Budgeting Finances – The Struggle

I struggled for many of my younger years budgeting finances.  Trying to find a way to manage money effectively was difficult.  My problem was that I always ran out of it!  And at the end of every year, I was seriously confused about where it all went.  I created countless budgets, determined to live my life according to this plan.  I was beginning to discover that budgeting finances just didn’t work!

Did I lack discipline?  Did I lack intelligence?  Was I just destined to live in debt for the rest of my life?  This was not an option for me.  In Define What Brings You Peace, I listed financial control as one of the things I needed in my life for peace.  So, I continued to try and fail until one day I tried using a business strategy called a Cash Flow Plan.  This was the key to budgeting finances!  It unlocked the mystery of the budget.

How to Create a Budget and Cash Flow Plan

A budget is a list of monthly expenses.  The problems with my budget were that a) there wasn’t a plan of execution and b) I didn’t have an effective way of tracking any of the categories.  So, during the month, I never knew how I was doing in any of the categories.   And, when I got paid, I would have no idea which of my bills to pay because I didn’t have a plan.  The cash flow plan actually put legs on my budget and made it walk for the first time ever.  I made a lot of mistakes in the beginning months.  But, I eventually got the hang of it and it changed my life, not to mention my future.

That was many years ago.  Since then, I have taught this same 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’s 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.
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Let me give you a little warning here, one that I’m sure you’re already well aware of.  This is an overwhelming topic.  But one that you can’t ignore.  You’ve got to put on your big girl panties and just do it.  You’ll be so glad you did.

I’m going to try to unfold this system in bite-sized pieces.  So, let’s get started.

Step 1 – Identify Your Income

• • Understand your income.  Everything is automated these days.  You go to work.  Then your money magically appears in your account.  Therefore, most people don’t even see the actual paycheck.  There are many categories of income and deductions.  Make sure you understand yours.  If you have questions, go to your HR Department.  You need to understand how it is structured.  After all, it is YOUR money.
  • Determine how many times you get paid next month.  If you are paid on the 1^st and 15^th, you will get two paychecks each month.  If you are paid every other Friday, you usually receive two.  Although, two months in the year, you will receive three paychecks.  You should have a plan for this money or it will just vanish in your account and you’ll never even notice.  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.
  • List additional income streams.  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.  You aren’t trying to create a budget that you can use every month of the year.  Each month is different.  You are only creating a budget for next month. This was very confusing to me initially.  I wanted one budget that I used every month.  That’s just not realistic.
  • Inconsistent income?  Create a plan.  What if your income varies from paycheck to paycheck?  Budget low.  Choose a number you are certain you will hit.  This will probably 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.

Step 2 – Identify Your Expenses

• • Create a list of monthly expenses.  Most people don’t know what they spend in each category.  So, grab your pencil and get started.  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 through your bank accounts to get an idea of where your money goes.  You probably spend more than you realize.
    • Gas & Groceries – Most people underestimate this category.  These are two areas you don’t want to run out of money.  Plan for more than you think you need.
    • Utilities fluctuate.  Plan high.
    • Miscellaneous – Consider adding this category. This helps cover the unexpected.
    • Pocket cash – I recommend everyone keep a small amount of cash on them at all times.  You just never know.
  • Note the due dates next to each expense.  You’ll need to know due dates in Step 4.
  • Late Payments? – If you are behind on some bills, you may have to plan to pay two months of those categories to catch up.
  • Plan for possible excess income. 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. 

Step 3 – Balance Your Budget

Here’s the emotional part.  The grown-up in you has to tell the kid in you NO.  And the kid is going to throw a little fit.  But the grown-up has to stay in charge.  Don’t forget this part as you balance your budget.

For the sake of easy math, let’s assume you bring home (after taxes) exactly $1,000 each week.  And let’s assume that you get paid every Friday and there are four Fridays in the month you are budgeting.  So you have a budget of $4,000 to spend this month.

Now, look at your expenses. Does the total exceed $4,000?  Most households spend more than they make.  But that was your past.  Moving forward, you aren’t going to let the kid make decisions. The grown-up is now in charge.

If your expenses exceed your income, you only have two choices:  Increase your income or reduce your expenses.  You may find that you have to cancel some subscriptions to balance.  You may have to cut back on some hobbies or limit your shopping.  This will not be the most enjoyable moment of your life.  It will force you to deal with the reality that you don’t have a money tree in the back yard.  However, it is a good lesson to learn now rather than later.

To create additional income, you might consider selling some things to pay off a credit card or two.  This would help reduce the amount of expenses you have and help balance the budget.  Even if you can’t completely pay off the credit card, it is still a great idea to get you moving in the right direction.

Once you have made decisions on where all of the $4,000 is going to go, you can create a Cash Flow Plan.

Step 4 – Creating a Cash Flow Plan

Now that you have balanced your budget, you are further along in your financial plan than most of America.  Congratulations!  However, you aren’t finished.  Remember, the budget doesn’t work alone.  It is time to give it legs and watch it walk.

• • Create a column for each payday.  This step is easiest to do on a spreadsheet that calculates totals for you. But honestly, you could use a crayon and a piece of construction paper.  Although, a pencil might be better.  It doesn’t have to be fancy. Create a column for each date you receive income next month. In other words, if you get paid twice and your husband gets paid twice, you should have four columns.
  • List your expenses (and due dates) down the left hand side of your sheet.  Let’s go back to your list of expenses.  Use the balanced budget, not the first one you created that exceeds your income.
  • Plan how you will spend each paycheck.  You have $1,000 each week.  So, you can’t spend $1500 the first week.  You have to space out your expenses.  Make sure you don’t plan to overdraw your account.  You can’t pay all of your bills with the first check of the month.  Well, most of us can’t.  You will probably need to space them out over the four checks you get paid.
    • Pay close attention to auto drafts.  Plan for those in the appropriate column. If a bill gets drafted on the 1^st, but you don’t get paid until the 2^nd, you are going to incur some overdraft fees.  Be careful!
    • Since most mortgages/rent are due on the first of the month, you should plan to pay that on the last week of the previous month.  In other words, pay February 1st rent/mortgage the last week in January.

Step 5 – Work the Plan

You did it!!!  Now work the plan!!  Don’t forget this step.  You should be thinking about this Cash Flow Plan every single time you pay for something.  Your plan will only work if you work it.  If you didn’t plan a trip to purchase new shoes, you should not go out and shop for new shoes.  Otherwise, you will bust your budget and your Cash Flow Plan will fail.

You should expect to have variances in your budget, especially the first few months you are trying to learn what your expenses really are.  When this happens, you will have to adjust the plan.  You may have to reduce some expenses in one area to make up for unplanned expenses in another area.  If you planned a miscellaneous category, it will help in this instance.

Tracking each category is necessary to keep from overspending in each area. I like to designate a particular day of the week to update my Cash Flow Plan.  I’ve found it useful to do it right before the weekend so I know the state of my money before the weekend begins.  Or, update it the night before a new paycheck is deposited.  Sometimes these are the same thing.  As an example, each column represents a week of PLANNED income and expenses.  On Thursday evening, I would update the column with ACTUAL expenses for that week.  So, my next column begins with Friday’s paycheck and whatever leftover monies I had from the current week.

Budgeting Finances – Success!

Five steps are all you need for a Balanced Budget and Cash Flow Plan.  I was just a normal person with a normal income and I did this.  And you can do it too.  Remember, without a well-executed plan, your dream is only a fantasy.  Your budget and cash flow plan is your key to having money for the things that matter.  Without a plan and a plan of execution, your money will disappear without you knowing where it went.

If this article was helpful to you, please share it with your friends.  I’d also love to hear how this plan works for you.  Leave a comment below and let me know what you think.