If you have already visited The Dollar Stretch, hopefully you’ve had a chance to read my post “Track Your Spending – a 90 Day Challenge“, if not, or if you are new to this website, I suggest that you read that post prior to putting together a monthly budget.
As I indicated in “Track Your Spending“, keeping track of where your current financial resources are being directed will give you insight into your spending habits and patterns; the process I suggest will provide you with a financial barometer that will allow you to put together a monthly household budget that is based on your actual spending. Personal finance is exactly that … personal. So you need to take a look at what is going on financially in your home and not the one size fits all box of “40% of spending should go towards housing, 15% towards debt repayment, blah blah blah” that some personal finance gurus may suggest.
And to quickly review the top three reasons for tracking your expenses (I recommend at least 90 days):
1) You’ll know exactly where your money is going and they’ll be no more looking at your bank account online with a blank stare wondering where your paycheck went
2) You’ll be more conscience of how and where you spend your money and this can be an eye opener. Forcing yourself to keep track of your spending forces you to become more conscience about your spending
3) You’ll be able to identify areas where you are obviously overspending and can redirect those ‘savings’ to more needed areas – paying off debt, establishing an emergency fund, giving, etc.
Five Steps to Creating Your Monthly Budget: the foundation for your Personal Finance Tower)
- Track your Spending for 90 days – see above
- Include your spouse (or any other adult in the household that is sharing financial responsibility with you) in the monthly budget process. Each of you must buy into the process and hold each other accountable; your accountability is to a jointly agreed upon and responsible set of shared household financial rules and objectives. These household objectives might include: getting out of debt, paying off your mortgage quicker, establishing an Emergency Fund, or playing catch up on an under-funded retirement account. Regardless of your goals, remember that a financial house divided can not stand.
- Sit down with your spouse and review the data you collected from your “Track Your Spending“ efforts. Together you must distinguish between household expenses that are “MUST HAVES” vs “NICE TO HAVES”. Examples of “MUST HAVES” include: mortgage/monthly rent, food, utilities, insurance, tithing/giving, transportation, paying of debt, and education. Examples of “NICE TO HAVES” include: dining out, vacations, leisure activities, consumer goods, the iPhone4, manicures, new fishing equipment and anything else that is not essential to the healthy financial functioning of your home. The ability of you and your spouse to honestly categorize your current household expenses is essential to moving forward – if either or both of you is unwilling to cut/limit your “NICE TO HAVE” spending, all the budgeting and expense tracking in the world will not help.
- Find budget software or a monthly budget spreadsheet that you both will have easy access to and are comfortable using. My favorites – Microsoft Excel spreadsheets that are already set up for you (they include spending categories and are already formatted for you … what I call “plug and play”). If you look on The Dollar Stretch home page under “Blogroll” and visit the link to Vertex, you will find an absolutely wonderful website that provides useful Microsoft Excel Spreadsheets that can assist with not only tracking your monthly spending but establishing a household budget. There are countless other free programs/spreadsheets out there – and while I am in no way connected to this website, it just happens to be one that I think has a number of very user friendly budgeting resources. (*see example at the end of this post)
- Reallocate and Prioritize. After you have separated your “must have” and “nice to have” expenses, you will be in a position to prioritize your most important monthly household expenses and reallocate money to these categories (money that was previously part of your undisciplined “nice to have” monthly expenses). This is where your monthly budget can actually be a fun challenge! Let’s say that during your “Track Your Spending“ phase you discovered that on average you spent $200 dining out each month. If you currently have any consumer debt (credit card, car payment, student loan, etc) there is no way you should be spending $200/month dining out (hopefully you would come to a similar conclusion when outlining your household’s financial priorities). With your new monthly budget you will want to reduce the amount you spend dining out each month (I’d suggest by half) and reallocate that extra $100 to paying off your outstanding (read my article “Eliminating Debt – the Debt Snowball“ for help on how to prioritize repaying your current debt. The objective is to have your monthly spending align with your near and long term financial goals. To do this you need to learn to be comfortable saying “NO” to life’s “nice to haves” and “YES” to lives “must haves”.
To anybody that has not previously tried to operate on a monthly budget this can seem like a daunting and tedious task. And to begin with, it absolutely can be. But I assure you that a monthly budget is not nearly as stressful or difficult as being buried under a mountain of credit card debt, wondering how you and your wife are going to comfortably retire, staying up late at night worrying about how to pay for your kids education, and living with possibility that you or your family one “what if” away from not being able to pay next month’s mortgage.
Instead, I would suggest that you look at the process of starting/maintaining a monthly budget as a new beginning, an opportunity to try something different, and part of the groundwork necessary to achieve your long term goals. The sense of accomplishment you (and your spouse) will feel as a result of working together to prioritize your household goals will be well worth the effort; it will also bring you closer together. In a short time you will feel not only a greater sense of control over you finances, but a greater sense of control over you entire life. And while telling yourself “NO” to those “nice to haves” can initially be quite difficult, remember that your are telling yourself “no” now, so that you can tell yourself “YES!” later. Yes to financial security , Yes to a greater sense of control, Yes to achieving your goals, and Yes to the long term happiness of you and your family!
Is your personal financial plan built upon sound principles, your family, a sense of security, self control, well defined goals and the pursuit of happiness?