If you remember we’re using this metaphor of rehabbing a house because none us start perfect with our finances and build from there. We all built the house as we were going on in life and now it’s time to do some renovations. We talked in the beginning about drawing a circle around your finances and that will be useful later in this post. Here’s where we’ll get down to the real “nitty-gritty” of your money, the blueprint aka the budget. For a budget we can keep the envelopes in the draw, for now, what we’re trying to build is a system for entrepreneurs.
For those that don’t have a steady paycheck, I find it more useful to think in percentages. God likes percentages. The tithe, as we talked about in the previous post is 10%.
Like a blueprint, a budget is a layout of out all the “lines” for your financial house. The first step to finding your budget is listing out all of your expenses. There are a few of you number crunchers out there that might have this down, but the statistics don’t lie. Fewer than 70% prepare a budget.
Find The Floor
What we want to do is set up a “floor” for your finances. A number it can’t go below. So for example, you might have a cable/satellite bill you want to include here and you can but mark it in a way so that you know if you are ever in a jam, you can cut out your TV and avoid going homeless.
Minimum Living Expenses
First Step: How much does it cost to live where you are? – What’s your rent or mortgage payment. Now, how about insurances? Do you have homeowners insurance or renters insurance? Now look at those utilities – Here’s a checklist for you to start looking for just “living expenses” excluding food.
- Renter or Home Owner Insurance
- Power Bill
- Gas Bill
- Water Bill
- Groceries (not eating out)
- Gas (see notes below)
- Cell Phone Bill?
You might have other things you call utilities. Unless you have to have them, let’s pause here for a second.
Groceries Without Eating Out
At this stage of the game, you might feel pretty good about your “living” expenses vs what you bring in. Remember we excluded other items. Now it’s time to tackle those.
An easy way to look at your food budget would be to look at your check register or credit card. (We’ll deal with that later) For now, look at your grocery bills. Just like the above bill, ONLY take that into account and not your eating out. You can easily spend $50 eating out for one meal while it can cost only dollars to eat at home.
Again, we’re not ignoring that other forms of food, fast food trips, etc are not part of your budget but they are the part of the ceiling not the floor.
I’d hate to call any prescription drugs as something other than required, so please include this in your budget. Unfortunately, many Americans fail to include drugs as part of their budget due to the length of prescriptions. If it’s quarterly, divide the cost by 4 to get to a monthly number.
Are you renting your car or paying for it? Here’s a quick list:
- Car Payment or Lease
- Auto Insurance?
Before we move on to debt items, take note of this number. This is your floor of financial income. You need this amount in order to keep moving on. Hopefully, you’re seeing the hope here. We’ll take your entire budget in a second but for now, bask in the glow that is your minimum required living expense. It’s helpful to also look at this as a percentage. If your minimum added up to $2,000 a month, then you know you need to make a minimum of $24,000 a year just to survive.
Let’s examine your “floor.” Is it dirty? Are there parts that need to be replaced? Is the carpet stretched or worn out? What does your floor look like when you compare it to the total amount you bring in? These are questions you should be asking yourself. The first time through doing this many people have netflix or verizon listed. These monthly services have become “necessities” but are they really?
If you just found out that your minimum living expenses exceed your average income, then we need to re-evaluate everything. If you’re short here, you need to relook at your expenses and determine what needs to go. You might even need to consider your career choice. It’s not my place to suggest you’re not making it, but if your basic needs aren’t being met by your income, you either need to spend less or need to make more. It really is that simple.
A great resource for someone in this situation is Dave Ramsey’s Financial Peace University or believe it or not a great financial planner like Beau Henderson can give you a lot of clarity around this.
If you remember back in our conversation regarding financial foundations we mentioned the “circle principle.” This is the outer edge of your lifestyle circle. The ceiling isn’t necessarily the highest your income should ever go but rather the amount of money you need to live the lifestyle that you want.
There’s no need for false modesty here. If you’re a 7-foot person, then don’t put your ceiling at 7 feet. That’s a recipe for disaster. The budget will be too cramped. It’s up to you how lavish you’ll allow your lifestyle to expand to but the important thing is that you set it now. So you if you want 30-foot ceilings, go for it.
This is an exercise that ideally you’ll look at yearly, it shouldn’t change much but there are some numbers that change with time. You might want a home on the beach but right now that’s a dream so you don’t know whether that’ll cost you $4,000 a month, $2,000 a month or $10,000 a month.
The point of this exercise is that it’s the practical application of the circle. It creates parameters for the “what if” good questions. Let’s face it, if you’re reading a blog post about finances then chances are really good you’re going to have more “good” problems than bad ones. Even if you’re struggling now, it’s unlikely you’ll be there long because you are committed to growing yourself and your knowledge.
Setting a ceiling is simply saying, “when I receive money in large amounts here’s what I am going to do with it.” It’s making a personal commitment to yourself not to splurge on something or blow a large check.
Like a Child
Children are wonderful. Unfortunately, we live in a world where there are dangers to our children, dangerous situations and people. The most effective protection for our children it turns out isn’t self-defense. While that may be good for their confidence, a 40-pound child is not going to overpower a 200-pound man or a 100-pound animal.
It turns out that role-playing scenarios of “what if” teach our children how to avoid and react. This is why fire drills are effective. They may be boring but in the event of a fire, your brain will immediately remind you what you did during the fire drill. That’s assuming you were somewhat engaged in the activity.
A ceiling is your opportunity to role-play and figure out what happens before it happens. It all goes back to having a plan.
Ceiling Items (for Reference)
- Cable Bill
- Premium Channels (Netflix, Hulu, HBO)
- Season Tickets To Sports Team
- Boat Payment Or Amount Monthly Needed To Save Up For Boat
- Car Payment Or Amount Monthly Needed To Save Up For Dream Car
- Yard Service
- Maid Service
- Upgrade To Home (Amount to save up for)
- Investment Property
- Mission Trips
To help you start budgeting I created a super simple spreadsheet here if you’re interested.