This is the second installment of our ten week video series, which will help you avoid the most common red flags that are keeping you broke. If you'd like to follow along with our FREE guide, you can download your copy here.
Today, we are covering the second red flag on our list: You don't have a budget or a plan.
First, let’s get this out there. The BUDGET has gotten a bad wrap over the years. In many cases the word BUDGET is considered a swear word for many people. Don’t believe me? Try some of these phrases out with your friends and family and see what they say.
"I can’t go out to eat tonight, it’s just not in my budget right now.” Likely response: “OMG, you’re on a budget? Are you broke?”
“Ever since we got on a budget we’re having a lot of success with our finances.” Likely response: “Why would you budget? YOLO, and that doesn't sound like much fun!"
“We finally saved our first emergency fund by planning out our month and using a budget.” Likely response: “Budgets are boring. Besides credit cards are for emergencies!”
“We have paid off a bunch of debt this year because we started doing a budget!” Likely response: “You can’t live without debt, you’re always going to have payments. Besides, budgets are too restrictive and for people who don’t make that much money.”
I like to be optimistic, and I’m guessing that some people will react in a positive way to you because you are using a budget. Why? Most people don’t have a working household budget. According to a recent Gallup poll, only 32% of people have a budget. That means the other 68% of people have no idea what’s going on with their money. Crazy enough, almost eight out of 10 people are living paycheck-to-paycheck according to CareerBuilder.com. Do you think this is a coincidence? Heck no, it isn’t! Most people are living paycheck-to-paycheck because they don’t budget. Let’s change that.
Today, I want to share a few tips that will help you start your first budget. Let’s get one thing straight—no matter how much money you make, you need a budget! Now that we understand that, let’s do this!
Commit to spending time on your finances and doing your budget. The biggest mistake many people make when doing their first budget is doing one, and then throwing it in a drawer or closing an app to never open it or follow it again. If you do this, your budget won’t work. Instead, commit to spending 10-15 minutes a day on your finances, your future self will thank you.
Creating your budget, especially if you haven’t done one before can be challenging. In order to do a working budget, you need to know what your monthly income and expenses are. People who don’t work on their finances typically have no idea what they spend their money on. Start looking at past bank statements, credit card statements, and anything else that will help you determine what your expenses are. Knowing and predicting your expenses takes practice, and will likely take you several months to get a good understanding of them.
With that said, be prepared and be comfortable with screwing up a lot, because you will! In many cases it will take a good 3-6 months, even sometimes up to a year to get really good at planning and following a budget. But, just like you learned to ride a bike, eventually you became a pro at it! Heck, you probably got so good you could even ride with no hands! A budget is no different.
Do a zero-based budget. What does zero-based mean? This means that you should spend every dollar of your income on paper (or an app) on purpose, before the month begins. Every dollar gets a name. If you don’t give every dollar a name, you will likely overspend and make financial decisions on impulse. This will destroy your budget and your plan! Being that you now know what your income and expenses are from step 2, now it’s time to write them down and put a dollar amount on those items.
Remember, you can't spend more than you make, if the money runs out, things must be cut in order to have a balanced budget. Tip: Your necessities like rent/mortgage, utilities, food, transportation, and clothing should be budgeted first and foremost.
By doing a budget and following it, you will begin to see where you are wasting and or overspending your hard-earned money. Now you can adjust, cut out that wasteful spending and put that cash to better use. Like building an emergency fund savings or paying down your debt. This is where it will feel like you have given yourself a pay raise!
Keep going and don’t quit! I hate starting new things because I’m terrible at them. It’s frustrating. I just want to be good at whatever it is I’m doing right away. So do you, I assume? This is why most people will quit and get discouraged. As I said in step 3, you aren’t going to be good at this, but you have to keep pressing forward. Those who do will have amazing success with their money! You can do this too.
This is just a start to doing your very first budget. But I can guarantee that if you implement these steps, you will be in a much better spot than you are right now and the number one personal finance cuss word “BUDGET” will be your new best friend!