- May 07, 2020
Creating a budget is more empowering — and less scary — than you think.
I’ve been advising individuals and small businesses on financial matters for over a decade, and in that time there’s one suggestion I always make that consistently makes my clients squirm: It’s when I suggest that they make a budget.
I get it. The idea of creating a budget is scary. It means taking a hard, even embarrassing, look at what you’re spending. It means coming to grips with what money you have — or don’t have — coming in, and how that compares to with the money that’s flowing out. As they say, ignorance is bliss. Plus, it seems to involve will power, which many of us lack.
And we tend to equate the word “budget” with “limitations” or “restrictions,” which have negative connotations.
I’d like to offer a new way to think of budgeting: as a freeing exercise, not a limiting one, and as a way to feel IN control, rather than out of control.
Now that we’ve sheltered in place for two months due to COVID-19, our feelings of fear about the unknown and powerlessness in the face of unprecedented restrictions are overwhelming. For many in our community, the financial uncertainties we face have yet to rear their ugly heads. So while we’re still safe in our homes, worrying about what comes next, there’s never been a better time than right now to get an accurate picture of our finances and take control of them. Making a budget doesn’t have to be hard, and I promise it’s more freeing and empowering than you think.
How to Get Started
First, find a system that works for you. There are a million tools out there to help you get started. Personally, I like applications that connect to your personal accounts, so they can automatically track your income and expenses. Xero Cashbook software is what we use here at Ludmila CPA; contact us and we’ll be happy to help you set it up. This is a subscription-based program that costs $7 per month, but we’ve found its exceptional functionality to be worth that small expense, particularly for small businesses.
If you prefer something simpler without the bells and whistles, a simple Excel spreadsheet works fine as well, as do several personal budgeting apps. Many existing budget templates can be found online, which you can customize according to the types of expenses you have.
Once you determine your preferred system, it’s time to get a picture of your current spending. Contrary to what many believe, budgeting doesn’t begin with immediately imposing restrictions. Rather, it starts by taking some vital statistics. Hopefully you have records of your expenditures — if you don’t balance a checkbook, perhaps your credit card statements are a good measure of spending. Or simply comb through your online bank account summaries. Go through your statements for various monthly obligations, such as utilities, phone and Internet bills, grocery receipts, etc. Tally your receipts from restaurants or Starbucks runs. Consider how much you’ve spent in the last six months (typical months, that is) on dry cleaning, gas, parking, child care, and more. And don’t forget all your subscriptions! Not only do those magazine and newspaper subscriptions sneak up on us, but so do our cloud storage, email, domain hosting, virus protection, Netflix, Amazon, and other monthly subscription draws as well.
Start inputting the monthly totals into your spreadsheet or other budgeting tool until you have a fairly good picture of the last three to six months’ worth of spending. Remember to include line items for everything, from rent or mortgage, loan, insurance, car, credit card, and utility payments to your monthly clothing, dry cleaning, dining, movie, office supply, and travel expenses, and even savings transfers. Everything should get a line item so nothing is unaccounted for.
Determine Monthly Income
Your budgeting tool will, of course, ask for a total monthly income. If your income is consistent and predictable, this monthly total is easy to calculate. However, if you are self-employed or own a small business such as a restaurant, your monthly income can vary — particularly now as many brick-and-mortar businesses are shuttered. In that case, you could determine what a year’s income would be and divide by 12 to come up with a monthly average. As you proceed with doing a budget each month, you may find that you can predict what income will for sure be coming in over the next month and plan accordingly.
Compare Income to Spending
Here’s where the rubber meets the road: Are you spending more or less than you make?
For many people, this exercise is eye-opening. For some it reveals that they actually have more than they thought. For others, they find more money has been flowing out the door than in. But only when you see what the true picture looks like can you fine tune it.
Determine Spending Habits
With the data you’ve collected, look at trends in your spending habits. Are you subscribing to services you don’t use? Are you paying high interest on a credit card that could potentially be lowered? What about that unused gym membership? Is your twice-a-week latte habit eating into your budget? Are you spending a lot on dining out?
One of the few silver linings to come from the COVID-19 crisis is that much of our spending has been paused, so take advantage of this time at home to get a handle on where your spending has gotten out of control and create a plan to move forward, stronger.
Knowledge is power. Knowing whether or not you need to cut expenses — and by how much — gives you the power to make some choices and take control of your finances, and I promise you it will feel GREAT. Later this month, I’ll share tips with you for cutting expenses and negotiating lower payments.
In the meantime, contact us today to see how we can help. And stay safe!