Guest Post by Jesse Mecham founder of You Need a Budget.
Giving your money a structured plan is the most beneficial thing you can do once you’ve earned your pay check. Yet most people over-look this crucial step. Imagine having a football team and never giving the players any sort of position or instruction. Instead, you merely hope someone on your team will be there to catch the ball, or in the right spot to block an opposing player. You hope you’ll score enough touchdowns to beat the other team and win the game. As ridiculous as this sounds, it’s the same approach many people take towards managing their finances.
We often hope there’s enough in our account to get us through until the next pay day. We hope our tank of gas lasts until we can scrounge up another $30 bucks. We hope we’ll have enough to cover rent next month because it was a slow month for sales and pay is commission-based. Just like sports, successful money management requires proactive planning, not just wishful thinking.
This proactive plan is a budget–a word that often gets a bad wrap. People envision a life of thrift store shopping and nothing but mac n’ cheese for dinner. “Budgets are too restrictive.” “We make plenty of money, we don’t need a budget.” “I’ve done just fine without a budget, I don’t need one now.” However, faithfully using a budget proves to be liberating, rather than suffocating.
A budget maximizes your money to it’s fullest potential. If a sports game had no plan, players would waste precious energy and run in random directions. The same is true for your income when there’s no budget. You see it in the $300 you spent on eating out, $200 on impulse buys, and $100 you lost in over-draft fees. What could you have done with that $600 if you had a specific goal? With your plan in place, you instantly cut back on useless spending and funnel your funds towards more worthy goals. A budget gives your finances laser-like focus.
However, this can only happen when you embrace the role of “money boss.” If you’re truly the manager of your money (the coach of your team) then you say what the money does, where it goes, and how much of it goes there. This pro-active approach keeps you hyper-aware of your cash-flow and everything that’s going on. The key is to create the plan and make the decisions before hand. With this in place, you avoid making high-pressure money decisions in the moment and you’re also much less likely to succumb to impulse buys. Assign specific jobs for your dollars at the start of each month. This guarantees your priorities are being met, and the game is going according to plan—rather than according to hope.
Once your budget is in place, look ahead to upcoming, irregular expenses. These usually surface in the form of renewed car registrations, Christmas, or family vacations. Set small increments of money aside for these each month. When the time comes to pay, the money will already be there. Because you and your budget planned for these expenses all along, your income avoids a severe hit as well as a possible dip into debt.
Above all else, strive to budget only the money you already have in your possession. Use the money you earn in the current month to pay for expenses in the following month. This helps brake the paycheck to paycheck cycle many people find themselves in. Although it may be challenging at first, working with real money rather than projected income gives you a clearer picture of your financial situation and keeps you on top of your goals.
Like anything worth doing, a budget takes work and discipline. The pay-off is in the power and control you’ll inevitably feel once a budget becomes a regular part of your life.
Jesse Mecham is founder of the financial software company,You Need a Budget—because you do! Based on four fail-safe rules, Jesse’s revolutionary software teaches a methodology that helps people break the paycheck to paycheck cycle, get out of debt, and save more money faster. You haven’t budgeted like this.