If you fail to plan, you are planning to fail
-Benjamin Franklin
Why Budget?
I wish that I could tell you that it is OK to not plan or budget when it comes to finances. I wish that I could tell you that everything will be alright with no plan and simply winging it. There are motivational speakers that will tell you to live your life without a plan. The best way to live life is from the gut. Well, I am not going to tell you that. Why, Jack? Why not? Well, because that would be a lie. If you are reading this, you are most likely not born into an unending trust fund. Also your family-owned business that can help fund undisciplined decisions. I would encourage you to develop a military-like discipline with the planning and forecasting of your money. I guarantee that once you do this, you will reduce stress and uncertainty in your life. It will allow you to pursue those things that you want in life. It will remove the uncertainty that ends up creating stress, depression and anger.
The Good News
Developing a solid plan or forecast for your finances is actually not very difficult. You can leverage a personal finance software (there are many out there) or you can simply use your favorite spreadsheet software. The key is to take time to create the initial drivers or items for your income (revenue) and you spend (expense). I will provide you a template to get you started and I will guide you through the most common items that should be included on your sheet. Additionally. we will work through the timing for reviewing and updating your plan. It is important that you keep it up to date and current. Our goal here is to limit surprises when something comes up … or at least, to be able to pivot our plan to accommodate any changes that might occur. As you know, life always brings us new challenges and this is no different.
Creating The Plan
This guide is to get you started on your journey toward piece of mind. You will take control of your finances and not allow them to take control of you, as so many do. These starter steps are just that. They are a starter guide. Over time, you will develop your own tricks and methods to do this faster and more automated., I suggest that you start with the manual method first. This is what I am going to teach here. It is best for you to become familiar with the mechanics of the process before moving to software and tools. This way, when you move to a tool you will have the knowledge required to select the right tool to fill the functions and capabilities that you would like to make this process easier and more fun.
Fun, did you say fun? Yes, I did. You will realize that managing you money and getting a handle on it is rewarding. Managing your income, debt and investments is possible no matter what your income level currently is in your life. The power is in the plan! You lose that power whrn you do not plan and you use debt to manage your finances. The great news that I am here to share is that you do not need to be bound by debt to achieve financial freedom. And it literally all begins with the plan. Before I jump too far ahead, let’s create our first plan.
Step 1 – Identifying all of your income and expenses – The Actuals
During this part of the process you will find and identify all of the income that you receive from all sources. We include everything so that we can record all of the incoming funds that are received. For many, this will simply be your paycheck from a single employer. For others it will be more complicated. This could be weekly, every two weeks, or whatever the frequency. Here are the fields to populate in our worksheet:
- DESCRIPTION – Anything that describes the source of income or the company that you pay on the expense side
- FREQUENCY – This can be weekly, daily, every 2 weeks, etc. This is important for when we populate the next tab of our worksheet
- AMOUNT – This one is easy. This is the amount that you receive or pay each time indicated in the frequency column
That is all for the first tab. You want to make sure that you cover all of the items that you can think of … even the small incidental things. Perhaps you grab a coffee each day from your favorite shop, be sure to include that on the sheet.
One note about the amounts. For the items that are recurring you will have an exact or near exact amount. For those that you do not have a fixed amount on a regular cadence, you will need to provide an estimate. I always suggest that you underestimate income and overestimate expenses. This will provide a cushion in terms of your budget.
Step 2 – Transition to the monthly worksheet
This transfer to the second tab will test your math skills. The next worksheet has the months of the year from January through December. What you need to do here (and you can see it in the example spreadsheet) is transfer your items to the other sheet and calculate the total monthly amount for each of your income and each of your expense items. AS I stated earlier, you should underestimate your income and overestimate your expenses. This is the best option to help you get ahead on your finances.
Calculating the amounts: Monthly amounts should simply be transferred. When you calculate the others I would do it like this … Weekly: Income multiple the amount by 4 and for an expense multiply by 4.3. As you know, some months have 5 weeks and some have 4. Specifically it would be 52 weeks divided by 12 = 4.333 weeks per month. So that is what I suggest for the expenses but not for the income. This way you are underestimating the income.
This sheet will then show you the total amount available in cash at the end of the month. In future discussions we will talk about what to do with that net income. You could pay down debt, invest, or save it for a rainy day. We’ll save that for next time.
Step 3 – Manage it and keep it updated
Keep the spreadsheet updated and current. This is the first step toward your financial independence and the first step toward financial discipline and moving Toward Alpha.
If you have questions please post them in the comments below.
Photo by Diane Helentjaris on Unsplash