Once you’re aware of the role that money has in your life, the next thing you can do is discover, “Does money actually play that role in my life?”
You can find that out by making a budget.
A lot of people have a resistance to doing a budget or they overcomplicate it.
For some people, making a budget is something you always do and you have all your numbers at your fingertips. If that’s you, then this will be a refresher.
Some of you don’t create a budget for yourself so you’re not really aware of what’s going on financially.
A budget is like a P & L statement (a Profit & Loss) statement. It tells you if your business is doing good or doing poorly, if financially you’re doing well or doing poorly.
Basically you’re identifying the state of your business. If you don’t have a current business, you’re identifying the state of where you’re at financially.
If you’re doing well, you’ll have a surplus of funds, You can then choose to have a more aggressive strategy if you want to or a more defensive strategy when it comes to your style of investing. When it comes to what specifically you’re going to invest in, talk to your financial advisor or a financial professional that has all the certifications and licenses required to give you the best advice.
A budget is simply identifying the income streams that you have available.
Ideally you’ll want to review your budget every 6 months to update it and make any necessary adjustments.
You can balance your budget to find out what’s the average that you’re looking at on a month to month basis or a year to year basis for you to:
- Be able to further develop an investment strategy
- Be able to develop a higher income strategy if you need it
- Discern if you need alternatives to your current income strategy
- Recognize if you are under budgeting or over budgeting
Through asking questions, this will bring more numbers to your awareness for you to be able to go, “Ok, I can now make a plan because I have clarity about where I’m at”
It will give you a clear picture of your current reality.
Once you have a clear picture of you current reality, you can take action on what’s required to move you in the direction of the end result you want. E.g. setting up passive income streams that earn money for you, having greater time freedom, travel, holidays, employing a personal trainer, purchasing several properties, increasing the number of people on your team or whatever is aligned with your vision.
Most of the time we just think more money is a good thing. More money is not always a good thing because it may not give you what you want. Creating more money requires greater responsibility, which may include your time, focus and energy.
If it takes away from your lifestyle or if it takes away from the joy of life that you have, you might not want more. And that’s perfectly OK. It’s a very reasonable thing to do till the time you’re clear that you desire to uplevel what you want. It’s important to be in touch with what is your true heart’s desire.
For your budget you’ll need to create a template spreadsheet. Use Excel or Google Sheets.
You’ll then be dividing it up into the different categories.
Here’s a simple downloadable budget that you can fill in and edit to fit your personal requirements.
https://docs.google.com/spreadsheets/d/15Wf-Zccji4R-UeNz8YXwB23-YJOnnCr60c9kVIQzHZI/edit?gid=0#gid=0
For our purposes, we’re going to look at 6 categories.
Income
Fixed Expenses
Variable Expenses
Savings & Investments
Debt Repayment
Miscellaneous
Income:
The first section or category is income. What are the different channels of income that you have now?
One of the biggest mistakes people make here is they go, all right, this is my salary and that’s it. However, that’s not all of your income.
You may have other sources of income. E.g. alimony money that you are receiving, income from a part time job, gambling winnings, earnings from a side hustle business, Airbnb rentals, earnings from garage sales income from selling clothes, books, computer parts. It could be anything. Just take into account things that are getting you paid in one way or another.
Calculate all of it, not just your salary.
If you don’t know your total income, you won’t have all the information to create a very effective budget.
Here are some of the income categories for you to be aware of:
Salary and wages
Bonuses and commissions
Rental Income
Investment Income including dividends and interest
Side hustle or freelance work
Government benefits such as Social Security, Unemployment benefits
Alimony
Trust Fund
Be mindful to include every income category and add them so you know your total income.
Once you enter all the values onto the spreadsheet, it will calculate the final number, which is the sum total of all of it, and you’re done.
Fixed Expenses:
The next category is fixed expenses.
Fixed expenses are expenses that you would pay no matter what. These are expenses that you pay every month or every year and you will end up paying them this year or this month as well.
These include things like mortgage or rent payments where you make the payments every month.
That’s why they’re called fixed expenses because they are fixed. They’re paid monthly and it’s approximately the same amount that you are paying every single month.
A second one is utilities. Utilities are things like cell phones, Internet, electricity, gas, water. These are things that you are using on a day-to-day basis and every month, whatever is your local electricity company or government organization on water, they will just bill you about the same amount.
Sometimes it’s based on usage, but numbers tend to be similar. These tend to be within the range of 5 – 10% variance. And so you can pretty consistently say that’s the fixed expense that a person has.
The third fixed expenses is insurance. This includes your health insurance, life insurance if you have it, home insurance or renter’s insurance and auto insurance. Sometimes they are billed monthly sometimes they’re built annually but you always have to pay them and these insurances are a necessity of life. You want to be covered for your health, your home and your car so if something happens to your house or something happens to your car, your insurance will cover that.
Again, there will probably be a certain number that you’re paying every month and that’s the number that you’ll continue to pay with some 5- 10% rate variance on what you’ll continue to pay. You’ll add these to the fixed expenses that you have.
The next fixed expense are loans. This include car loans or any other kind of personal loan that you might have, and now you’re on a payment plan to pay it all back. You want to find out what those numbers are, and you want to write those also on this fixed expenses sheet.
Lastly, under this category are subscriptions. Now subscriptions sometimes are optional, because you could always say, “Let’s not do Netflix.”
But there are certain subscriptions that you need and it’s important for you to have them. These subscriptions are things that you always need and so we’ll put them under fixed expenses because they are the fundamentals that we use in our daily life and/or are a requirement for doing business such as Zoom, Google One and Cloud storage, Microsoft 365 and AI tools such as ChatGPT.
Sometimes people have an extraordinary number of subscriptions and they don’t even use them. There are so many subscriptions in today’s world that we sign up for and the dollar amount is minimal so we forget that we are signed up for this thing that we have not used.
Some of these subscriptions can then be cancelled and may eventually not be in your fixed side of expenses. Be aware that because the cost is low and they don’t add up to a significant amount on their own, we may overlook them. It’s important to start including them, so we can see how much we are actually spending and we will log them under fixed expenses.
These include Netflix, Apple Music, Spotify, Tidal, Duolingo, Magazine subscriptions, Amazon Prime, gym memberships, clothing subscriptions and beauty treatments.
