The following is a guest post from Neal Frankle. He is a Certified Financial Planner in Los Angeles and owner of Wealth Pilgrim, one of my all-time favorite personal finance blogs.
You may not have grown up with good financial habits being modeled all around you. Most people I know didn’t. I know I didin’t.
To make matters worse, financial advisors, for the most part, aren’t going to help you in this arena either. Even though your budgeting is the foundation of your financial security, there is no money in it for advisors to help you here so very few do.
The good news is, you can be the master of your budget without much education or training. And you don’t even need sophisticated software to do a good job. Here are the basics of budget coaching that you can do for yourself.
The first thing you need is information. You need to know how much it costs you to live. Or, let me put it another way. You need to know how much money you spend, on average, each month.
One way to do this is by writing everything down. When I was a young financial advisor, that’s what I asked clients to do. The weird thing is…nobody did it. After about 5 years of being disappointed by non-compliance I came up with another suggestion.
Look at your bank statements. This idea, if I must say so myself, is genius. If you pay all your bills from one checking account (and if you aren’t doing this, why not?) you can simply look at the total monthly distributions. Every checking account monthly statement summarizes those distributions so that, in effect, is what you spend.
Of course, if your credit card bills (or other debts) rise or fall, that will mean you either spend more or less. But for most of us, the total withdrawals from our checking accounts tells us what we spend on average each month. Go get your bank account statements from each of the last 24 months and tally up your average monthly spending. It’s a powerful number to know. I encourage everyone to use this method (in addition to the method below) because it gives you a big picture view. You will know very quickly if you are spending too much compared to your income. It’s staring you right in the face.
The third method is to use a budget tracking software package program. If you go this route, you can download your transactions right into your software without doing much work yourself. This will give you the details you’ll need to make the decisions about what to cut and by how much.
2. Values and Goals.
The next step is to evaluate whether or not your spending is in line with what you value most. For example, if your dream is to travel to a third-world country and help cure disease, it would be appropriate to budget in an aggressive saving plan for travel. But if that’s your goal and you spend your savings on trips to Vegas every other month, it won’t be difficult to see which financial behaviors need to change.
Likewise, if your goals are to create financial security for your family, it will be important for you to be clear on that and keep that goal in mind when you examine your spending. If you spend more than you earn, clearly your behaviors are out of synch with your goals and values.
3. Pow Wow
The third step towards financial health is to get total commitment from everyone in your family. The way I figure it, everyone is involved in spending so they have to buy in to the new approach. Talk about what’s changing and why. Explain the benefits of making these changes and talk about the changes the family (collectively and individually) are considering. Don’t make it an edict. Get everyone’s input and commitment.
Finally, have monthly meetings to discuss progress. Don’t expect perfection because it doesn’t exist. Make allowances for people going over budget. Just gather the family together every month and discuss what went right and what could have gone better. Get input from everyone to determine how they see things.
Using these 3 steps, you’ll be able to transform your financial situation dramatically and rather quickly. At least that’s been my experience.
What about you? Have you ever had to make big changes in your spending? How did you handle the situation?