Thursday, January 9, 2014

Budgeting Basics - The Big Picture

Alright friends, let's get down to brass tacks here.  The big B word - Budgets.

Answer me this - why is it that you want to create a budget, anyway?  I mean, besides the fact that "everyone says" you need to budget, why do YOU think you need one??

-- Are you working paycheck to paycheck right now, stressing at the end of each pay period because there are more days left on the calendar than dollars in the bank to cover them?

--  Do you feel like you just don't have a good handle on where your money is going each month, and feel like you want to be come more responsible about where you're spending?

--  Are you planning for a wedding, and trying to figure out how you'll merge your finances after you're married?

-- Are you freaked out about the fact that you really haven't started saving for retirement, or the kids' college accounts, or a huge dream vacation, and are not sure how to come up with the extra cash to do so?

-- Are you still in college, and are getting really overwhelmed about the thought of being out in the real world soon, having to fully manage a "big kid job" and finances like a real adult?

Now that you've thought a little bit about why you want to set up a budget, let's take it a half step further- when it comes to budgeting, what is your end goal here?

It's totally ok if you have more than one financial end goal.  I have like 7, including paying off debt, saving for college for my 2 babies, and saving for retirement (we're going to be covering these topics in a lot more detail, but I'm just going to generalize here for the moment).

Take a minute to really think about why you want to create a budget- what those financial end goals are- and jot that down on a piece of paper.  Let's keep what you wrote down on the front of your mind while I dive into this next section.


I'm going to take this topic in a bit of a different direction now, so bare with me.  Let's talk about cooking for a minute.  I love all things food-related, so am all about a good food analogy.  Let's go there right now.

Bottom of the barrel basics here-

What is a recipe?

A recipe is a game plan to make a certain meal, right?  So there are 3 parts to a recipe:

-- The list of ingredients
-- The list of actions you need to perform in order to transform those ingredients (aka the actual cooking)
-- the completed dish you just cooked

So let's rephrase that in a different way- a recipe is a list of items we need (the ingredients) and a list of actions we need to take (the cooking) in order to get to a desired end result (the completed dish).

Do you know what else is a list of items we need and a list of actions we need to take in order to get a desired end result?

* ding ding ding*

Your Budget.

Are you feeling a little surprised by what I'm saying?  Are you thinking to yourself  "Wait a minute- I thought a budget was just a spreadsheet that matched my income up against categories of expenses I have for each month, and told me how much I could spend in each category?"  Yes, you're not crazy - the traditional definition of a budget is exactly that.  Take your expenses, bucket them into categories and assign them dollar amounts, then try your hardest not to overspend on them each month.

But I want you to think outside of the traditional definition of budget here.  I want you to stop thinking of a budget as just this income/expense spreadsheet you need to put together and follow to the letter, and start thinking of your budget as your financial recipe.  Let me expand on this-

When I was a really little kid, I used to spend Saturday mornings raiding the fridge while my parents were still in bed.  I'd crack some eggs into a Tupperware and add anything that was within my little reach - black pepper, olives, chocolate sauce, Italian seasoning, ketchup, you name it.  I'd whisk it all together, microwave it for about 5 minutes until it was a nice little souffle, and then take it to my parents room and beg them to eat it for breakfast (lucky them).  When my mom would ask me to try some myself, I'd basically give her the 6 year old equivalent of "H(eck) NO!".  The end result was something you couldn't pay me to eat- I was just experimenting with ingredients and seeing what happened.

Fast forward to today- any time I'm making something in the kitchen now, I'm cooking with a purpose.  Unlike my microwave "a pinch of this, a handful of that" souffle days, I'm focusing on what it is that I'd like to eat, and then working backwards and collecting the ingredients necessary to make that dish happen.

Let's talk about your financial recipe now-

We're going to take our definition of a cooking recipe - a list of items we need (the ingredients) and a list of actions we need to take (the cooking) in order to get to a desired end result (the completed dish)- and change it into the definition of a financial recipe:

a list of items we need (your expenses and income) and a list of actions we need to take (how we manage our money day to day) in order to get to a desired end result (our financial end goal)

The biggest thing I want to drive home for the next step in our journey is that I want you to stop putting your full focus on merely creating a budget list to follow, and start focusing on your financial end goal.  Putting your full focus on your budget list/spreadsheet (the ingredients), without any thought as to what the end goal is you're actually trying to achieve (the completed dish), is just like how my focusing on ingredients only when I was little resulted in a poorly thought out microwave souffle.  My heart was in the right place, but the end result was just a big, hot mess.

If you don't know where you're trying to get to financially, just throwing a strict list of expenses together and trying to stay within its boundaries isn't going to work well for about 90% of us.

So my challenge for you is this- start thinking about what "success" would look like to you at the end of this financial journey, because that vision is different for each and every one of us.  Once we have the end in mind, then we can really get cookin' (lame pun totally intended, sorry) on putting a game plan in order to get you on the financial path to success.

"If you don't know where you're going, then you probably won't end up there."
-Forrest Gump                                 

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