Powered by MailChimp
I used to run cross country. For seven years, I embarked on 5-10 mile runs. On good days, they wore me out but I had fun. On bad days, I felt like I was dying slowly and painfully.
Races were held weekly in high school. They were 5K races, or 3.1 miles to those of you not familiar with the ol’ metric system. I’d be smack in the middle of it, and I would have no idea where the finish line was. I was so focused on how tired I was that I couldn’t get my head wrapped around where I was in the race. As a result, my performance absolutely sucked. Ask my coach: despite three years in high school cross country, I never really reached my potential. I couldn’t get my head into the psychological aspect of it.
And those of you who are going to respond with “Why didn’t you just run faster?” have never been in a race like that.
When you don’t know where the finish line is, you can’t run the race very well. Financially, you need to be working towards something. If your goal is to just kinda be good with money, you will never make it. Just like if your dieting plan is to lose a bunch of weight, you’ll stay fat forever.
It’s all about making smart goals, and one of them is to make it very, very clear. Here are some examples:
Now we’re talking! These are goals – and depending on your financial situation, they are clear, attainable ones. Having a clear goal gives you something to focus on. Once all your energy goes toward that goal, great things can happen.
My fiancé and I have so far nailed every goal we’ve set out to attain in the last two months. Now, the big one: paying for our wedding and honeymoon in cash. It’s lofty but achievable. Two and a half months ago, we would have just resolved to keep it as cheap as possible. You know what would have happened? We would have had a $25,000 wedding and financed the crap out of it and would take 5 years to pay it off.
Without any clear direction, you just kinda flounder around. Once we set our financial goals and set out to pay this thing in cash, our financial world shifted a little bit.
It’s the biggest part of any budget – what do you want yours to accomplish?
Get great, practical advice sent straight to your inbox every week! For more information on The Practical Nerd Rules for Life, click here. Plus, learn how you can get a copy of my FREE ebook!
Post Footer automatically generated by Add Post Footer Plugin for wordpress.
I’m sitting in my cold apartment, eating yet another lunch of Ramen Noodles. I’m 5 pounds lighter than I probably should be, and my jeans have a big hole in the knee. I climb into my car with one burnt-out headlight and pray the gas will hold out until tomorrow. After seeing how much food I can squeeze out of ten dollars, I return home to hop on the computer and I breathe a sigh of relief.
“Oh good,” I think to myself. “My credit card payment cleared on time.”
Anybody else see what’s wrong with this picture?
This isn’t really that much of an exaggeration, either. Last fall and in the beginning of last winter, this was my life. And you know, it’s actually a portrait of a lot of lives. Today, I’m a couple pounds heavier (it takes a while for me to gain weight – sorry, ladies), my gas tank is full, and my cupboards are far from bare. That’s because the first thing my fiancé and I figured out in our budget was The Four Walls.
Dave Ramsey teaches The Four Walls as the basic needs for living – no matter what, these things need to be covered:
Now, you notice he doesn’t say:
Sure, those things are nice, but they’re not basics. For food, you need ingredients for a healthy diet. That means you need to start cooking. Go to Amazon and type in “cooking for beginners” and you’ll get a ton of books that will teach you how to apply heat to food and watch a timer. That’s really all there is to cooking. Heck, my chicken recipe for this week consists of spreading mayo on chicken breast, rolling it in bread crumbs, and putting it in the oven for a little while. And it is some of the tastiest chicken I’ve ever made! Don’t overwhelm yourself at the thought of having to cook. Remember, this is for your health and well-being.
For shelter, find a modest space that you can live in for a while. It may mean having to downgrade a little bit – a smaller space, maybe a place that doesn’t have an on-site gym or pool. Included in there is money to keep the lights and the heat going. This is for the comfort and well-being of you and your family. This could even mean selling your house and renting for a while. It might suck, but it might be necessary if you are struggling to make ends meet. Let’s be realistic about what you can afford. Don’t choose a living space based on emotion.
For clothing, make sure you’re not naked and you’re dressed appropriately for the climate and occasion. Simple stuff.
And for transportation, let’s keep gas in the tank every week and have a modest car that will get you to and from work. Something that runs.
I do listen to Dave Ramsey’s radio show on my Sansa Clip every day, and he gets a lot of calls from hysterical people drowning in debt. To calm them down, he says, “Okay, let’s budget this out – start with the basics” and he walks them through the Four Walls. At the end of it, the person has stopped crying and he says something like, “See? Life seems a little less scary when you know you’re going to eat and keep the lights on, doesn’t it?”
We learned in grade school what the basics to living were. Yet, somehow, in our Spend-Spend-Spend culture, we’ve gotten away from it and forgotten. All of a sudden, we’re buying crap we don’t need and sacrificing dinners to pay for them. It’s stupid, and I’m just as guilty of it as you are.
When you sit down to put together your budget, take care of those things first. Even if that means you can’t pay a credit card bill right now, you need these things. What good is a decent credit score when you’re eating ham sandwiches in the dark because they turned off your electricity? Life takes on a whole different perspective when the basics are covered. Those are the moments when you think, “You know what? We’re going to be okay.”
And what about that bill that you can’t pay? Well, you may just have to tell them you can’t pay right now. Then you go out and you start working harder to bring in more money. But you have to take care of yourself first. Let the collectors stomp their feet and whine. You need to eat.
I have budgeted $30 a week for groceries for myself. It’s a very liberating feeling to go into the grocery store and have an obligation to myself to spend that $30 every week on food to keep my cupboards full. Having that psychological peace keeps your head on straight when you have to deal with the rest of the garbage of your financial situation. That’s a big key in getting out of it!
So remember: before you pay for anything, put dinner on the table, keep you and your family protected and warm, stay covered up, and get yourself to work and back. Build on that, and you’ve got yourself a solid plan. No amount of debt in the world is worth sacrificing those things from your life.
This is my favorite line in the budget.
Last year, while I struggled financially and professionally, I really didn’t do anything socially. I rarely went out for a drink, I never bought any clothes or anything for myself unless I had to (for example: when my only pair of jeans finally sprouted a hole). As mentioned in the introduction to this series, I rarely took my fiancé out on dates. Sounds pretty miserable, doesn’t it?
I’m not going to tell you to ignore your financial troubles, but you do need to get your mind off of them for the sake of your sanity, right? You need to go see a movie or treat yourself to a new pair of shoes (if you’re into that sort of thing). You need money to blow on stuff. Some people call it “blow money” or “fun money”. We call it “play money”.
Play money is the “no questions asked” line in the budget. It’s the money that my fiancé and I don’t need to explain to each other. As long as we have room in the Play Money budget, we can do whatever we want with it. She can buy more clothes (like she needs them), and I can grab a beer with my Best Man. She can go out to eat with her old friends from high school, and I can buy Bob and Brian albums.
Plus, we can go get a nice dinner together, or spend an off-day at IKEA imagining our future home, or go see a movie. Play money is like a candy bar to a dieter. It’s not something you need in excess, because it will completely derail your diet. But a well-placed candy bar lets you reward yourself for all the hard work you are doing.
It doesn’t have to be a lot, either. My play money is $75 every month. That’s hardly anything that’s going to paint the town red on a regular basis. But I can buy blank DVDs, a good dinner, and a few beers with that money every month.
To be honest, for my fiancé, it forces her to limit her shopping. She bonds with people over going for pedicures and grabbing a bite to eat and buying a bunch of clothes. And that’s perfectly fine! But now she just has to make sure that day doesn’t turn into $250 out the window. For me, on the other end of the spectrum, it forces me to have a life. I’ve spent a lot of time sitting around by myself because I’ve been broke. Now I can make sure I get together with friends and enjoy my life a little bit.
Ever go out and swipe your card thinking, “I really shouldn’t be doing this…” That type of night really puts a damper on your mood. The Play Money line in your budget liberates you from that by making sure you know exactly how much you can spend. You may have to limit yourself to more low-key activities like buying a case of beer and hanging out with friends at home, but it sure beats sitting at home alone doing nothing or that feeling in your gut when you know you shouldn’t be paying that much while you’re out.
If you remember from yesterday’s introduction, I mentioned that my fiancé and I have a $1,000 emergency fund in cash in a savings account. If you are six figures in debt, why would you want $1,000 in the bank just to sit there when you could use that to pay down some debts?
When people tell you how to get more mileage out of your gas tank, one of the first things they tell you is to not make any really sudden movements: don’t speed up too quickly, and don’t brake so hard. Try to keep it steady. There’s a reason for that: speeding up and slowing down burns more gas than maintaining your speed. That’s because the good ol’ force of inertia keeps you going.
Force of inertia: an object in motion stays in motion unless acted on by another object or force.
That same law of physics dominates the world of personal finance. When you get momentum going, life is good and things start getting paid off. But then your license plate renewal notice comes in the mail. Or your refrigerator breaks down. Or you come down with strep throat and you need to get a prescription filled.
Sudden emergencies pop up all the time, and it only takes a little one to completely derail your entire spending plan. Then you need to burn all that energy trying to get back on track because you stopped paying down your debts to take care of that one new bill and eventually you lose all motivation to even bother. “What’s the point, every time we get ahead something else comes up! We’ll never make it!”
FALSE.
You’re not making it because you’re not preparing yourself. An emergency fund is a tool that you can rely on in these situations. Hey, you are using this budget to plan for your long-term future, right? So why don’t you use it to plan your short-term future, too?
Because we are following Dave Ramsey’s plan, we went with $1,000. But you can do whatever you want. Many people do $500. Figure out what would be a good lump sum of money you could keep in an account just for quick emergencies while you work through your debts. This number can be different for everybody. If you’re out of debt and living large, a good rule of thumb from pretty much anybody in the financial world is to have 3-6 months’ worth of income in your emergency fund – at that point, it is there to prepare you for sudden unemployment.
This is a very common critique of the idea, and it’s one that my fiancé and I got from loved ones early on. That’s like carrying Band-Aids in your purse and somebody saying, “Well, that’s not going to help you when your leg gets chopped off!” Right, but we’re preparing for the more common papercuts here.
My attitude towards this statement is, “Hey, if an emergency pops up that costs more than $1,000, chances are I’ve got bigger things to worry about than just money!”
Most maintenance-type car repairs can be done for under $1,000. Minor medical bills can be paid for with $1,000. You can get a killer new refrigerator for a few hundred bucks. These are the financial “papercuts” that we’re preparing for here. You can take these problems in total stride, knowing you don’t have to change a thing – keep paying your debts, because you have the money to cover it. That’s what it’s there for.
Gifts (and I was guilty of dipping into it for that – I promised I wouldn’t do that again), groceries, gas, rent, credit card bills, etc. This is for EMERGENCIES. When you go to the store to buy Band-Aids, you don’t plop down your health insurance card to pay for it, do you? And if you do, please tell me where this wonderful coverage is!
Back to the car analogy: most of us are living financial lives riding the tails of the car in front of us. Once that car brakes, we either need to stop hard and waste a ton of gas or crash head-on into it. Having a small emergency fund increases your following distance – now you have room to brake a little slower and you can keep your momentum going (and you can avoid that crash!)
Call it what you want: a spending plan, an income/expenses statement, or even… *GASP* a budget!
So many people need it, yet so few people use one. I didn’t for years. I got on a written budget at the start of the year with my fiancé and it has transformed our lives together. Don’t think you need a budget? Neither did I. In fact, I didn’t think I made enough money for a budget! I get paid every week, I used to pay the bills that are due that week, and then I moved on. Sadly, this is how so many people run their finances, and they don’t make full use of the potential of their money.
We were engaged and panicking. I had just moved back in with my parents and owed my former landlord nearly $1,500 in rent and a mind-numbing amount of fees. I was buried under over $8,000 of credit card debt and tens of thousands of dollars in student loans. My weekly paycheck went to a variety of bills every week, and sometimes I would be left with $15-20 to feed myself for the next seven days. My fiancé worked part-time, covering her bills but any extra expense that came up sent her into a dizzying panic. We were stressed and we found ourselves seemingly at each others’ throats when talking about money. We had a feeling of "treading water": we were covering our lifestyles, but we just weren’t making any progress. We literally never went out on dates because we had no money – we spent our time hanging out in each other’s living rooms watching DVDs.
Oh yeah, and we have a giant wedding coming up in October.
Flash forward to today: our bills are covered comfortably. We have $1,000 in cash in a savings account for emergencies. We have a fund set up (and $100 away from being finished) to cover a security deposit and first month of rent whenever we decide to get ourselves an apartment later this year. We have a hall booked, a limo paid for, a photographer hired, a cake lady booked, music equipment scheduled, and about $1,200 in our Wedding Fund to pay for reservation fees and start building for dinner and the honeymoon (the two biggies). And between the wedding and other debts, we’ve paid off over $8,000 in a little over two months.
Our incomes have both grown – not dramatically, but they are picking up momentum and they continue to grow. Our conversations about money are filled with excitement instead of stress and anger. Our unexpected expenses have been covered every time. I’m eating well and consistently have $30 every week to spend on food. Once or twice a month, she and I go out on a date – last month we went out to a nice dinner and in January we drove to Schaumberg, Illinois to spend the day at the IKEA store (and followed that with dinner). Activities like that would have been unheard-of in December.
We’re about as happy as we can be at this stage in our relationship. Our secret to this wild change of events: in the second week of January, she and I sat down and put together a written budget.
Sounds ridiculous, right? Well, personal finance isn’t just about numbers – it’s about behavior. And putting together the budget has a drastic effect on your behavior. Here are just a few of the psychological benefits we’ve enjoyed since writing down a budget:
One of the first things we did was line up all our debts, smallest-to-largest. This is to use Dave Ramsey’s "Debt Snowball" method of paying things off. I’m not going to sit and talk about Dave this whole week, because that would get pretty annoying. But writing down everything that we owe was a giant smack in the face for us. We listed our cars, our student loans, my credit cards, our budgeted wedding expenses, and even our little store credit cards. Whenever we need motivation to keep pushing forward, we look at our Debt Snowball and remind ourselves to keep going. And if you don’t want to do the Debt Snowball, no problem – but line up your debts and take a look at them. It’s imperative that you see exactly where you are financially.
A few months ago, any time spent in a store would involve my brain imagining a chalkboard with numbers like the one in Good Will Hunting. I had to figure out how much I could spend, how much I needed, where the money needed to go, where I could borrow from, etc. It was a nightmare. Then I would wind up back at home, ready to enter in my receipts, only to discover I didn’t factor in one bill that throws my whole week off. All of a sudden, I’m calling my parents and my brothers to borrow money! Today, I know exactly how much I can spend, and I do it without having to think one bit, because I know everything else is covered.
This goes along with motivation, but remember how I said our income has gone up? I’ve started hitting the phones hard, cold calling during the day to drum up some business while I work second shift 40 hours a week. She picks up extra days at the hospital and added babysitting on Mondays. As business grows and she gets picked up full-time, we’re going to keep bringing in more money. As they say, "The world belongs to those who hustle."
Having money to eat is a good thing. Having money to eat something that isn’t Ramen Noodles is even better. We get sick less often, and we can’t afford to go to the doctor all the time, so we make sure we are taking care of ourselves. This means cooking basic meals and exercising at least a few times a week. This results in more energy to keep us going throughout this process and we feel better while we do it.
We spend more time laughing and smiling around each other instead of stressing. Our demeanors towards our families and friends are much more pleasant. In summary: we aren’t freaking out so much.
Now, it’s not just the magic of writing down a budget – you have to stick to it, and that can mean a few other things:
So, all this week, I’ve got secrets to making a budget that’s going to work for you. I’m not going to force a bunch of methodologies on you – these are flexible tips: things you can apply, but in your own way and appropriate for your situation. They’re things everybody needs and can do, regardless of whether or not they think they can. I hope you join me along the way, and heck, bring a few friends or loved ones along with you! If you’ve got some feedback on a tip, drop it in the comments for all of us!
