Budget….it ranks right up there with taxes.  Pretty much no one wants to ever do this.  It’s time consuming, and you’re secretly afraid of what you’ll find out.  Ignorance is bliss, right?  It is, until you get the point where you are clearly spending more than you are making and dealing with the consequences.  

So why does every financial plan have to start with a budget?  Because if you have no idea how your spending relates to your income, then it is impossible to figure out how to make any adjustments to reach your financial goals.  

Now let’s change this mindset of making a budget.  Instead of looking at this as a chore that fills you with dread, let’s look at it as a chance to actually take control of your finances.  

First, let’s get rid of the term “budget.”  It sounds so restrictive.  It sounds dry and boring.  

Now let’s reframe this as a “spending plan.”  Doesn’t that sound a little better?  A plan puts YOU in charge.  You can stick to a plan, not a budget.  A plan means you have control, and you can change your plan as you see fit.  

Now let’s apply the analogy of S.O.A.P. to your spending plan.  I know this may sound strange, but hear me out.  We treat our patients in a methodical manner every single day: the patient arrives with a problem (subjective), vitals are taken and lab work is ordered after the physical exam (objective), the patient is assessed (assessment), then the patient is treated (plan).  Perhaps if we tackle our personal finances the same way, we can be better motivated to follow through.  I will discuss “S” and “O” in this post, then I will follow up with “A” and “P” in a separate post.

“S” IS FOR SUBJECTIVE

When I first started keeping track of our expenses, I became frustrated at how our monthly budget (back when I still thought of this as a budget) seemed to fluctuate wildly month to month, depending on factors such as vacations or taking money out to put into our IRA accounts.   We would seem to do well in the savings department for a few months, but then the holidays would roll around. Holidays = unusually large credit card bills.  And then the cycle would continue.

With so many transactions occurring automatically (automatic deposits, automatic debits, moving money virtually from one account to another), it almost feels like you’re playing with Monopoly money.  But this is real money, and moving this money around is definitely not a game.  I finally got tired of feeling like I had little control over our money and decided to act on this by making a spending plan that worked for our family. 

S: Lack of money management skills results in bouts of anxiety and feelings of inadequacy. Patient’s financial situation is questionable.  

“O” IS FOR OBJECTIVE

For those that don’t like math or spreadsheets, I have bad news….we will have to start looking at numbers.  Because numbers are about as objective as you can get when it comes to spending plans.

But the good news is that the math is easy! The hard part is coming up with the numbers.  This will require patience and time, but I promise you that it will be worth it.  Here are the numbers that you will need:

  1. Income: If you are a W-2 employee, this is easy: it’s your take home pay. If you are a business owner, this will be a bit more complicated as you will have to figure out your take home based on your business revenue and expenses.  You should also include reliable passive income, such as rental income if this applies to you.
  2. Monthly Fixed Expenses: Common categories are housing, auto, utilities, and childcare.  
  3. Irregular Fixed Expenses: These are the expenses that always seemed to materialize out of nowhere because they are not paid monthly, but they are required nonetheless.  These expenses may come up only once or twice a year. They may also be seasonal. Examples of irregular expenses are insurance premiums, vehicle registrations, property tax (if not paid out by escrow), lawn care service, and retirement contributions.

Here is an example of a spreadsheet that includes income and your monthly fixed expenses: 

Monthly Annual
INCOME
HOME
AUTO
INSURANCE
UTILITIES
HEALTH/MEDICAL
CHILDCARE
SUBSCRIPTIONS
CHARITY
SAVINGS

These are very general categories, and you will probably end up with a number of subcategories under each category.  For example, you would put subcategories like mortgage and property tax under “Home.”  Utilities will include subcategories such as gas, electricity, water, internet, and phone.  You can click on this link as a checklist for creating your own categories and subcategories.  Keep in mind that for now, we just want to focus on monthly fixed expenses, which you will typically receive an invoice monthly or pay via automatic debit/credit.

You will have to comb through your bank statements, credit card statements, paper statements, online statements, and checkbook in order to find all of your numbers. This chart will be completely unique for each individual, so build a spreadsheet that will make the most sense for you.

For any expenses that are paid monthly, place the amount under the first column labeled “Monthly.” For monthly expenses that tend to vary, such as your electric bill, you can take the average of the last several months.  Convert all of these monthly payments to an annual number by multiplying by 12 and place these numbers under the “Annual” column. 

For any expenses that are considered irregular fixed expenses, add up the total that you expect to pay for the year and place it under the “Annual” column.

In order to see how these numbers play out, let’s look at an example that includes step-by-step instructions.

MEET DR. JONES

Dr. Jones is a veterinarian who is married with two children.

Step 1: Annual net household income: $100,000 (remember, this is take home pay, not your gross income!)

Step 2: Monthly fixed expenses

Category Monthly Annual (Monthly x 12)
Mortgage $1,500 $18,000
Property Tax $500 $6,000
Homeowner’s Insurance $200 $2,400
Auto Insurance $150 $1800
Childcare $1,000 $12,000
Utilities (water, electricity, cable, phone, etc) $400 $4,800
Gym Membership $100 $1,200
Charitable Giving $200 $2,400
Savings (Retirement, 529) $1,500 $18,000
Total $66,600

Step 3: Irregular fixed expenses

Category Annual
Life and Disability Insurance $2,000
IRA $11,000
Vehicle registration $200
Lawn Care $500
Veterinary association membership dues $100
Summer camps $500
Total $14,300

There were a couple of categories that I left out on purpose which are absolute priorities, like food and clothing (although if you’re like most people, you probably have plenty of clothing to last you a long while).  Gas would also be a must have for those that rely on a car to get around.  The reason I left them out is because these are expenses that tend to fluctuate, and you are not obligated to pay an outside entity for these items.  In other words, how much you spend is completely up to you.  So how do you account for these expenses?  This is where you will have to actually track your spending, either retroactively or over the next few months, and see how much you are spending in these categories, which I will refer to as flexible spending.  Here is a spreadsheet that you can use to track your flexible spending:

Step 4: Flexible Spending

Jan Feb Mar Apr May June
Food (groceries)
Food (eating out)
Gas
Clothing
Travel
Entertainment

You can add as many categories as you’d like.  You can refer to the same link as a reference guide for these types of expenses.  The more accurately you track your spending, the better you will be able to assess your numbers and plan accordingly. 

O: Dr. Jones spends a total of $80,900 annually on fixed expenses.  She is currently tracking her flexible spending.

This brings us to the conclusion of the first two steps, “S” and “O.” So far, we have determined that we are tired of feeling like we have no idea where our money is going or what our money is doing.  The objective portion required that we get some numbers on paper.  Apple has some great Numbers templates that are specific to producing a budget (spending plan!).  I am sure that Excel also provides similar templates that you can use. If you absolutely hate spreadsheets and inputting this information on your own, you may do better with apps such as Mint, You Need A Budget or EveryDollar.   Please choose a method that will work for you, because this will lead to better compliance and success!

Stay tuned for part 2!

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