A guest post from Joel Stopha, a father and businessman in the United States.
Budgets are for BUSINESSES, not for households. Budgets are guidelines for the predicted NEEDS of a business in the upcoming year. Generally, individuals are not emotionally attached to the Business Budget, so if income falls or does not meet estimates, ‘cutting the budget’ in a business has little pain to the person working in the business. The word ‘Budget’ has connotations of constraint, limitations, and ‘out of our control’. The term ‘Spending Plan’ is empowering because most people feel good about spending and YOU make the spending decisions, in advance, based upon your priorities. For many, the simple decision to use the term ‘Spending Plan’ will remove much or all of the anxiety of this financial planning process.
Personal household Spending Plans have three simple components: GIVE, SAVE, SPEND. Other than make or earn money, what else can you do with it? Therefore, to many, these categories (things you can do with money) are familiar. What is critical, though, is the order or priority given to the three components. So here we go with the process!
STEP 1 = empty your brain of everything financial except your, or the household “take home pay/income” (net income)
STEP 2 = at the top of a blank sheet of paper, write “SPENDING PLAN for (your name here) – 2017” immediately below the title write, “Total Monthly Income $_____________”
STEP 3 = on the left side, write “GIVE”, in the middle – “SAVE”, on the right – SPEND (see example form at bottom)
NOW THE FUN (and DISCUSSION/PLANNING) BEGINS!!!! Because you emptied your brain in STEP 1 above, remember?
STEP 4 = WITH AN EMPTY BRAIN (i.e. you have no bills and no debt), how much of your net income would you LIKE to give away to charity, to friends and family in need, etc WITH NO EXPECTATIONS of ever getting a penny back!!! Once all involved agree on a number or a percentage, realistic or not, write it down in INK.
STEP 5 = knowing that you have already given away “X” amount of your income in STEP 4, but with complete disregard for anything else, discuss how much of your income you would like to put in savings, WITH ONE CAVEAT. That CAVEAT is, whatever amount you put in savings HAS to be spent on a big ticket item (vacation, car, iPhone, laptop, Big Screen TV) at the end of 12 months. Write this number or percentage in INK under SAVE.
STEP 6 = Net Income – Give – Save = “X” Put this number below the heading ‘SPEND’ on the form. If this number is zero, your generosity and savings ambitions are GREAT, but not realistic.
STEP 7 = under SPEND list all the existing monthly expenses, debt payments, and the monthly portion of quarterly bills (insurance premiums, property taxes, etc.) Obviously, the earlier in your income producing ‘life’ you implement this SPENDING PLAN process, the less complex this section becomes.
STEP 8 = total up the monthly expenses. Chances are your monthly expense total is larger than the number you placed under SPEND. If not, great. You have a SPENDING PLAN that you can implement immediately.
UNDER NO CIRCUMSTANCES should you EVER erase or cross out the numbers you initially put under the GIVE and SAVE columns. These are goals you have identified and they need to be seen regularly. A big part of the SPENDING PLAN process is psychological!! Following the directions that follow to the letter will help you overcome bad spending habits you have developed.
If your monthly SPEND expenses exceed your total net income, you have only two options: Make more income or cut out non-essential expenses. Identifying and agreeing on what is a non-essential expense may require some counseling.
UNDER NO CIRCUMSTANCES should you ever NOT GIVE or NOT SAVE (Pay Yourself). If you need a place to start, I would suggest giving a minimum of 1% of your total net income and saving a minimum of 2% of your total net income. I encourage setting a goal to give 10% and save 10%. Being able to live on 80% of your income will all but eliminate any financial stress in your life.
The discipline you develop giving and saving (paying yourself) each month will make you more financially savvy as time goes on . Remember, all PLANS take time, and if you are not disciplined with your present income, when you increase your income, you will just spend more.
Once you establish your SPENDING PLAN, decisions have been made (predetermined). Emotions are removed because you decide where your money is spent – not someone else. If you get emotional about buying something on impulse, simply add it to your list of things to spend your ‘savings’ on, and when there is enough money in your savings, if you still want it, buy it! (That’s known as delayed gratification – a very foreign concept in our on-demand, instant gratification society) I can make a promise here….. 90% of the items you were once emotional about buying on impulse you will NOT buy once you have waited until the money accumulated in savings. Marketing folks and consumer lending folks hate the term ‘delayed gratification’ because it equates to lost business for them!!!
Only GIVE, SAVE, SPEND will keep you financially self-disciplined to live a life with minimal financial stress. It is as important as educating the next generation about saving money. Next time we will discuss “getting your children involved in ‘the planning’ and ‘the work’.
2017 SPENDING PLAN for T.M. Bucktu Family
Take home/Net Monthly Income = $XXXX.XX
GIVE SAVE SPEND
$ or % $ or % $