Creating a Plan for Your Money

I totally understand why creating a budget has a bad reputation.  In the first place, it involves numbers which for some bring on traumatic flashbacks of high school algebra (Scary Teacher!  Big Hair!).   In the second place, it means taking an honest look at how much money is coming in and all the stuff that has to get paid.

But the thing is, whether you go through the process of creating a budget or not, there will always be a plan for your money.  The question is whether it is your plan or someone else’s.

Lots of People Are Trying to Separate You From Your Money

Every year, hundreds of billions of dollars are spent to convince us to part with our money, so it is on us to be savvy consumers and to take charge of what we purchase, when, and at what price.

Although I have never been in marketing, I have always found the science behind advertising fascinating.  In college, I came across this old slide set in the library that dissected a variety of print ads, pointing out how they were designed to appeal to a buyer and produce a sale.  Nothing was left to chance, whether it was the color of a shirt on a kid who didn’t eat anything except Wheaties, or the amount of bubbles floating to the top of a glass of Coca-Cola.

Today’s ads are just as well researched and designed—if not more so.  And, because so much of our lives are open to tracking, marketers are able to target ads to us based on what they anticipate we will want to purchase.  For example, I recently looked at courses recommended on The Muse, a career/job search website, from my laptop.  That night, I was playing Words With Friends on my tablet and you will never guess what ad played after I submitted my word?  An ad for the very course I had looked at earlier that day.  I was both in awe and a little freaked out.

So how do you create a plan for your money?  Here are the steps I followed.

Step 1: Identify Your Time Frame and Your Expected Income During that Time Frame

The first thing you need to do is to define the time frame you want to budget to and the amount of income you expect to have during that time frame.  I get paid every two weeks so I budget for a four week period of time.

Get paid on the 1st and 15th, or once a month? Your time frame can be a calendar month.  Work on commission so your income fluctuates? Look back over the past six to twelve months and figure out an average monthly income.  In those months where you make more than average, put the extra in a separate account so you have something to draw on during your leaner months.

Step 2: Identify Your Fixed Expenses

The next thing is to identify all your monthly bills.  At the beginning of my debt free journey, here were all the bills I needed to budget for during my four week budget cycle:

• Primary Mortgage
• Home Equity Loan
• Home Owner’s Association dues
• Student Loan
• Car Payment
• Electricity
• Internet
• Cell Phone
• American Express
• Visa
• College Fund for my Niece and Nephew, partial costs of my Niece’s grade school tuition
• Car Insurance
• Gym membership
• Storage Unit.

I assigned each of these to either the first or second check using a simple excel spreadsheet and listed them in the first column, each on a separate row.   I pay my mortgage, my largest expense, with my first check so use my second check to cover most of the smaller bills (my bills naturally fell into this pattern but if yours don’t, you can call the company and see if you can negotiate a different due date).

This chart hangs on my refrigerator and every time I pay a bill, I write down the date it is paid. To make it easy to see what is paid when, bills covered in by the first check are shaded grey.  Also, I pay my bills as soon as I get the money to pay them, even if they aren’t due for several weeks.  In my experience, waiting is a recipe for disaster: the money isn’t going to earn any interest sitting in my checking account for a few more days, and I may be tempted to spend it on something else if it just sitting there, making me feel richer than I actually am.

See—that doesn’t sound too painful!

Step 3: Daily Expenses and Other Expenses That Are Expected But Do Not Occur Regularly

I pay for daily expenses and things that are expected but not regular—such as oil changes, hair cuts—out of a weekly allowance I budget for myself.  While I was getting out of debt, the best way I have found to do this is to just withdraw that amount of money in cash at the beginning of the two week cycle.  As many people have noted before me, there is nothing like cold hard cash to make you think long and hard about spending money on something.

If it helps, you can further subdivide that allowance into specific envelopes for gas, groceries, etc.  This is the classic envelope system which is classic because it works.

Since I don’t have to negotiate spending with anyone else in my life right now, I just allocate it in my head.  If I know I am going to eat out several times, then my groceries may consist of hot dogs instead of hamburgers.  If it is time for a haircut, I know not to plan to go out for dinner that week, but to invite friends to my place instead.

When I have money at the end of the two weeks—which happens more than you would think—I may put it aside for a pedicure or a special dinner.  I can add it to my debt payment but the beauty of a budget is you can allocate things for fun too.  Budgeting gives you power and I like to be in a position of power when it comes to my money.

Expenses That Are Not Regular and Not Expected

For expenses that are not regular and not expected, you can pull money out of your emergency fund (which is hopefully not your credit card).

This would be a car repair, a home repair, etc.  This would not be a vacation or a great sale.  You can spend money on those things but they should be paid for with money you saved for that purpose.

Since I am in the middle of my debt payoff, I only have $1,000 in my emergency fund and I don’t have any money set aside for vacations and only a small amount for new clothes.  I haven’t stopped taking time off but when I do, I just do fun things to do in my hometown.

And If I Still Haven’t Convinced You…

If you have never budgeted before, the first two months or so will probably be an adjustment.  You might forget about an expense, or overestimate your income.  If this happens to you, it doesn’t mean you are a failure at budgeting.  Budgeting is a skill just like riding a bike or swimming.  You had to practice those before you mastered them, and with practice you will master budgeting too.

Extra Motivation for Creating a Budget

Need some extra motivation on creating a budget? Here are some parting thoughts:

• Knowledge of what money you have coming in and what bills you need to pay is power.  With this information, you can prioritize your spending and set goals such as the one I set to pay off almost $60,000 in debt in 16 months.  This wasn’t wishful thinking but the result of a mathematical calculation based on my income and other pots of money I could access to pay off my debt.
• This knowledge can also help you rethink the income part of the equation.  If, after looking at your debts and comparing them to your income, you realize that being debt free other than your mortgage in the next five to ten years is impossible, it may be time to rethink your job, get a second job, or even start a side hustle.  You may not think you have the time or marketable skills but my guess is you can find something.
• Hiding from the truth isn’t a long term strategy.  Bad news, unlike cheese or wine, does not age well.  Besides, when you actually crunch the numbers, things might not be as bad as you think they are.
• Optimism also isn’t a plan.  I am all for the glass being half-full but for this to work in the context of budgeting then the glass actually does have to be half-full.  And the only way to know this is to calculate your numbers.

Let me know where you are in making a plan for your money in the comment section below.