This is the third of a series on personal finance budgeting.
In my first post on the cash flow killers, we discussed how to deal with “Unexpected” expenses, now it’s time to discuss how to defeat “Forgotten” ones.
Tip #2 – Begin allocating a portion of each deposit towards “Forgotten” categories
Here is a classic example. Fred has delayed getting Christmas presents until December 15th. He runs down to the store to buy that necklace his wife has been hinting about, and to grab that new video game his son has been nagging him about. He totally forgot to plan for his parents, so additional items find their way into his cart. Once he gets home he jumps online to make sure Susie gets the shoes everyone else has at school. All these purchases quickly result in an additional $1,000 being charged on his card. If Fred had a budget, it has just been blown up, and he might as well toss that worksheet in the trash.
As simple as this tip is, if you can master it you are well on your way to Personal Power Budgeting. As I mentioned before, this step reflects the soul of budgeting because you no longer are told by money what to do, you begin telling money what it will do.
If you don’t have the funds for an emergency fund then getting that established should be your first focus. Do whatever you can to allocate as much as possible, as quickly as possible towards that first $1,000 fund, and then build from there.
After you have your emergency fund secure, you next need to identify your quarterly, semi-annual or yearly large transactions. Make note of the months when family events take place (i.e. holidays, birthdays, anniversaries, etc.) Next, review your credit card and bank statements looking for spikes in charges on your card, and lows in your register balance. What happened that month? Does that event / circumstance happen frequently? Did the same result happen the previous year? Make a list of all these items along with the months they occur.
Next, decide how much money to allocate to each event. A good way to do this is the backward method. With the backward method you decide how much to allocate to each group and then divide by the number of paychecks or deposits you make to find the amount to save with each transaction. For example, if you plan to spend $600 a year for birthdays, divide that by the number of deposits you get, and you might find that $25 a paycheck will get allocated to cake and presents. Maybe you want to set aside $5,000 for a big vacation 18 months from now. You would need to set aside $278 each month to fund it. Finally, begin tracking the amount you accumulate and spend from these categories. Most people start doing this in a simple spreadsheet or a separate check register for that fund. The most important principle here is that the funds need to be tracked, so make sure this starts with the first deposit.
Now, let me share an observation I had when I started this process. I was literally shocked how quickly my income evaporated! It felt like everything was gone before the month even started, and I did not like that feeling. I despised it! I was tempted to sink back into my old comfortable routines. I didn’t care that I now had $300 in the HOA account. That bill wasn’t due for 3 months and I had my eye on some baseball tickets. And then…..
The washer broke. It was in this moment that the benefits became crystal clear because for the first time in my life I had the plan in place to deal with the situation. I went down to an appliance store, selected a washer, paid cash for it, and went home feeling at peace. It was no big deal. A few months later, that annual HOA bill came due, and I didn’t feel the pinch of it coming out of my account. Soon, I found myself taking advantage of discounts with my auto insurance provider because I now had a way to save the funds to pay for 6 months in advance—and by doing this I saved money on my premiums. So not only was I sleeping better at night, I was also putting more money back in my pocket. What a difference these changes made for me.
This is the power of budgeting. You make the decisions! You decide where things go and when!
I guarantee that as you adopt these simple changes into your personal financial behavior, you will begin to see new applications of the power of budgeting, and will begin to go down new paths that will lead to greater peace and financial stability in your life.