Quote by Dave Ramsey, "Budgeting is telling your money where to go instead of wondering where it went."

 

Ever look at your account balance and think, "Where did all my money go?"

Budgeting doesn’t have to be complicated, but a budget matters because it can help you identify spending patterns that are slowly draining your account. Track your spending for one week and see what you notice. 

 

Awareness is the first step to taking control of your finances. 

Now that you know where the money leaks are, let’s plug them.

“A budget tells your money where to go instead of wondering where it went,” explains Financial expert Dave Ramsey.

Managing your finances is about taking control of how your cash flows. So let’s create a plan for where you actually want your money to go.

Here is a 4-Step plan for managing your finances.

 

Step 1. Create a Balance Sheet

Managing your household finances is similar to managing a business. Your success depends on the relationship between your income and expenses. And to better understand this relationship, let’s start with a balance sheet.

A balance sheet is simply a list of all your monthly income and expenses. Break down income into various savings and spending categories, e.g., retirement, emergency fund, groceries, housing, transportation, fun, etc.

You can download a free balance sheet template from Consumer.gov.

Now, let's set some goals. 

 

Step 2: Set Goals

What are your short-term and long-term goals?

  • What do you want money for now, and what do you need money for later?
  • Do you want to pay off debt or save for a down payment on a house or a car?
  • Do you want to go to college or retire comfortably?

These are essential questions to sit down and write out. Not only do you need to list your goals, but you also need to write down how much money you will need to achieve your goals and the timeframe in which you want to reach them.

For example, say you want to pay an additional $50 toward your mortgage principal payment each month.

  • Your goal – pay additional principal
  • Money you need - $50
  • Timeframe you want it – monthly

Clear goals help you make better financial decisions. Without a goal, your money is heading somewhere, but it may not be heading in the direction you want it to go.

Once you have your goals, you are ready for the next step – a cost-benefit analysis.

 

Step 3. Make Better Decisions With a Cost-Benefit Analysis

In business, a cost-benefit analysis (CBA) is a technique used to weigh the strengths and weaknesses of a financial decision, according to SBA.gov. Now that you have a balance sheet and goals, you can take a closer look at where your money is going and decide if the cost of it going there is beneficial to you.

For personal finances, we can use an adapted CBA to weigh the strengths and weaknesses of our financial decisions. 

For example, you hate commercials and want to upgrade to the premium streaming service to remove ads. You currently pay $15 a month. Removing ads will increase your payment by $5 a month, which doesn't sound like much, but let's look at the cost-benefit.

Ask yourself some questions:

  • How many streaming services do you currently have?
  • Are you planning on upgrading all of them?
  • What is the actual cost? $5 a month extra is $60 extra a year, which is actually $240 toward one of your streaming services. 
  • How often do you watch TV and utilize the service? Is it worth the cost?
  • What are your short-term and long-term goals? Will this decision affect our ability to achieve your goals in the timeframe you desire?
  • Are there alternatives, e.g., a free streaming service or a consolidated plan?

Thinking about the cost of a decision in relation to the bigger picture of your financial goals will help you make better decisions on how you spend your money.

 

Step 4. Build a monthly Budget

Now it is time to tell your money where you actually want it to go. Every year, businesses build budgets and allocate their annual spending limits. Each month, their accounting teams submit a balance sheet that reports income and expenses, showing the company's financial position. Managing your home finances is like running a business. Your personal financial success depends on how well you understand your expenses in relation to your income.

Your balance sheet is the foundation for your monthly budget. Use it to determine your monthly spending limits.

To build your monthly budget, list your income (from your balance sheet) and then, using your goals as a guide, divvy up your money among your savings and expense categories.

A few tips we encourage when building your budget:

  • Pay yourself first. Before looking at expenses, allocate money toward your savings, e.g., emergency fund, opportunity fund, retirement, and paying down debt.
  • Prioritize your necessary expenses, such as loan payments, utilities, insurance and other necessities. Don’t be afraid to cut costs by switching to lower-cost services or cutting back on spending. 
  • Then add money to your extras, such as subscription services, dining out and play money. Having a little fun money will help you stay motivated, but don't let it drain your resources for the things that truly matter. 

You can use the same template from your balance sheet for your budget.

Each month, prepare a balance sheet to check your progress. Reviewing your balance sheet regularly will help you notice money drains early so you can adjust your spending sooner.

 

Take control of your finances.

Stop looking at your bank account balance and wondering, "Where did all my money go?" Take control of your finances and make yourself happy when you look at your account and say, “Well done. Keep up the good savings.”