Count the Cost - Step 2

If you are following along I hope you spent the last few days determining your financial worth. This is only a financial side, you are worth much more than that to others, but this is a ground work to help you understand where you are at and how you need to focus going forward. Now you know you are in 3 possible positions. Content and at peace with the current state, mad and wondering how you are so lopsided in one area or humbled and surprised at the outcomes. I can tell you, I never did this exercise up until about 2 years ago and was shocked and humbled by the outcome. As I tell many, I have sort of stumbled into some good and some no quite so bad decisions along the way.

With that as a ground work, now we need to start looking at our months. From Step 1 you should have your income somewhat figured out, or at least getting an idea for it depending on the type of worker you are. I should note, you should also be combining details here between you and your spouse. From there you can build a plan for the month ahead, planning is what will set you up for success. Benjamin Franklin said "If you fail to plan, you planning to fail." Even Christ gave us wisdom on planning. Luke 14:28-30 (KJV)

"For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, Saying, This man began to build, and was not able to finish."

Opposite Income come your monthly expenses. This is where it can get a little difficult, so I like to try with all things to keep it as simple as possible. We will categorize things out later, but I like to start by focusing on the things I know v. flexible areas.

Things I Know

These are regular bills, they either come in monthly, quarterly, yearly… As you start watching this month to month you may find some subscriptions that you forgot you had.

Rent or Mortgage (25-30%) is usually the first one to list here. I assume that should be standard each month. Ideally you want that to be less than 25-30% of your monthly take home pay. Why? Because the higher that number gets the harder it is to make a budget and stick to it. Be careful, if you are looking to buy a home, the mortgage lenders will offer you over 40% payment here, so know what is possible. People always say, well I live in a high cost of living area… My response, so do I, and your income should match the area you live in, if not you should be looking to grow your income either through a career change, increased work, or moving to a lower cost of living.

Insurance is a key part, this includes Medical, Dental, Vision, Life, Homeowners/Renters (if your mortgage company doesn’t keep it), Auto and possibly a few others depending on your age and circumstances. Chances are Medical/Dental/Vision come out of your paycheck or if you are self-employed you pay out of pocket, but you should still have a clear understanding of the cost. Too many times we pick a plan without realizing the impact to our paychecks

Subscriptions area key watch out area. Things I expect for the most part, Cable, Internet, Cell Phone, Streaming services, Amazon, etc. These could be a long list. Usually this can be a make or break on a budget discussion. Many cases this is where things get out of control, so you want to list each one and know whether it bills monthly, yearly, quarterly and then ask yourself a few questions. Can I get a better rate? Do I need this? When I started doing this several years ago, it lead me to cut my phone line, and then my cable line and last year I cut Amazon.

Electric/Gas are things you should know, but they may vary depending on your situation, key is to account for them, plan for them and know the cost. It is usually best to look back on the prior year and see how much you spent overall, this way you can plan accordingly, save for the months that high and use that savings from the lower months to fund them later. Unless you have enough flexibility in your budget to adjust other areas on a month to month basis.

Flexible Areas

These are the tougher ones to nail down when you first start budgeting. These include Groceries, transportation costs and miscellaneous expenses. This is where you need to figure out, set a budget and try to stick with it. If you flex, you need to know where you pull money from to cover a possible overage.

Groceries is always a hot topic and a great place to get people mad and fired up. There is really only one way to get control of your grocery spend, make a plan and stick to it. It takes time to figure out what to eat, but if you plan ahead, you can buy ahead and then plan accordingly. For instance, you know steaks are expensive, so you are not going to eat that every night, but within a budget you can plan how much you can spend each day on food. If you are in debt, we recommend not eating out, so assuming a set budget for each meal for your family, can help guide you to figure out what to budget. We are a family of 5, with 1 in college right now, our spend is $800 per month on groceries, and we have exceeded that and come under in some areas in the past, but we have flexed in other areas of our budget to account for it to keep us on budget.

Transportation can really hurt when gas prices go up. If you commute to work or any where regularly do some mileage calculations to estimate. One of my clients and I worked to come up with a budget for this based on her travel and they have been shocked over the past 2 months that every time they are just a hair under the original estimate. With the right mindset, and the willingness to try you can figure it out. It is ok to be wrong, it takes a few months to build this muscle.

Miscellaneous is the worst of all categories and one I recommend you keep a close eye on. Be sure regular expenses are not coming into here, if so make them their own category. Overall, keep this budget tight and if you can go without, go without until it is in your budget. It may require that you save a bit of money to cover the expense in the future.

Debt Payments

We will work on this more in Step 3, but let’s list out your minimum payments for all debts that you currently owe. You are going to need to have those in your plan.

Now let’s shift gears to categorizing, how to build your first budget. From step 1, know your income is the beginning so set that as your top line. Then we are going to focus on the MUST haves, these are to take care of you. MUST Haves include, Mortgage/Rent, Electric/Gas, Groceries, Transportation, Insurance, and possibly known medical expenses if you have some pre-existing things like regular medication that you need to take care of. Get those clearly laid out. This is what you need to live healthy and take care of yourself each and every month. Did you notice something that is not in there…?

Internet, in MOST cases this is not a must have, but I do understand if you work remotely or like my realtor wife, must have this to do your job, then in may be a must have. Only you can determine that.

Next, I like to recommend keeping your yearly expenses into 1 grouping, this way you know how much to put away each month to cover these items. This could be a mix of the different groups before, don’t worry, we are still keeping them separate, but it is good to have a monthly savings target for these bills and a special place where you are keeping these. I like to use my savings account with buckets so that I know how much is assigned to each group. Then each month slide the money into that account.

Last, let’s look at those flexible areas. Here is where budgeting catches most people because they can be a little unpredictable, e.g. last minute road trip for family, increased costs of good in the grocery store, etc. If you are really struggling in this area, the best guidance I can give you is CASH!! Yes, every month take the cash out you need and that is all you have. This will not only save you money at the pump, since cash usually brings a lower cost, but also force you to see that money leave your hands. In addition, when you only have X amount of cash in hand you think a little differently about whether you really need to buy something or not.

Ok, that was easy right… 😊 You have it set and at the end your remaining line should read 0! You will need to adjust categories and spend to get to 0, seeing it will help you see where you need to help. Maybe you just have more month then you have income, maybe your subscriptions are too high. This is where mindset comes in, do I really need this. Is it worth me working another job so that I can have this. Seeing it on paper changes your perspective.

That is just the beginning, now you have your plan, it is time to commit to execution. Look at the budget daily, check your spending, and stick with it. Most it takes about 3-months to get into a steady stream. For me it took about 6-months to finally get it dialed in, but I can assure you, it gets better with time and you have to stay with it day after day, month after month, year after year. Stick with it, and this will set you on the path you need.