103: Finding Balance

Well done!

Your financial Snapshot is finally in focus and your Priorities, Goals & Values are mapped out in black and white. I can safely say that the hardest part is behind you. You have the potentially ‘sad’ reality of your Snapshot but now, with your Goals/Values in plain sight, you have the motivation you need to turn your spending habits around.

It’s finally time to tackle your budget. You can use the same template you used for your Snapshot or head over to my Resources Page and take a look at the budget links. Pick one that you understand and feel comfortable using. Keep in mind that when you’re just starting out, you’ll want to keep your budget as uncomplicated as possible – otherwise you’re less likely to stick with it. Work your way down the chart, filling in each category accordingly.

Here are the general guidelines that most personal finance experts agree you should adhere to:

  • SAVINGS: %10 (Minimum)
  • DEBT: 15% (Minimum)
  • HOUSING: 35% (Maximum)
  • TRANSPORTATION: 15% (Maximum)
  • LIFE: 25% (Maximum) broken down into the following categories:
  1. Groceries
  2. Transportation
  3. Clothing & Gifts
  4. Entertainment
  5. Everything Else

Note that this breakdown is a very general baseline. If you look at your financial snapshot and see that you’re spending 50% of your net income on restaurants (LIFE), then you need to either scale back in that category, or make more money. It’s just that simple. It’s also important to note that logically, it’s not a good idea to pay more than 35% on housing but it’s a very good idea to contribute more than 10% to savings. If you have debt, add up your outstanding balances and come up with an amount that will have you debt-free in 3 years or less.  

Here’s some other stuff to keep in mind:

  1. 10% Savings: Emergency Fund and Retirement – This must be allocated FIRST because from now on, you’re paying yourself first
  2. Fixed Expenses: These are expenses that don’t change like your rent/mortgage, insurance, car payments etc.
  3. Debt Repayment: If you have debt, you need to be budgeting at least 15% of your income towards repayment. We’ll discuss repayment strategies in the next lesson.
  4. Incidentals: These are expenses that you have control over like entertainment, personal care, food. This is where your Snapshot (financial analysis) comes into play. Take a look at your average monthly spending to determine your starting point. If there were categories in your spending analysis that can be scaled back,

You have the option to keep the categories in your budget as detailed as they are in your spending analysis OR you can make things simpler for yourself (the simpler your budget, the more likely you’re going to maintain it). For my own budget, I simplified all my Incidental Expenses into the five categories listed above: Groceries, Transportation, Clothing & Gifts, Entertainment and Everything Else. Incidental Expenses are the most fluid of all your expenses and also tend cause the most trouble debt-wise. I found that the best way curb my own spending was to start writing everything down. I have a 5-subject spiral notebook that I write all my spending in. Basically every week, I give myself an ‘allowance’ in each category and as I spend money, I ‘debit’ the amount. This tells me exactly how much money I have to work with and ensures that I don’t go over budget in my incidental categories. Alright, back to the budget.

The beauty of spreadsheets is that they do the math for you, allowing you to easily tweak your numbers. Once you’ve entered everything, check your balance. Is it a negative number? If so, you need to tweak your budget so your balance is zero dollars or more.

Sometimes…the budget just won’t balance. No matter how hard you try, you’re in the red. You’re either not making enough money or you’re living too far beyond your means…possibly both! It’s at this point that you need to make some hard decisions. Do you need to find a better paying job? Get a part-time job? Move to a cheaper place? Get rid of your car? Whatever it is, you HAVE to do it. You CANNOT continue living your life in the red.

Once your budget balances, STICK TO IT! When times get hard, remind yourself of your goals to help keep you motivated.

Naturally there will be times where you get derailed, but don’t’ throw in the towel. If you think about it, you’re in a WAY better position now because you KNOW when you’re over budget and by exactly how much. You’ll feel secure/empowered knowing where all your dollars are going. You’ll finally be in control.

Now it’s time to deal with your debt in my next lesson: 104: Other People’s Money

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