The B Word
And by “B” word, I am referring to… dun, dun, dun: BUDGET.
Some people say diamonds are a girl’s best friend, but those people are wrong. When you think like a boss lady, budgets are a girl’s best friend. Forget what you’ve heard about budgets. Budgets are not “hard.” Budgets are not a “necessary evil.” Budgets don’t require a lot of math or special software or a college degree.
Budgets are actually pretty easy, and budgets are awesome. A budget will buy you a new car. A budget enables you to take that trip to Paris. A budget helps you to accomplish your life goals and works better than medication for reducing stress and getting a restful night’s sleep. And a budget will literally save your butt in a crisis.
When you control your budget, you control your money, and when you control your money then you become truly independent and empowered. No matter what your income level, almost anything is possible when you know how to budget properly. Whether you’re still in college, just starting out your career, newly married, or have been avoiding budgets for most of your life… it’s never too soon or too late to start.
Basics of Budgeting
1. Tally up your current sources of income, and break that down into an annual and monthly number. This is your livable income and you should aim to spend no more than 90% of it on your living expenses. The other 10% should be earmarked for any debt repayment, and then savings. As you eliminate debts and increase your income, you should also aim to increase your percentage of savings. My personal savings goal started out at 5% and grew slowly to 25% or more, meaning that I spent 75% of my income each month and put the rest into a retirement fund, savings account, etc. I realize that this isn’t realistic for everyone, but the important thing is to pick a number that works for you today and adjust it over time as you are able.
2. Identify how and where you’re spending money now. You can do this in a spiral notebook, in a spreadsheet, or numerous free apps. Establish spending categories and try to track your spending backwards for the last 6 months or longer in order to figure out your actual spending trends. Break it down into a monthly average. Ex: $200/month on dining out, $1200/month on rent, $150 for utilities, $100 for cell service, $200 for shopping, $25/month towards credit card debt, etc.
3. List your long-term goals for the future. These should almost always include: paying off all debts or loans, building an emergency nest egg, and saving for big ticket items like a vacation, new car, house, etc.
4. When it comes to debts, you need to focus on paying those off as quickly as possible — especially credit cards. Student loans will understandably take longer to pay down and you should avail yourself of deferment programs and other government assistance as much as possible to limit your exposure to accruing additional debt. Credit cards, however, are the bigger danger to you because we often use them to pay for ongoing living expenses as well as luxuries, and there is a much higher possibility of crippling ourselves financially simply because we don’t understand the extremely negative financial impact of credit card interest rates.
If you only pay the minimum on your credit card balance each month and you simultaneously earmark $100/month for a retirement fund or car or house, that $100 is going to get cannibalized over the long term by the high monthly interest rate on your credit card’s outstanding balance. It’s better to focus on paying off large chunks of any outstanding credit card debt first. Otherwise your savings will eventually get eaten alive by your mounting debts.
You want to pay as much towards your credit card debt as you can afford without sacrificing your ability to pay for necessities like rent, utilities, groceries, gas, car maintenance, and things like that. Every month that you carry a balance on your credit card means the value of every dollar you earn is actually worth less. Pay that sucker off!
5. Look closely at your existing spending categories and build out brand new categories for how you will spend going forward in order to accomplish your goals. Ex: $20/month towards new car fund, $50/month towards vacation fund, $50/month towards emergency nest egg. Always build a “Miscellaneous” category into your budget to account for things that you might not have considered or that crop up randomly. If you don’t use that money, great! Save it. :)
6. Remember that you will need to adjust your spending habits in the old categories to free up the money needed to reach your new category goals. Many of us mistakenly view luxuries as necessities. Do you REALLY use that $100/month gym membership? Is there a cheaper alternative? Will you REALLY suffer if you only get Starbucks twice a week instead of daily? I want you to sincerely evaluate your spending and decide what is most important to you for the next 12 months. Choose less expensive substitutions and make peace with the idea that trade offs are in your best interest. Oh, and prepare to be surprised when your budget reveals spending habits that you didn’t even realize you had!
7. Don’t be too hard on yourself. In the beginning, you may find yourself splurging accidentally in some categories, while you underspend in other categories. Maybe you budgeted $200 for dining out and really spent $250, but you budgeted $200 for shopping and only spent $150. In that case, you are still within your budget and are on track to meet your goals. Or maybe you went $100 over budget across the board last month. It’s not the end of the world and it happens to everyone. Don’t give up! If you fall off the wagon, think like a boss lady and just climb back on.
8. Re-evaluate your budget every 3-6 months. Life is not linear and you will occasionally need to make adjustments to your categories and percentages. Your budget works for you, boss lady, so if you need to issue new marching orders then go ahead and do so. You want your financial goals to be ambitious but not so unreasonable that your budget cannot perform.
9. Don’t be fooled by financial windfalls. If you come in under budget in a given month because you spent less than you budgeted or you unexpectedly come by some extra money (maybe it’s your birthday or holiday, or dear old Aunt Mabel died), don’t take that as a green light to suddenly overspend outside of your set budget. The smartest thing to do is treat yourself to a little something extra (say 10%) and then invest 90% back into yourself by paying more towards your credit card balance next month, or adding the extra cash to your new car fund, etc.
10. It really adds up quickly. Even if you aren’t making six figures a year, you will be quite surprised at how quickly your wealth accumulates once you’ve eliminated your debt for good, and become accustomed to saving for short and long term goals. It’s very liberating to see your net worth growing each month, and to be the boss of your financial security. When you think like a boss lady, absolutely anyone at any income level can be financially independent and have the things that they want. Budgets make it possible.
For more bosslady tips head to Lisa's blog!