My five year-old twins love to pretend to drive. They will sit in the driver’s seat while parked in the garage, heads barely peeking over the windshield, and move the steering wheel back and forth, gleefully imagining they’re going places.
If they tried to actually drive, they could make the car move, but it definitely wouldn’t go in any purposeful direction! It’s the same thing with a budget. Using a budget to control your spending and move toward a financial goal is like operating the steering wheel of a car. Anyone can comprehend the concept, but it’s an action that has to be executed with skill and as one component of a process to arrive at your destination.
Budget Theory versus Reality
Theory and reality are totally different. For all your effort and penny pinching, your budget is making you feel like a failure. You’re still strapped for cash and you hate accounting for every purchase. You make a little progress until the car needs a new timing belt and boom- you’re more deeply in debt than when you started. What’s the point if it’s constantly one step forward, two steps back?
You’re not a failure and you’re not bad at numbers; what you’re lacking is an overall strategy that will allow you to make consistent progress, build momentum over time, and give margin for imperfection. After all, the budget is here to serve you, not the other way around.
The easy part is making the numbers work on paper. Whether you’re using a budgeting app, a spreadsheet, or a notebook, you make a list of your expenses, including bills, spending categories, food, and entertainment. You might have some extra set aside for savings, and you might try to pay a little more of the principal balance on your credit card.
Technically, the numbers add up, but it’s still all theory at this point. For a budget to be effective, you need to know your destination, work the plan, and prepare for the unexpected.
Know Your Destination
It’s a huge mistake to focus on multiple goals at once. You get spread too thin both in terms of your money and your mental energy. It’s no good to take a year to build an emergency fund and ten years to pay off debt while you invest two percent of your income in a 401k. You’ll never gain traction on any goal if you’re working on them all.
When you enter a destination into Google Maps, it shows you the shortest path to your destination. You can’t travel down a road and get to three different places at once, just like if you never get out of debt, you’ll never get around to building wealth consistently. When your budget is informed by a singular goal, you can align the numbers to maximize progress and expect to see significant results.
This is why Dave Ramsey’s seven baby step plan works so well. It forces you to focus on one goal at a time and to go in a particular order so that you can keep making progress. For instance, if you don’t have $1000 that you can set aside for an emergency fund, your first goal is to get that $1000 scraped together as quickly as possible.
Clearly define what the goal is right in front of you, and don’t allow yourself to be distracted by funding lots of goals with a little bit of money. Bring focus to the budget by prioritizing your goal and making your discretionary categories fit within what is left over.
Work the Plan so It Works for You
When you are driving and see a large pothole in the road, you respond by driving around it. Maybe you even switch lanes. You don’t run into the pothole, get a flat tire, and blame the directions for being incorrect. Yet this is exactly how most people treat their budget. They don’t adapt when an unexpected expense pops up, so they keep plowing forward, overspend, and blame the budget for not working.
Remember the budget is nothing more than a plan. Think of it this way: you are not on a budget, you use a budget. It is not meant to be a rigid document that you are enslaved to, but a plan to put boundaries around spending so that your priorities are protected. When you need to edit it, do so.
Your kid gets a hole in his shoes and there’s no money in the clothing fund? See where else you have spending money and move it. Be intentional and calculated about this just like you would be about seeing a pothole ahead and adjusting so you’re not thrown off course.
Plus, the emergency fund and the margin that I’ll explain soon will smooth things out so much that after a few months, you won’t need to edit your budget for every little thing.
Prepare for the Financially Unexpected
Why are you surprised every time there’s a financial emergency? Emergencies are surprises, but the fact that they happen should not be unexpected. In fact, you can be financially prepared so that you can stay on track with your goals.
As mentioned, if you don’t have $1000 (this is minimum, your situation might require more) to cover emergencies, scrape this together in the next 30 days.
Beyond that, build in mini savings goals to your budget to take care of expenses that really are not true emergencies. These include school supplies, car maintenance and repairs, home maintenance, and medical expenses. Don’t get too hung up on predicting exactly how much you need to cover these. Just start setting aside something, even if it’s $50 a month for car repairs and $20 for doctor’s visits. Over time, you’ll accrue money in your savings account so that it’s there when you need it without it becoming an emergency.
I’ll share an example of how this works so beautifully. I worked with a client who was over his head in debt and was overspending by about $800 every month. We turned his budget to be a cash flow positive, debt-busting machine. One of the most important components of his budget was building in these mini savings funds. Six months into coaching, he had an unexpected $700 car repair. Before, that expense would have completely derailed him. However, because he had money set aside for the car, he was able to handle the expense with savings and didn’t have to use a credit card or even touch the emergency fund.
When you build in margin for the unexpected, you prevent life events from becoming emergencies in the first place, and you don’t need to make as many adjustments to the budget.
The other thing to remember is the importance of practice. Stick with it, and don’t give up. Once you get a few months of practice with the budgeting process, it becomes much more automated and only requires minutes of your time and effort, in place of the hours you’ve spent struggling to put out the the financial fire of the day. The solution is to build in these important components to your budget, and you’ll begin to see success.