Note: The following transcript is from a Copper State Credit Union live virtual event and has been modified for readability. Timestamps that coordinate with the video are included at the beginning of each section for your convenience.
Welcome! Whether you’re already a budgeting expert, a beginner at budgeting, or somewhere in the middle, I want you to know this: Budgeting can work for everyone.
Let's get empowered to take control of our finances.
Easy + Empowered Budgeting in 4 Simple Steps
Budgeting: 4 Simple Steps Overview (12:05)
We have four main steps that we're going to go through today. Visualizing your goals, assessing the money coming in, capturing the money going out and then giving every dollar a job. Let’s get started.
Step 1: Visualizing Your Financial Future (12:40)
First up, visualizing your financial future. I want to start today with a goal-setting activity, but before half of you decide to sign off because you don't want to do that kind of stuff, hear me out. Data supports it!
There was a study done with two groups of participants. One group was assigned to do exercises on a regular basis and to see what kind of improvement they had in their muscle strength. The group that did the exercises had a 53% improvement. The other group was assigned to simply sit and think about doing the exercises. All they had to do was visualize doing the exercises, and their improvement was between 13-35%! They had significant improvement from just using visualization.
This makes me want to go home and sit on the couch and think about going on a run instead of actually doing it. No, maybe it doesn't apply to all situations, but in this case, I think it's a nice example of why we should take a minute to visualize what we want for our financial future, because if you don't have a goal and you don't have a vision, it's hard to get motivated to do a budget. (Honestly? Because it's a little bit of work) But hopefully I can break it down into some really simple steps today, and you feel empowered to do that work.
Ask yourself a couple of these questions:
According to your poll responses, the most popular financial goals were to:
- live debt-free
- not have to worry about money
Now get specific! If you answered that you want to live debt-free, imagine that you're magically out of debt. What does your life look like now? What do you want to do? Those are the fun types of goals that motivate us when we don't really want to put that extra $20 a month away into the budget or into the savings account.
It could be really easy to say, "Well, I just need more money. That's my financial goal, is to make a ton of money," and I hear you. I hear you on that, but think of all of the stories that you've heard about people who win the lottery and become millionaires and then they blow all their money and they're broke! Or famous people, who have a lot of money at one or more points in their lives and can't manage it. It’s not always a fix to have more money.
Pause and really think about it - What do you want for yourself and your money? Write it down.
Close your eyes for just a second, think about what it would be like to be in that vision and know that we're about to build a plan to try and get you there, and we'll talk about these goals a lot as we go through the rest of our session.
Step 2: How Much Money Is Coming In? (19:20)
Note: We’re going to base our budget on monthly numbers. There are many other approaches, but for today we're going with one calendar month as our focus. And just a reminder – everything we talk about today is not a ‘one size fits all.’ Apply it to your own personal situation and find what's going to work for you, because that's our goal at Copper State Credit Union. We want to find what's going to empower you personally and financially.
Before we can come up with a plan for what to do with our money, first you have to know how much money is coming into your household in any given month.
For some of you, it's simple; take a look at your pay stubs and write the monthly total on a sticky note. This “Money In” total is an important number that we’ll come back to!
A unique opportunity for anyone who’s interested – regarding that “Money In” number:
If you take that income number, let's say it's $4,300 over the course of a month. Take that and round it down to $4,000. Try to make your budget work pretending you only make $4,000 a month, or even $4,200 a month. If you pretend that you make a little bit less, then that cushion is going to build up over time in your account and provide a little bit of flexibility.
Next I want to share the top frequently asked questions about income calculation. This is especially helpful if there are multiple people in the household bringing in money, or there are different sources of income.
1. "What if my income is different each month?”
We call this variable income. With variable income, you have two nice options. You can take the lowest month from the past year, or you can take an average from the past three to twelve months. Take a look at this visual for an example.
2. What if I'm receiving social security benefits or unemployment right now? Is that income?
Yes, there are many types of income. If it’s money that's coming into your household on a regular basis, that you're using to pay for things you need, consider it part of your “Money In” number.
Here’s a [partial] list of what to include:
- Side Job
- Selling goods online
- Dog walking
- Rental income
- IRA distribution or pension
- Social Security support
- Unemployment benefits
- Child Support
3. What if I have income that only comes in once or twice a year?
We call this periodic income. Here’s an example of how we might distribute periodic income across a budget over the course of a year. In simple terms, add up the income and divide by 12 to find the monthly split.
Let's say this was 2021. In January and February, this person technically has not made this money yet. Depending on when you're making your budget, you may want to consider spreading out this income over all the months to follow until the next periodic income. Hopefully that makes sense and can help you if you have periodic income.
Step 3: How Much Money Is Going Out? (29:05)
So far we have visualized our financial future - we know what we want. We have come up with a number that is our “Money In” number and now we're moving on to Step 3 “Money Out.”
Whew! This seems like it will be a lot of work.
I know a some professionals who recommend that you carry a notebook and pen around with you, and every time you pull out your wallet and spend money on anything, you write it down. For me personally, that would not work because I would think of that little notebook as talking to me. "Christina! Stop going through the Salad & Go drive-thru twice a week for cold brew and salad! Stop spending so much money!” So the notebook method may work for some people, but it also might change your behavior. If it changes your behavior, then it’s not a true picture of your spending habits and will cause problems when you get to Step 4. The other thing about the notebook is you'd have to keep in mind all of the automatic payments that are happening electronically, like a mortgage payment for example. This would be a challenge!
So, all of that being said, what are we going to do instead of the notebook? We are going to look at the past.
I recommend getting all the statements (or transaction history) from a recent month printed out. This means bank statements, credit card statements, check register, etc. If you use multiple credit cards and multiple accounts, it's going to take a little bit more digging but if you get everything for one month and get it in front of you, the hardest part is over.
You might be wondering, "Ok, I know you’re saying to find Money Going Out but what does that actually include? What does Money Out really mean?" And the answer is - everything. Every penny leaving your possession is going to be included in this number plus whatever you're saving in any savings accounts.
We’re going to break “Money Out” into three categories.
I borrowed Dave Ramsey's idea of the Four Walls - Food, utilities, shelter, and transportation. His justification is you've got to have these four things taken care of and they're the first four priorities for your money, no matter what. Because if you don't have number one, food, there's no point in saving money for your kids' college, for example. I added two more categories to "Bills" that you'll see below. Read on for descriptions:
Probably focus more of the grocery side of things, not necessarily your take-out every night, but hey - a little bit of this, a little bit of that. It's your budget.
That's going to be wherever you live, what utilities you have to pay. You're probably familiar with this because you are currently paying them, could be water, gas, electric, sewage, trash, etc.
Your rent payment, your mortgage payment, or whatever you contribute to that if you have roommates or whatever the case may be.
Lots included here. If you take public transportation, whatever that ticket costs per month. For transportation, it could be a car payment for your car loan, insurance, fuel, oil changes, etc.
- Other bills
You probably have some bills that you need to pay in order to do your job or function in daily life. For example many of us at this point in time rely on internet service and probably a cell phone, unless you have a landline and that's your only communication. So, something like that if you're working from home, if you need to have internet, you're going to have to have that in your bills category.
- Debt Payments
If you've got a credit card debt that you've been working on and you have a payment you're making every month, that would go here. Student loans, personal loans, anything besides house + car that you have to make minimum payments on.
Action item: Take your blue highlighter, go through all of your statements and mark every transaction or item that falls under the "Bills” Category as I’ve named above.
This is any funds that are set aside for any savings purpose.
Think about all of the things a person could be saving for; an emergency, a rainy day, maybe you're saving up for a new TV or you want a down payment for a house, retirement, saving up for education.
We’re going to find in our statements any funds that are being set aside regularly (remember this is what you're currently doing, not what you want to do in the future.”
Ask yourself “How much did I actually save in this given month? And make your statements prove it.
A common question - Why does savings count as part of “Money Out?”
Think of it as paying future you. It's not technically going out away from you into the world. It's still owned by you, but if you think of it as a payment that needs to be made, it helps to make it a priority in your budget.
Action item: Take your green highlighter, go through all of your statements and mark every transaction or item that falls under the "Savings” Category as I’ve named above.
Now that we’ve covered your bills and your savings, everything else that does not fit into the first two categories is going to be in spending.
Action item: Take your green highlighter, go through all of your statements and mark every transaction or item that falls under the "Spending” Category as I’ve named above.
At this point, everything in your statements that is a withdrawal of any kind should be highlighted.
I think it will help to look at some examples!
So what’s next? We’re going to find our totals. Add up the bills per month, the savings per month, and the spending per month. Then, add all three together to give us our total “Money Out” per month.
Step 4: Give every dollar a job (42.50)
We now are to the point where we can give every dollar a job, and this is the fun part! Every dollar coming in has a job to do – it’s going out and doing that job in one way or the other throughout the month. That job could be paying for gas in your car, that job could be having fun and going out for dinner with some friends (back before COVID-19 maybe). Your money can do a lot of jobs and not all of them are boring! Saving up for our financial goals, or paying off debt, or paying for groceries are some others.
To start Step 4, we complete a simple equation: Money In minus Money Out. Take a look at the three different scenarios you could find yourself in, after doing this equation.
Even if Money In – Money Out = Zero, your money might not be doing exactly what you want it to. For example, let's just say that one of your goals is to buy a house in the central Arizona area within the next three years. You take a look at your statements and you see that you are spending $1000 monthly and you're saving $10. That's the type of thing where, yes, every dollar has a job, but you may not necessarily reach your goals, that vision you have for yourself, if you don't reallocate some of those dollars.
Note about negative cash flow: If your Money In – Money Out is a negative number, there are a few things to think about:
- Is it possible to increase income at all? Even selling an item or adjusting tax withholding can help to increase your “Money In” number.
- Can we save money or reduce bills monthly?
- Can we cut down on spending in a reasonable way?
As an example, meet Alejandro. Alejandro's financial goals are to pay off his $15,000 student loan debt and save up to go on a big vacation with his friends in a few years.
Giving every dollar a job is all about looking at where your money is currently going and deciding if that's where you want it to go, or - if it's meeting your financial goals. This step is very individualized. No two plans will look exactly alike!
In conclusion, these are the four simple steps on how to create a budget that works. We do have some free tools available to you to help as well! There’s a customizable Excel spreadsheet budget template and a step-by-step budgeting eBook guide that you can download for free from our website.
Q: Do you use gross income or net income when making a budget?
A: I recommend that you use net income, or take-home pay, when calculating your household budget.
Q: Where would property taxes and HOA fees fit into a budget like this?
A: This would work well under Shelter, as a part of your monthly Bills.
Q: I have a bad habit of adding to my savings and not wanting to take that money and pay off my numerous credit cards. I can't let go of that safety net feeling, so any tips and what should I keep in savings as a safety net?"
A: I consider the safety net as your emergency savings. Start with a low, reasonable goal, such as one hundred or a few hundred dollars. Work your way up to $1,000. The final goal in emergency savings is three to six months' worth of income. However, you’re likely paying a hefty amount towards interest if you’re carrying consistent balances on your credit cards, so it’s worth it to get those paid off. Think about it this way: once your credit cards are paid off, you’ll have so much more savings power due to your freed up monthly cash flow.
Q: I'm scared to have my savings in my budget, because what if I spend it all on dining out?
A: Yes! Lots of folks think they’ll just end up spending what’s in their savings account so they don’t bother. Here’s a few suggestions to help:
1) I'm not sure if you bank with Copper State Credit Union, and you have a savings account with us or not, but there's a really cool feature in your online banking. If you go into your Dashboard, there's a little wheel, it's like a settings wheel, and if you click on that, you can hide certain accounts from your Dashboard so that when you sign into your online banking, you don't see them. Something as simple as ‘out of sight, out of mind’ can help.
2) It’s also very helpful to tie your savings to a specific goal. When you put away that $20 per month, what is it going towards? Decide exactly what you are saving for and connect it to your future financial goals. That will help keep your motivation when you’re tempted to pull the money out.
Thanks for joining us! See you next time.