So we talked last week about what budgeting isn’t and what it is, and hopefully that whet your appetite and got you all revved up for more of my strong thoughts — yeah???
To push the points a little farther and get more into the details of what I believe are the hallmarks of a successful budgeting system, let’s explore the six common habits of successful budgeters:
1) Looking Forward
Did you notice the definitions of budget in last week’s post? They are really important, most especially because I think so many feelings of I-can’t-do-it and it-takes-to-much-time, etc. etc. surround the whole notion of a budget. Here are two of the definitions again. Read them. Internalize them.
Notice how these definitions point to a forward-facing plan. What do I mean by that? Well, successful budgeters don’t just look back on how much money they’ve already spent in a certain category. That is not a budget and it’s not budgeting. Merely being able to say how much you spent on groceries in January doesn’t make you a budgeter either. “To make and follow a plan for spending your money” involves action before that money leaves your hands. Similarly, in order for there to be “an amount of money available for spending,” that money can’t be spent yet. Successful budgeters make a plan before spending.
I love this Dave Ramsey quote:
“A budget is telling your money where to go instead of wondering where it went.”
So when does this telling your money where to go, this plan, happen? Well, right now. Which is to say, any time. You have a certain amount of money at your disposal and you have a certain amount of time until more money comes in. It’s your job as a successful budgeter to tell that money where to go. Which brings us to the next habit.
2) Telling Every Dollar What to Do
Successful budgeters have a plan for every dollar in their possession. Rather than their needs (or wants) driving their spending behavior, the amount of money they have left of the amount they’ve allocated drives their spending behavior. The allocation is the “telling.”
I think the best way to explain this is with an example. Let’s say Sally (Why is that always the name that pops into mind for examples like these? Is it universal? I once called a best friend way too late at night — it was 10PM; we were in high school. When her father answered the phone, I freaked out and squeaked, from fear and to throw him off the scent of the trail, “Is Sally there?” Hahahaha!) has $500 available for spending between right now and next Monday, when she gets paid. She wants to be a successful budgeter and she wants to start right now.
So she considers her necessary expenses between today and next week. She’s a little low on groceries, she needs to buy a Mother’s Day gift, her cell phone bill is due, and she’ll probably need to fill up her car again. So she decides, based on informed guesses of amounts she’ll need: groceries $75, Mother’s Day gift $30, cell phone bill $50, gas $40. She’s left with $195 still “free.” Woohoo!! Shopping! Whoa, whoa, whoa, not so fast, Sally… What about that credit card debt? What about that trip you’re planning at the end of the summer?
Keep reading about paying off debt and sinking funds because successful budgeters tell their money to go to these two categories, regularly.
3) Paying Off Debt
If successful budgeters have any debt, they want to get rid of it and they make it a goal. Reading Dave Ramsey‘s (big fan) The Total Money Makeover
totally revolutionized our relationship with our money and with our budget in the earlier years of our marriage. I highly recommend it. In the context of these other habits of successful budgeters, paying off debt frees up more of their money to be allocated to things other than to paying for things they couldn’t afford in the first place. Yes, successful budgeters know about “good debt” and “bad debt,” but their goal is NO DEBT — including no car payment and eventually no mortgage! Think of all the monthly income that frees up, money that can be told to go where you want it to go, rather than never being available in the first place.
4) Maintaining Sinking Funds
Nothing throws off a monthly budget like those $600 car insurance payments. Successful budgeters look down the road, toward those big expenses that come up maybe once or twice a year. And they plan for them. Putting aside a certain amount every month so that the total can be saved by the time the payment is due makes due date time no sweat. Doesn’t that sound wonderful?
5) Using “Cash”
So much of successful budgeting is a mental game, and we are all much, much better at not spending money frivolously when we realize it’s actual effect: money is being spent (go figure). Successful budgeters know this, and many of them use actual cash in order to force themselves to “feel the pain,” to be able to physically see how much they have left, and to keep themselves from overspending. If they don’t actually, physically have the money for a particular category, they don’t spend it because they can’t. We don’t use actual cash, for logistical purposes, but we use our debit account almost exclusively.
6) Recording Each Transaction By Hand
Some people can’t stomach the thought of budgeting because the very idea of recording transactions is mind-numbing. And there are ways of recording transactions that are excrutiatingly tedious. Successful budgeters realize that in order to be truly in touch with their money and where it’s going, they need to handle their budget with every purchase and deposit. This allows them to monitor their spending as it happens and to see — frequently — how much they have available in their various categories and what adjustments they may need to make. They do not rely on apps or other automatically generated tools to tell them how much they’ve spent. Their goal is to gain control of their finances, and they want to hold the reins themselves. Because successful budgeters realize that recording transactions is less-than-fun, they make it is palatable as possible by, say, recording purchases and deposits as the money goes out and comes in.
Let’s recap. Successful budgeters:
1) Look forward
2) Tell every dollar where to go
3) Pay off debt
4) Maintain sinking funds
5) Use cash
6) Record each transaction by hand
Next week I’ll be talking about what I personally use to budget and why I think it’s THE greatest budgeting tool out there.