I’m guessing that if you’re like most people, month after month you look at your bank account and wonder “where has all my money gone?!” You feel like you didn’t spend money on anything, maybe you only went out to eat a few times, and you spent less on gas than you thought you were going to, yet, without fail, your balance is dangerously low.
How do you stop this from happening? The answer is simple: budget.
Okay, first things first. From here on out, we are going to change our vocabulary. The B word, like all other offensive terms, is banned. We are going to call this tool My Roadmap. You can choose any word/s you want like, my itinerary, the dream plan, and so on. Find something that fits for you.
Next, we need to look at why most peoples’ roadmap fails. The general rule is that when people try to sit down and create a roadmap, they don’t seem to find it all that helpful so they don’t keep doing it. This is because these roadmaps only have one column. A good roadmap needs to be broken down like a modified basketball play, or as I like to explain it, the 2 by 2 by 3. 2 columns, 2 rows, and 3 categories.
The First Two is the two-column roadmap system, which is the key. Column one is for what do I think I will spend this month, and column two is for what did I actually spend. This means that you go over your roadmap for each month twice, once on the first and once on the 30th or 31st.
It is important to know that a roadmap is an estimation of what you are going to spend, and it is a forward thinking, living document, meaning that it needs to be updated when things change, challenges arise, and unexpected fortune comes to you. Every dollar has a purpose at it fits in there somewhere.
Each column will also break down further, into The Second Two, known as the two rows: income and expenses. Income can be anything: salary, wages, bonuses, tips, student loan money, and allowance from your parents, self-employment income, alimony, and real estate income. Your expenses are everything that you spend money on, and this too is going to get broken down even further.
Expenses come in two forms, fixed and variable. Fixed expenses are ones that are not likely to change, or cannot be changed no matter what. These are things like car payments, car and health insurance, debt payments, housing costs, and your savings. We will come back to why your savings are in the fixed section later.
Variable expenses are ones that can be adjusted depending on what income you have coming in. Variable expenses are the danger zone where most roadmaps breakdown. These are things like food, both groceries and dining out, gas, entertainment, clothing, gifts, your cell phone bill, and other miscellaneous expenses.
But how to keep track of all of these numbers? The old-fashioned way, with a pen and paper works just fine, but there are also handy technological advances that can save you time and help out with the calculations if math is not your forte. An excel spreadsheet is great for this. There is also software like Quicken that can be helpful. Additionally, you can download apps like Mint, Level Money, YNAB and Pocket Expense that can do all of this on your phone or tablet.
The easiest thing to do is to always pay with your credit card and download your bank statements at the end of the month and analyze them. I like to sit down with highlighters and divide by color. So everything that went to groceries is green, everything that was dining out is orange, every time I filled up my car with gas is purple.
Then I add all those up and put them into my what did I actually spend column. If you are a cash person, make sure you keep your receipts. A good tip for this is to have dedicated envelopes for each category of receipt. At the end of the day, or every few days, empty out your wallet of these receipts and put them in their corresponding envelope. When you sit down to fill in your what did I actually spend column, they will already be organized and ready to go.
Once you have completed a full month of what do I think I will spend and what did I actually spend, it is much easier to gauge accurately what funds go where for the next month’s what do I think I will spend column. Now you have nice system you can work with each month.
Wish I May
Finally, let’s get to the last part of our play, the 3 Categories. These are what do I need, what do I want, and what do I wish for? Things you need include, a roof over your head, so money for rent, or your mortgage payment. You need to have car insurance if you have a car. Notice how these correspond to your fixed expenses. Things that you want may include, buying an awesome pair of shoes, going to Starbucks for a coffee a few times, going to see that Oscar nominated film. Notice how these correspond to your variable expenses.
The third category is your wishes. Instead of wishing upon a star, you can actually plan for these things. A wish is something that is perhaps a longer-range goal, like moving to Europe or starting a new business or taking a month off to travel.
You will put away savings for your wishes, but they won’t be your primary savings goal each month. I like to think of wishes as things that I really want to do…but I’d be fine if they didn’t happen, or didn’t happen right away. I’m still planning for them…but they are kind of out there in the distance.
I know that creating a roadmap can be scary when you have never done it or haven’t done it in a while. I am here to tell you that the fear, anxiety, and overall lack of desire to keep track of your finances is normal. But the only way to make that anxiety of checking your bank account go away is to stay on top of it regularly. Once a habit has been formed it becomes part of your routine, like brushing your teeth. If you spend just 15-20 min a month – that’s really no time at all- you can really beat your budget blues.