1. Give Every Dollar a Job
Now that we have a budgeting tool set up, let’s get to budgeting!
The first rule in budgeting is this: Every dollar gets a job.
Your hard-earned money must work for you, and not the other way around. If you want your money to work for you, you need to be in control and tell it what to do.
As soon as you get your money, you have to decide where it is going to go. What will you put it towards? How will it move you forward?
- Prioritize every dollar. As you assign your dollars a job, you want to make sure to prioritize their assignments. Whatever is most important to you gets assigned a dollar first. For example, if you receive a paycheck of $1,000, I would imagine that you want to make sure you have a roof over your head and food to eat. In which case, you want to assign you dollars the job of paying for your rent and for your groceries before you even think about assigning dollars the job of paying for a shopping spree.
- No dollar left behind. Dollars cannot be left unassigned. You can’t have free-floating dollars that do not have a plan. Why? Because free-floating dollars are out of your control. They do not have a purpose, thus making it very easy to spend them nonchalantly. Having arbitrary dollars give you an excuse to purchase things on a whim. It gives you the leeway to be free with your spending. In other words, it allows you to lose control, and that’s not where we want to be.
Imagine this scenario. You see $500 in your bank account, and your co-worker invites you to go out for Brazilian BBQ, which we all know is not cheap. If the $500 are not given a specific job, then it may seem to you like you have the money to go to dinner with your co-worker. However, if your $500 are pre-assigned for gas money ($100), groceries ($250), cell phone bill ($50), and utility bills ($90), you will quickly realize that there is only $10 left for dining out. In which case, you may ask your co-worker to go out for street tacos instead.
- Stick to the plan. This isn’t the time to be lenient. Especially when you are just starting out. You must exercise those frugal muscles. Be focused on your goal, which is to master the budget in order to achieve your WHY. If you intended a particular dollar to cover groceries, and there are no dollars left for dining out, then you cannot dine out. Or, you can dine out but you must take out that money from your grocery budget, and make do with less groceries. (Spam, rice, and ramen on repeat, if you know what I mean.)You can easily see why having a plan to stick to in the first place will make budgeting that much easier. There will be less stress and less chances for guilt-inducing decisions. Instead of resisting the urge to splurge, you will simply be following the plan that you’ve mentally prepared for all along.
2. Admit to Your True Expenses
Rule number two can be extremely tough, especially for the proud … and the failing.
I think most people feel trapped when it comes to discussions revolving around money. It’s hard to accept that we are spending more than we can afford. It’s hard to admit that we aren’t making as much as we would like. And it is hard to untangle ourselves from the American Dream. From the belief that we can have it all. From the advertisements that tell us we need (and deserve) more. Sometimes, we want to convince ourselves, too, that this is all possible. Sometimes, we try to hide our true expenses. We use our credit cards, and then forget about our consumer debt. Next month… we will get it right. Or so we tell ourselves.
No amount of spending is negligible.
I used to never track my expenses. I used to count only my large weekly grocery runs when I “kept track” of my grocery spending. I never thought of the moments that I swung by to grab an apple, or a bag of flour. Those little expenses, in my mind, were arbitrary, or as some would say, negligible. Eventually, I began to understand that nothing was negligible. Every dollar counts (see rule 1). I saw that I was only fooling myself, and in doing so, I was preventing myself from making any real progress.
Plan ahead to capture all your true expenses.
However, if I was being completely honest, most of the time, I would fail at budgeting because I never planned ahead. I never accounted for all of my TRUE expenses. I would forget about the auto-insurance bill that I’d have to pay at the end of the year. I would ignore the upcoming holiday shopping spree in order to put presents under the tree. Since I didn’t plan ahead for these things, I was constantly unprepared. It would come time to pay a yearly occurring bill, and I would not have the large sum that I was not used to paying for every month. I would then have to use a credit card to cover the payment. If only I had foreshadowed this moment six months prior, I could have been setting aside some money ahead of time, to make the payment more manageable. Spending $600 on the holidays isn’t as over-whelming as setting aside $100 over the course of six months.
Budgeting is a humbling thing, because for all of us, life happens. Life throws us surprises, it brings us shortcomings. It makes us aware that we make mistakes, and sometimes, it makes people feel like they aren’t enough. We are human, and we need to practice budgeting with more grace, and less pride. Only then can we admit to our true expenses, and address them in a productive manner.
Use categories to determine your true expenses.
This is where categories become useful. Your predictions of how much you need to save per month for particular categories will be inaccurate at first. Do not let that discourage you!
Over time, you will start to see the average spending in each category. (YNAB has a quick tool that will calculate this for you over the history of all your budgeting.) This average spending is the truest reflection of your true expenses.
Do not shy away from it. Use it to your advantage.
If you are embarrassed that the spending is too high, then do something to change it!
This is the power of having good categories!
3. Be Flexible, Adjust Accordingly
On that note, let’s practice grace when we budget. We need to be strict, but not un-moving. We need to have discipline, but not be tyrants. Otherwise, this will never work. Not long term, anyway.
It’s hard to continue moving towards a goal when we refuse to make a new path after we’ve veered off of our original trails. When we overspend in a particular category, we simply need to adjust. Go with the flow. There is no need for guilt. No need to be hard on ourselves, for what purpose does that serve? I think it’s best to recognize the mistake, learn for future’s sake, forgive, and then move on.
We should never ignore our mistakes in budgeting, but rather, have the sensibility to address them right away.
The solution does not lie in next month’s budget (which is another way of avoiding the over-spending), but rather, in the alteration of what we do have at our disposal right now.
And if it is a regrettable decision, then what better way to train ourselves to be more mindful of spending for future months to come?
4. Age Your Money
If you follow steps 1 through 3, you will soon get into the habit of spending less than you earn. Which in turn leads to you saving money.
Eventually, you will have saved enough money to use this month’s dollars to budget head for NEXT month’s spending. When you have gotten to the point where you are spending previous month’s earnings for this month’s spending, you will soon realize that life becomes less stressful.
Congratulations! You no longer are living paycheck to paycheck, worried about how the bills will be paid and when the next deposit arrives. And if you suffer from a major change such as a job loss or a TRUE emergency, your aged money will help alleviate that financial burden.
So what IS the age of your money?
If you have enough money to cover tomorrow’s bills, then the age of your money is one day. If you have enough money to cover all of next month’s bills, then the age of your money is 30 (or 31) days.
The age of your money is determined by the number of days for which you can pay ahead. If you are starting from scratch and this is your first time budgeting, aging your money may not happen overnight (unless your income is much higher than your spending). Don’t stress about that. Take it a day at a time, knowing that steadily, you will reach this point in your budgeting and it will be a life-changer!
Remember the rule of thumb: Always spend less than you earn.
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