As a budget coach, I talk to a lot of people who are frustrated about their finances. Some of them feel like they don’t make enough money to make ends meet and there’s no way out. Other people can’t figure out why they make so much money and still have nothing to show for it. The one thing they all have in common is that they don’t know where their money is going, so it always comes as a shock when there’s nothing left. This is why the first step in any successful budget is creating your financial picture. This is a powerful tool that can answer a lot of questions and give you a firm start toward changing your financial life.
One – Where is my money going?
Many people don’t have a clue! Creating your financial picture includes writing down all of your bills and expenses. This means you must go through your bank account and see what’s actually happening. You may be paying for subscriptions you’ve forgotten about; your electric bill may be higher than you realized and almost everyone I coach is shocked when they realize how much they’re spending on eating out! There’s no shame in what you choose to spend money on, but if you want to change your financial life – your financial picture – these are things you have to be aware of. Once you have a full breakdown of your monthly bills and expenses, you can answer the question “where is my money going?” This will give you the power to go through and decide, intentionally, what you really want to spend money on.
Two – Am I spending more than I’m making?
This is a crucial question to answer, because if you are spending more than you’re making, you’re going farther into debt and it’s not sustainable. Once you’ve created your financial picture, you can simply do the math to find the answer. Add up all your expenses and subtract that total from your income. If there’s money left over, the answer is no. But if you end up with a negative number, that means you’re overspending each month and your debt is growing. To change this, you’ll need to cut expenses or add income.
Three – Can I spend money on X and still save for Y?
This is a very simple answer, based on how you answered the previous question. If the answer is no, you have money left each month. So consider how much you have and what you want it to do. Let’s say you have $100 left each month. Can you spend money on X and still save for Y? It depends on how much you want to save for Y and how much you want to spend on X. If you want to save $50 per month, that leaves $50 to spend on X. If that’s enough, great! If not, consider whether you’d rather save less for Y, so you can spend more on X, or save more for Y and not spend on X right now. It depends on what’s important to you. You have options! Your financial picture shows what you have to work with; you decide what to do with it.
Four – How much can I save each month, based on my current income and expenses?
Again, figure out how much income you have left, after subtracting the amount of all your expenses. The answer tells you how much you can save each month. Now make an intentional plan to actually save it!
Five – What changes can I make to my bills and expenses, to increase my savings?
This is the most important question your financial picture can answer, because it puts the power in your hands. If you don’t like the answers to any of the previous questions, look at your list of bills and expenses. Some are non-negotiable. It’s pretty hard to change the amount of your rent, unless you move. But there are other things you can control, like your electric bill. If it’s too high, find ways to cut it down. Put on some extra clothes and don’t use the heater as much. Make sure to turn off the lights when you leave the room. Check your internet and cell phone bills. Are there services you’re being charge for, that you don’t need or are not even aware of? This happens a lot and all it takes is a phone call to remove them and lower your bill. Look through your bank account for subscriptions you’ve forgotten about or no longer want to pay for. This is the perfect place to start looking for more money to save.
Changing your financial future starts with having a clear view of where your money is going today and realizing you have the power to redirect it!
If you need help getting started, schedule a free chat with me!