Budgeting…the Dieting of Money Management
Budgeting and dieting are similar in many ways. As you drive home you make the decision: stop at the closest fast food restaurant or go home to cook steamed vegetables and chicken. One is quick and easy and tastes great; the other takes time, and depending on your cooking skills, may not be the best. As with your food dilemma you have constant emails with the phrase “50% off…valid for 24 hours”. We are surrounded by temptations and sometimes it is difficult to resist (I will admit, I fall victim as well). If you truly want to change you’re spending habits, follow these five steps.
WANTS VS. NEEDS. Just as if you were to start a diet you need to first understand which foods are healthy and unhealthy. For example, lean protein is great for your diet, so chicken and fish is what you want to consume. Foods with large carbohydrates, such as pasta, is something you want to limit. For a budget, as in a diet plan, your first step is to understand the difference between health or unhealthy expenses or discretionary and non-discretionary expenses. A discretionary expense is a non-critical expense to your budget. For example: going to the movies, out to eat, or (for me) fishing lures. These expense are the “cookies” not the “bananas”. A non-discretionary expense is a critical expense to your budget. For example: rent, mortgage payment, and utilities. These expenses are the bare minimum you need to live or the fruit and vegetables of your diet.
UNDERSTAND THE DETAILS. Understanding the details is similar to reading the food label, searching for the fat, protein, or sodium content in the food you are going to eat. You want to understand where you should cut and/or add nutrients to your diet. The same exercise goes for budgeting. Once you understand the difference between the two categories of expenses, do the following exercise. Write down every discretionary expense you incurred in the past month and the total monthly value for each expense (if the expense occurs multiple times in a month add each individual expense together to arrive at a monthly value). Do the same with all non-discretionary expenses in a separate list. Sum the total monthly values to arrive at your monthly discretionary spending and non-discretionary spending. Now you have a key understanding of exactly how much you are spending on fishing lures and the roof above your head.
ANALYZE THE DATA. Now that you have concrete numbers, it is time to analyze your spending. Take your monthly paycheck (if you are paid weekly or biweekly, add up your check to arrive at a monthly value) and divide your monthly discretionary and non-discretionary amounts by your monthly pay -this will give you a percentage. This percentage reveals the amount of your paycheck that goes to the “wants” and your “needs”, or how many cookies you can eat and how many apples you need to eat.
SLASH COSTS. Now that we understand what we are eating, it’s time to cut out the cookies from your diet. However, every healthy diet needs sugar - we do not need to go cold turkey. If your discretionary expenses are more than 30% of your total paycheck, look to cut. When looking to cut expenses, read through each discretionary expense and at every line ask yourself “Can I cut this out of my budget?” If your first reaction is yes, that will be ranked #1, maybe, ranked #2, no, ranked #3. Now you can cut every #1 expense, and if that is not enough to get you to 30% move to #2 and so on. This method helps cut the high sugar foods and leaves in the proper sugar we need to have a healthy diet.
TRACK YOUR PROGRESS. Eating healthy for one week won’t help you reach your goals, you need to track your progress. There is no difference when it comes to maintaining a budget. There are multiple free apps out there that can track your spending. You can enter in your credit card and or debit card and every transaction will be pulled and tracked. Other options include apps such as Mint.com or working with your bank to see if they offer a similar service. Tracking your progress can be difficult; you need to be consistent to see results.
The above five steps allow you to take control of your expenses by managing your budget. But beware this is not an easy task to accomplish. For example, a recent article about JJ Watt’s (an NFL D-lineman) diet was published, which stated that he was eating 6,000 – 9,000 calories a day. That is eating every day all day and he is doing it extremely healthily, stating “I started crushing avocados”. The point is you need to be consistent with your plan and keep up with your budget -start crushing those avocados!