My husband and I struggled most of our younger years together trying to find a way to manage our money. The problem we experienced was that we always ran out of it. And at the end of every year, we were seriously confused about where it all went. We created budget after budget and were determined to live our life according to this plan we had in front of us. However, it just never worked.
Did we lack discipline? Did we lack intelligence? Were we just destined to live in debt for the rest of our lives? This was not an option. So, we continued to try and fail until one day we tried using a business strategy called a Cash Flow Plan. This was the key that unlocked the mystery of the budget.
A budget is a list of monthly expenses. The problems with our budget were that a) there wasn’t a plan of execution and b) we didn’t have an effective way of tracking any of the categories. So, during the month, we never knew how we were doing in any of the categories. And, when we would get paid, we would have no idea which of the bills to pay because we didn’t have a plan. The cash flow plan actually put legs on our budget and made it walk for the first time ever. We made a lot of mistakes in the beginning months. But, we eventually got the hang of it and it changed our lives, not to mention our future.
I have taught this system to hundreds of people. I have found that the system works for those who work it. I suppose the opposite could be said as well. Without a well executed plan, your dream is only a fantasy.
It is important to know that your budget and cash flow plan will not be like anyone else’s. Just as no two people are alike, no two budgets are alike. I’m going to unfold this system in bite sized pieces. It would be slightly overwhelming to complete it all at one time. This is why I have broken this blog into two parts. I’ll reveal part two next week. So, let’s take a look at how to create a budget and cash flow plan.
Step 1 – Identify your income
- Take a look at your paycheck. Everything is automated these days. You work, and then your money magically appears in your account via something we call “Direct Deposit.” Therefore, most people don’t pay attention to the actual paycheck. There are many categories of income and deductions. Take a look at yours. Make sure you understand it. If you have questions about it, go to your boss or your Human Resources Department. It would be a good idea to understand how it is structured.
- How many times do you get paid next month? If you are paid on the 1st and 15th, you will only get two paychecks. If you are paid every other Friday, you usually receive two paychecks a month. However, twice a year, there are two magic months where you receive three paychecks. We need to plan for this money or it will just vanish away in our account.
- If you are married, do this same exercise with your spouse’s paycheck. Understand it, and know how many checks you will receive next month.
- Do you have other income streams? Child support? Multiple jobs? Cash from watching kids in your home? Garage sale money? Right now, you are only trying to identify the money available to you next month. We aren’t trying to create a budget we can use every month of the year. Each month is different. We are only creating a budget for next month.
- What if your income varies from paycheck to paycheck? Budget low. Choose a number you know you will hit each month. This will mean that you will have to scale back on your monthly expenses. But, you can budget in a way that makes allowances for the excess. I’ll cover this in Step 2.
Step 2 – Identify your expenses
|Auto: Pmt 1|
|Auto: Pmt 2|
|Ins: Life & Disability|
|Ins: Medical & Dental|
|Credit Card 1|
|Credit Card 2|
|Fuel & Travel Costs|
|Hair & Personal Care|
- Many people really don’t know what they spend in each category. That was okay for the past. But, you are moving into a better future. So, grab your pencil and get started. Note due dates of bills as you go along. You’ll need them for your Cash Flow Plan.
- Give yourself plenty of grocery and gas money. These are two areas you don’t want to run out of money.
- Unless you are on a balanced bill, utilities fluctuate. So, plan high.
- Consider adding a little bit for Miscellaneous expenses, especially if this is your first time to budget. You may not be thinking of everything. And even if you are, things happen that you can’t plan for.
- Give yourself a little bit of pocket cash each pay period. This helps absorb some of those small unplanned expenses.
- If you are behind on some bills, you may have to plan to pay two months of those categories to catch up.
- If your bank account is overdrawn, you need to plan that amount in this month’s budget to pay back.
- If you are working on a variable income, remember to have a plan for the excess. Here’s an idea. Plan your monthly expenses around an income you know you will receive. Then, plan your variable expenses around the excess. For instance, if you only hit the low number, you don’t purchase additional clothing that month. If you get more, you can tuck some money away for a trip to your favorite store or a lunch date with a special friend. Or, if you are in debt, you could plan to send in a larger payment.
Getting all of your expenses together is usually more difficult than it sounds. This is especially the case if you have never tracked them before. Look over your expenses in your bank account for the last few months. You probably spend money that you aren’t even aware of. Keep your budget handy throughout this week. Try to stay conscious of the various different areas every time you pull out your debit or credit card. Maybe even keep a list of what you spend money on. Give yourself one week to document your income and expenses. Then next week, we will talk about creating a cash flow plan.