Welcome to Day 25 of the 30-Day Financial Wellness Challenge.
Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.
After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 24: Retirement Savings
On Day 25, we’re putting it all together and helping you budget better.
A budget will help you spend your money on value-added expenses and allocate your money towards your goals. If you want to make your life easier, then get friendly with budgeting.
Let me first get this out of the way. There are countless ways to budget money. Some offer buckets or percentages or use specific line items. But all do the same job of allocating your money.
What is a budget?
A budget is a daily, weekly, and monthly spending plan. It helps you allocate financial resources to the areas of life you value. Spending plans don’t have to be elaborate. They simply show how your money will be spent and make comparing to actual spending easier.
So which budget is right for you? A budget that you can stick to.
Today, you’ll get a better sense of how to set up your budget to allocate income for your value-added expenses and the goals you’ve identified. For most people, the hardest part of budgeting is getting started. But luckily, you’ve done 80% of the work in the previous challenges.
Budget better basics
Budgeting is a process that includes listing your income and expenses and calculating your cash flow. It also requires identifying your goals and financial requirements. As you can see, you’ve already done the work. You’re just tasked with putting it all together.
There’s a reason why budgeting came later in the challenge. I wanted to show how a budget is a plan that’s going to bring more into your life and not simply take things away. Most people default to using the term budget to limit themselves.
I remind people that budgeting is an act of direction, not deprivation.
Budgets work when goals are aligned with your vision, values, and mission. Getting clear about them helps create a budget that supports and not restricts your life.
Difference between budgeting and financial tracking
There’s some confusion between budgeting and tracking. Many budgeting apps don’t actually allow you to plan but simply track spending and categorizes them. They are great tools but are more useful when coupled with a budget or spending plan.
The ideal scenario is using a spend tracking app that lets you easily see if you’ve spent at, below, or above your $200 food budget for the month. In some cases, these apps can track your daily and weekly spending. This helps you adjust more quickly to ensure you stick within budget. And it’ll help you determine if you need to increase or decrease the money allotted to a budgeted expense.
What a budget tells you
With a budget, you’ve listed your goals, bills, debt, and discretionary wants and allocated your income to each of those expenses. Hopefully, you have enough income to cover them. If not, you’ll need to either increase income or reduce expenses. Sound familiar? It should because this is how you calculated your cash flow.
How to Budget Better
When people say “I’m on a budget”, what does it mean? Do they have an actual budget? Or it is mental accounting? To make sure your dollars are working for you, follow these steps:
Step 1: List your monthly income
Use only earned income for goals and expenses. Exclude interest and dividend income or found money (gifts, rebate checks, etc).
Step 2. List your monthly expenses
Use your Expense List that includes bills, debt, and discretionary spending.
Step 3: List your value-added goals
Step 4: Calculate your cash flow
Determine if your income is sufficient to cover your expenses and goals. The equation is Cash Flow = Net Monthly Income – (Monthly Expenses + Monthly Goals Contribution)
Step 5: Analyze the results
Do you need more income? Or reduce expenses? Or adjust your monthly goals contribution? This step looks at the numbers to determine what tactics are needed to meet your financial obligations. It also identifies opportunities to have each additional dollar allocated.
Budget Better using Cash Flow
|Income||Monthly Budgeted||Monthly Actual||Difference|
|Rainy day fund||$50||$50||$0|
In this example, your monthly budget projected a $225 surplus. However, a decrease in side income and increases in expenses resulted in an actual budget surplus of only $15. Overall, you’re doing well and can use the surplus to add to your goals, debt payoff plan, or treat yourself. If the actual result was negative, then your choices would be to increase income, cut back on expenses, or reduce your goal contribution amount.
After a few months, you’ll see patterns and will need to take corrective actions to continue to afford your lifestyle and reach your goals.
Now, it’s your turn.
Day 25 Assignment
- Download the budgeting spreadsheet. Add as many cells as you need.
- Complete the spreadsheet by entering your numbers.
- Determine what the numbers mean.
Answer the following questions:
|What’s your cash flow amount?|
|Does your income cover your expenses and goals?|
|Can you find opportunities to improve?|
|How will you proceed?|
Budget Better Tips
- Remember your vision. Your budget is your plan to achieve your objectives and goals.
- Execute strategy. Whether its increasing income, reducing expenses, paying off debt, determine how you’ll achieve your mission.
- Refer back to the financial health checkup and evaluations. Set objectives to improve your financial vitals. For example, increasing your income can reduce your debt-to-income ratio, paying off debt can increase your net worth, and having savings goals can improve your cash ratio.
- Personal Capital is a free personal finance app with a 360-degree view of your money. With Personal Capital, you can see all your accounts in one place with planning and analysis tools.
Next Daily Challenge: Day 26: Managing money with automation and tracking