Introduction
Every business has a financial plan. Every business has a budget. What would happen if you would create and adjust your budget with the efficiency of a Fortune 500 Business?
We can dream, can’t we? Well, we can do more than just dream. Let’s take a look at how we can manage our own finances and wealth like a well-oiled business machine.
A budget tells your money where to go
Imagine two people who have $500. John has a budget. Brad does not. Brad spends his money the way he wants and after all he has a right to because it is his money.
So he goes and buys a new pair of sneakers, a video game, and caps the Night off at his favorite takeout restaurant where he orders the most expensive meal on the menu.
When Brad wakes up in the morning he, like many of us, will ask the question,
“How in the world did I spend $500 in one night?”
I can tell you how. it’s because you didn’t have a budget.
You messin’ with the wrong system!
John, on the other hand, was able to take his $500 and keep it in his pocket. did he want to spend that money? Of course he did. everyone in his position would want to as well.
However, John had a plan. John had a budget. So before John spent the $500 he realized the money had already been reserved for something else. He already told that money where to go. He could not spend the money the way he wanted to at that moment.
John wasn’t betraying himself. By not doing what he felt like doing with the money in that moment, John was making a sacrifice today for himself in the future. His budget allowed him to stick to the plan for his future.
A budget helps you track and adjust
I learned this one from Darren Hardy of Success magazine. He is a firm believer in the idea of tracking. As a matter of fact it was his confidence in this one step that convinced me to give it a try once and for all.
Definition Of Tracking
What is tracking? Tracking is the act of writing down every time you do an activity whether it is good bad or ugly. This is done to overlook the biases that we have concerning our activities and habits.
The truth is we lie to ourselves more often than we would like to think. When you track your habits you take the feeling out of your observation.
Tracking In Action
Let’s say for example Barbara is a frivolous Spender. Does she know it? Probably not. In fact she would probably deny it if you told her. We’re like Barbara as well because we deny the facts even if the evidence is right in front of our faces.
So, a friend convinces Barbara to track her spending. He literally says,
“Don’t take my word for it. Write down everything that you spend money on for one week and see for yourself.”
She takes him up on the challenge hoping to prove him wrong. She write down every purchase that she makes. She even records the 27 cents she puts in the tip jar at the pizza shop.
The first day she seemed to make some prudent purchases. probably a result of knowing that she has to record everything she does. Two Days go by and on the 3rd she has such a busy day that she didn’t even get a chance to write everything down.
After she Landed in her favorite chair after a hard day of work she pulled out her notepad to recall and record the missed purchases.
The Objective Truth
As she went throughout her day looking for the different ways she spent money, she was horrified at what she was forced to record. it looked something like this:
- $27 at the cafe
- $15 belt from a street vendor
- $8 in snacks from the newsstand
- $189 online for a pair of black high heel shoes
- $65 for meeting a friend at lunch
- Six more dollars spent on the way home
She could not believe that she had spent $310 in one single day.
This is the secret power of tracking. It opens our eyes to the reality of our activities. After tracking her spending that day, Barbara could not deny that she needed to make a change.
Know where to make changes
Seeing a clear picture of your financial inflow and outflow gives you confidence to make changes. You can adjust your budget and spending without wondering if you’re doing the right thing.
Where to adjust your budget
Let’s see for example you need to subscribe to an app that will help you to make better Financial decisions. Obviously, we would classify this as a valuable subscription.
The problem is, it cost $20 every single month. The next question you would ask yourself is, “ Where am I going to get the money for this?” This is a great question. One that makes you wise to ask and even wiser if you have an answer to it.
Having a budget will give you a good answer. Because you tracked and budgeted your spending, you found a couple of areas where you could make changes. You found out that you were spending an extra
- $60 on coffee every month
- $135 on a premium cable bill
- $75 a week on lunch for 5 days
Thanks to your detailed budgeting, you gave yourself a few options. Let’s establish first that the app will help you tremendously. This would mean it’s value is a no-brainer to you. Simply put, it would be worth the sacrifice.
The question now becomes what can you say no to in order to say yes to the subscription? These three line items of expenses were listed because they are pretty much elective purchases.
They aren’t necessities. Some might say small luxuries. In financial terms, expenses that can easily be cut.
The Options To Adjust Your Budget
So, the three options are:
- Spend $10 per work day on lunch instead of $15
- Downgrade the cable bill by $20
- Go without your favorite $2 coffee for 2 days a week
It seems straightforward now, doesn’t it? Of course it does! It’s because you had clear numbers next to those expenses. There’s power when you adjust your budget. When you saw those numbers, both you and I knew immediately where we could make changes.
Consider the opposite. How many people today would say no to the valuable subscription simply because they did not think they had the money get it?
Which we knew it wasn’t true because we could see the numbers. Suspend that clarity for a moment. See through the eyes of a person who was looking for a reason to not make a sacrifice.
It would be easier to dismiss the good decision than to make the changes. Adjust your budget to make it that much easier.
How To Adjust Your Budget
The beauty of the budget is that it Is used to plan different segments of your financial Journey. You employ the discipline needed to create the budget.
Once created it gives you a snapshot of your financial landscape. The budget informs your decision on how to be financially disciplined going forward. It even informs you on how to optimize itself.
Did you get that? The budget is used to make the budget better. Don’t miss this stuff!
Case Study #1
Imagine you are spending $200 a month in transportation. This seems like a general term. Let’s break it down. When you look into it you’re spending
- $150 on gas and
- $50 on parking
This is the beauty of the budget in action. Not only does it tell you what you are actually spending. Additionally it helps you inform your decision on how you should spend.
You decide to spend $30 and get a month long Metro pass allowing you to take Unlimited public transportation for the month. Since your work is only 5 MI away you decide to bike some days, Cutting your parking and gas expenses in half.
- So, yesterday you were spending $200 on Transportation
- Tomorrow you will cut your transportation expenditures down to $130.
And this is because you not only tracked your spending but used your budget to inform your spending.
After you have optimized your budget, you will use it to calculate how long it would take to save and double your money when investing.
Case Study #2
Let’s say you discovered you’re paying $150 per month on video games. You only figured this out because you were honest and went through the previous steps and mentioned.
Anyway, You’re spending $50 a month on dry cleaning and you need to clean your clothes more often. When you adjust your budget, you would be able to put some of that game money toward your dry cleaning budget.
Imagine you had the discipline to take $50 out of your video game budget and put it toward your dry cleaning budget?
It sounds simple now that I’ve highlighted these two expense categories. The reality is it is not this simple when we do not have budget.
Flying Blind financially means we do not know what we are actually spending. Getting this clarity is the key.
Conclusion
We learned about the value of adjusting your budget. I hope you can see just how powerful of a financial tool it is. Take the first step now and start to adjust your budget. If you hadn’t created one yet, the best thing to do is to check out this beginners guide on how to create a budget. What’s your best tip for adjusting your budget?
