CBS news reported that 76% of American households are living paycheck to paycheck. Less than half have three months of worth savings. We are sending our kids to college with no money and over a trillion dollars of outstanding student loan debt.
Normal in America is being broke. It’s time to get weird.It’s time to stop managing our debt and start eliminating it for good.
It’s time to get on a Money Plan and use a budgeting process that works.
What Is A Budget
- Wikipedia definition: A Budget is a quantitative expression of a PLAN for a defined period of time.
- Expanded definition: A budget is a quantitative (measuring by quantity) expression (the act of using the money for something like a bill or savings) with a Money Plan for a defined period of time (I recommend a calendar month).
- John Maxwell’s definition: A budget is telling your money where to go instead of wondering where it went. Amen Brother!
Why We Should Budget
Doing a budget and living on a budget is a means to an end. A budget helps make smart purchasing decisions and avoid making the wrong ones. It encourages debt elimination and savings while squashing impulse purchases. A budget also tracks your progress and allows us to make course corrections along the way.
A budget can help us to reach our short-term and long-term financial goals one month at a time. Budgeting makes us spend less than we make and do something smart with the difference. ‘Nuff said.
Avoid These Types Of Budgets
- The Bank-Balancing Act: Seeing if there’s money in the bank before it’s spent
- Smudget: Tracking expenses without the forecasting aspect
- The Annual Budget: Taking last year’s spending and dividing it by 12, resulting in a monthly average
These processes don’t work because they don’t tackle both sides: The forecasting and the tracking.
Instead, I recommend using one of these three budgeting processes to whip your spending habits into shape!
Budget 1: The Front-Loaded Budget
Zac Bissonnette, author of Debt Free U and How To Be Richer, Smarter, And Better Looking Than Your Parents, suggests young adults set up all their bills on auto-draft (auto-pay). This includes putting money into an emergency fund, savings goals, and a Roth IRA. Once all your bills are covered and investing is underway then the rest of the money is your to spend as freely as you wish.
A Front-Loaded Budget works best for college students, young graduates, and people who have no debt. It sure beats the Bank-Balancing Act of looking at your bank balance on your smart phone to see if there’s any money there before buying that new couch.
Budget 2: The Zero-Based Budget
This is the type of budget process most people are familiar with. Sit down with a piece of paper, write down all your bills, monthly debt payments, and what you expect to spend towards groceries, gasoline, etc.
A Zero-Based Budget must also include savings for short-term and long-term goals such as an emergency fund, Christmas, and larger purchase like vacations or car replacement.
This process of spending everything on paper before the month begins is more detailed and works best for people trying to get out of debt. It can also be created in an Excel spreadsheet or using online resources like Dave Ramsey’s Gazelle Budget http://www.daveramsey.com/tools/budget-lite/ or Mint.com.
Want to start your own Zero-based Budget in under 1 hour? Take my video course and I’ll walk you through it step-by-step
Budget 3: Spending Last Month’s Income Budget
How would it feel to have a one month buffer of income to spend this month? If you bring home $4,000 a month and had that much in your checking account before September started then how much lower would your stress levels be? This is the ultimate assassin of the “living paycheck-to-paycheck” disease and those who budget like this absolutely love it!
Of the three budgeting processes, this one works best for those with an irregular income. Are you used to bringing home $4,000 but only brought home $2,000 this month? You still have time to make adjustments this month before next month begins. Did you get a bonus? Put your new-found windfall in storage (savings) for a month when your income is less than normal.
Spending last month’s income this month takes care of the electric bill, the cell phone bill, the car payment (if you still have one), the rent or mortgage, covers the groceries for the next 4 weeks, and so much more. This process also causes you to look into the following month to see if there are any non-monthly expenses coming like birthdays, anniversaries, and holidays. It is also flexible so you aren’t scrambling to cut things when you can instead of when you have to.
There are many side benefits to spending last months income this month and it’s the one we use in the Stewart household.
The Budgeting Process We Use
You could use an Excel Spreadsheet for any of these budgeting processes, similar to the spreadsheet I teach my clients to use Money Plan SOS Excel Budget 2013 once we get their budgeting act together. However, spending last month’s income this month is best done in software like YNAB.
You Need A Budget is a beautifully designed program you install on your computer. It works on both Mac and PC and one purchase can be installed on multiple computers in your house. YNAB also offers a free iPhone and Android app that allows you to enter transactions into your budget as they happen. 90% of the purchases I make outside of the home are entered into YNAB via my iPhone while standing at the register.
- Fill the tank with gas? That goes right into YNAB before I reset the counter on my dashboard.
- Paying for my daughter’s skating club? It’s in YNAB before she can finish putting on her skates.
- Take my wife out to dinner? OK, whipping out my cell phone before leaving the dinner table to enter the receipt into YNAB might ruin the mood but you can bet I enter that puppy as soon as there is an opportunity.
The CloudSync feature allows my smart phone to talk to the budget – even when my computer isn’t turned on – by storing a copy in the cloud for free (we use DropBox to store a copy that both my wife and I use together). YNAB is always there, always waiting, and has always been easy to use.
The Money Plan SOS Budget Coaching Process
I walk couples and individuals through all three of these budgeting processes with the ultimate goal of getting them to live on last month’s income:
- Using our history of purchases to create a list of ongoing expenses
- Prioritize our expenses (which always fosters some good communication between spouses)
- Show exactly how far our money can go
- Begin this absolutely simple budget mid-month
- Create a Debt Snowball to attack and strangle our debt!
My process of living on less than you make works best for those who are currently in debt or have an irregular income. Once you get control of your money then I recommend moving to a more complex budgeting system like YouNeedABudget (YNAB).
Feel free to teach yourself any of the processes above. But if you want a quick-start to financial freedom then check out the Virtual Budget Coaching Course that will get you started in under an hour!
Also mentioned in this episode:
Google Hangout with Jon White http://youtu.be/9yjOTa7wiAg