    • Food
    • Shelter & utilities
    • Basic clothing
    • Transportation
  3. Save some
  4. Invest some
  5. Give some away

The simplest budgeting is called Zero Based Budgeting

  • Income – Expenses – Everything Else = $0
  • In other words, give every dollar a job

You will never have a “perfect month” to track spending

The first few months you start doing it will likely fail, but you will get better

It takes several months to get a feel for budgeting

  • Give “fudge room” to account for odd unexpected things that will come up

The less-than-perfect months allow you to learn and adjust for future months

Computer software makes budgeting easy, but do it by hand or in a spreadsheet to understand how it works for the first few months

Make the month’s budget before the month begins

1. Add all of your household incomes together

Standard paycheck(s)

  • If a paycheck amount varies, make an average amount from several months’ pay
  • If you need, budget each paycheck individually or make the budget period 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

  • Keep long-term goals in mind for windfalls

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 (~5-10% of income)

  • Can include credit card payments, student loan, car payment, and personal debts
  • 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


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 immense power in tracking your money, don’t include a “miscellaneous” group

4. Put the remainder into substantial expenses you’re saving for

Saving for larger purposes should be ~10% of income at first, 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
  • Parties
  • Home repairs and improvements
  • Weddings
  • Retirement
  • College for your kids

5. “Tweak” your budget

  1. Find things that can be removed or cut down on
    • Get creative in finding new ways to do it (more on this later)
  2. Shave off a few dollars for each category
    • Saving a little in each group can become a significant amount directed toward a better purpose
    • Look at your spending in only one category at a time to see if you can change your lifestyle
  3. Dig deeper to analyze any details of your budget to track any overspending
  4. The most overwhelming sign of budget success will be when you’re living on last month’s income

Track your cash flow

  1. Start with your cumulative net worth as of the beginning date
  2. Show all income and expenses in chronological order
  3. Create consistent ranges where the amount of money in and out is measured
  4. The amount available will go up and down, but it will climb over weeks and months if managed correctly

Break out any other plans and worksheets that you’d like to examine

The reports will vary depending on your lifestyle and plans

  • 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 occur

Use at least two bank accounts to track your finances

  • One will track your regular monthly expenses
  • The other one tracks one-time purchases
  • You can also use a third account to monitor 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
  • Manage some of the more easy-to-overspend expenses like food and entertainment with money in an envelope or a prepaid card

Get a bank that doesn’t charge any fees outside of overdraft fees

  • Bank overdraft fees come from sloppy and lazy money habits and are a sign of a crisis
  • 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

Make a visual representation of your status to make it feel tangible

  • Use milestones with incentives marked at each one
  • Put up a chart or a jar filled with beads in a common area of the house

Always keep a mental track of how much you have

  • Use a spreadsheet or grab a template
  • Try online software like Mint that automatically imports financial data
  • Track online purchases with an app like Slice

You will sometimes fail to hit your budget goals or spend money inappropriately

  1. Own your own mistake
  2. Forgive yourself and move on
  3. Let your failure motivate you to do better next time
  4. Find out what you did wrong and make it a story to help others

Think about doing a “spending freeze”

  • Don’t spend any money for a set period and devote it to your goals instead

Try using a rewards system if you need extra motivation

Next: Money 104: How To Have The Mind Of A Millionaire