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Practical budgeting, for normal people

You may have noticed, at this point, that we haven’t really outlined a proper ‘system’ in this book. I can only bet that many people will be frustrated because they are looking for a map that shows them exactly what they are looking for.

Here is the problem, without the basic skills of knowing how the read a map, you still won’t get to where you want to go. This may seem obvious when you put it like that, but when it comes to finances, the approach often used is to simply outline a magic formula and then people are left to figure it out for themselves.

All of these systems, when followed, do in fact work. Do not get me wrong in thinking that I disagree with these systems. But, the problem is that most people do not have the mindset to follow them.

Hopefully in this book you are developing a mindset in order to properly take action on the basic skills we are teaching here.

So, if we take an approach to basic budgeting, let me correct myself, practical budgeting, how would we go about it? Here are the steps:

1. Review the last 12 months of your expenses. Not 3 months, not 6, not 1, but 12. The longer the history you have, the more likely you are to capture the infrequent expenses like gift-giving, expensive holidays, house, kids, sports, donations, and vehicle maintenance, etc.

2. Determine what your priorities are. Read Chapter 8.

3. Develop a plan moving forward. Ensure you are saving money for your future. Read Chapter 11.

4. On a daily basis, look at your bank account, 3 times a day. When you wake up, in the middle of the day, and before you go to sleep.

5. Track and WRITE DOWN your expenses on a weekly basis. If you can do it on a daily basis that is even better.

Let’s dive a bit deeper into all of these.

Reviewing Expenses

This one is fairly straight forward. Simply grab a pad of paper and your bank statements and categorize EVERY line item on your bank statements. Break down, food, internet, cable, gas, fast food, etc., yes any category that might be applicable to your situation. At the end, you simply divide the category totals by 12 to know your average monthly amount.

This will allow you to understand your past spending. It does not mean you will use these exact numbers moving forward, but they will be a great starting point when developing your plan.

Some expenses you might not know what they are. That is OK. Place them in a Miscellaneous category. I can almost guarantee that this category is where you will discover that you can save the most amount of money. It is very rare that necessities do not have a line-item name.

Determining Priorities

We covered this extensively in Chapter 8, so I won’t go into that great of detail. We will use these details to properly make our plan.

What you need to determine is what is important to you, not anyone else. The reason why we want to build this list is so that when making compromises a bit later it will be easier.

Develop a plan moving forward

This is where we get into typical budgeting. On a per-pay basis (bi-weekly, semi-monthly, monthly, etc.) write out the income you expect to receive and then list the expenses you plan to spend.

Sounds easy, right? Many people mess up here. In order to create an effective budget you need to use items from Step 1 and 2 in order to develop this correctly. Start with mapping out how much you want to spend based on your averages. For example, if on average you spent $500 per month eating out previously, and want to trim this down to one meal a month for say, $100, then only budget $100. But be realistic. It isn’t realistic to believe that you will turn your $750 per month grocery budget for a family of 4 into a $300 grocery budget.

Go expense by expense. Start with the expenses that are required to survive. Food, shelter, medical, transportation, etc. before getting into discretionary items like cell phones, entertainment, subscriptions, etc.

I do not recommend you immediately leave out items, unless they are very obvious. Once you have a detailed list, go ahead and determine if you need to cut anything based upon your priorities. At this point, this should be fairly straightforward as you have, fairly extensively, gone through what is most important to you.

I also recommend, that in this step, you also add the date in which you will be spending the money you have planned. For example, if you say you will spend $50 on take-out. Then put the date you intend to order take-out. This will help you stay accountable to the plan.

Looking at bank account

Many people ask, ‘Why is this important?’ The goal is that, in 2-3 months of constantly checking your account 3 times a day, you will begin to simply ‘know’ where you are at financially. You will know how much is in your account, what you can spend, what is left in a particular budget category, etc.

This one isn’t hard, but is really the key to staying on top of your spending plan and your priorities.

The real goal here is to make sure you are constantly thinking about your money. Ideally in a positive way, now that you have taken full charge of your finances. The process of constantly thinking about money will allow you to make better decisions as you go through life as it comes to your finances.

Tracking and WRITING THEM DOWN

I always think, when I put things in ALL CAPS, that people probably think I am yelling at them. I usually am not, but this time I am. It is extremely important that not only do you look at your bank account, but you write down the expenses that you incurred. You do not need to do this on a daily basis, but you shouldn’t let more than a week pass without doing this. The goal is to establish a habit of looking at, reviewing, and writing down your expenses. And, if you wait until the end of the month to write everything down it will be hard to make changes.

Summary

Congratulations on getting to the end of the book. Think of all of the positive action steps you have taken to get to this point. You’ve already taken many of the steps we advocate for in this book. I hope you take this book and use it to propel you to a better financial future.

To tie everything up, the goal is to develop a financial clarity or an awareness about your situation. At the end of the book, implementing all of the steps contained in it, and working through the exercises should occur within a 2-3-month period. It may seem like a lot, but many of the tasks and exercises only exist to get your mind thinking about money and to start establishing sound money management principles.

Ideally, in 3-6 months from beginning, you will have a proper money management system in place, a good handle of any debt you developed, and a small emergency fund being created.

Once you have reached the point of having at least $1000 saved and are no longer living paycheck to paycheck that is when I recommend you move onto some of the other finance books that go into more advanced strategies. Perhaps I will even write one myself!

Effectively, the book is over. But, I have added a quick-info chapter to supplement many important topics that many people misunderstand.

I hope you have learned from this book and you keep an eye out. Finances and methods are ever evolving, as we update our process we will release new editions of the book.

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