The worst kind of income to have is the unpredictable kind. Salespersons and independent contractors need a black belt in budgeting to survive such a rollercoaster income. Cash sitting around in a checking account has to last through several months while covering unexpected expenses.
When income comes in every 2 weeks on the dot, it’s easy to start spending the money before it’s even there. Entrepreneurs would give a gonad to have predictable income. It means that they can plan for future investments without having to worry as to whether the income will be there.
I would guess that somewhere around 30% of our income slips through our hands because it’s taken for granted. Few of us have a black belt in budgeting because few need such a skill.
As soon as the checking account starts looking positive, an unexpected expense comes along and wipes out the progress. This is demoralizing.
Starting To Budget
It’s easy to budget when you have goals in mind. It’s incredibly hard to budget when a financial plan hasn’t been fully hashed out. Add to that the chaos of a job-lifestyle and a 100 different unexpected expenses in the month and it’s really hard to stick to a budget.
Cutting out the spending fluff is a good start. Anything that requires batteries is a great example. Cars that need a lot of maintenance. Or a vacation home that just eats up your money. Same is true for credit cards with annual dues or online subscriptions.
Too Many Categories
When you first start out it’s good to list every single category and you’ll probably have close to 50. A category listing not just food but:
- dining out alone
- dining out socially
- dining out with family
- drinks with friends
This level of detail allows you to identify where the money goes. By preparing food at home and meeting friends only for drinks, you’ll drop this down from 6 categories to 2:
- drinks with friends
Budgeting is hard because there are simply too many categories to keep track of and way too many things that we didn’t even know we needed to budget for.
However, after a couple of months of budget tracking, you’ll identify where you can cut expenses. You’ll soon merge budget categories and drop down to make 10-15.
The Unexpected Categories
Within about 6 months of budgeting you will identify 80% of all these unexpected categories. I have my “Stuff I forgot to budget for” category and now it’s maybe $500 for the year.
Soon you’ll realize that the kids will need some new sporting equipment before the year is up and so you’ll just create “kids’ sporting equipment” category and put a little towards it every month.
Black Belt In Budgeting
You’ll be a pro budgeter when you can create your September budget in June. You would use the paycheck from June to plan groceries, transportation, housing, and health care for not only June but also July, August, and September.
This frees up the upcoming paychecks and allows you to use the income in July, August, and September to pay down debt, save and invest.
There is no need to live like a pauper but you won’t go out to a fancy dinner with the family or buy a new sofa just because you have money in the checking account or a credit line at Pottery Barn.
You allow yourself some spending-pleasures after covering all the bases and when there is disposable income to play with. That right there is having a black belt in budgeting. Not only is it a means to financial independence but it will serve you incredibly well should you ever start a business.
No More Arguing Over Budgets
Talking finances in a relationship can sometimes get stressful. But if you both sit down over a glass of wine or a joint and come up with the budget for the next few weeks/months, then there won’t be anything to argue about.
Next time you guys go out to dinner you look at your available budget in the “dining out” category and see that you have $227 to spend. You can spend the whole thing now or leave some for later in the month.
When at the grocery store you can check your grocery budget and see that you have $217 left to spend. Either you can spend all of it or shift the extra budget to another category.
The above screenshots are from YNAB. This budgeting software has been my most powerful tool towards gaining control over finances.