6 simple steps to create a personal budget – Part 1

by Helen

What is a personal budget?

Most personal financial planning experts will tell you: You need to do a personal budget. The reason being a monthly budget will allow you to plan for how you will spend and/or save your money each month and also keep track of your spending patterns. Personal budget is vital to keeping your finance in order. These experts are absolutely right, but all you probably hear is: blah, blah and blah. And you are not alone. The same sound played in my head when I heard the big B word: Budget! Most of us never complete a personal budget.

Various studies show serious lack of personal planning among North Americans. Not surprisingly, average consumer personal debt has been rising year after year. Yet, there is no shortage of easy to use online budget templates that are also free online for download. So why do we keep ignoring the one easy yet vital tool that could help us organize our finance and help us better track our cash flow?

Why do we avoid creating a budget?

Well, let’s just be honest! First, budget is not thrilling activity. It is boring as hell, tedious and can be downright terrifying for some. It is much more entertaining to watch Will and Grace or even Gilmore Girls re-runs than doing a budget.

Secondly, most of us don’t want to honestly face our own finance situation. It is easier to bury our heads in the sand and pretend we don’t see it. Much like eating well and exercise, we know that we should be eating more fruits, vegetables and maintain an active lifestyle but many of us just don’t.

I was like that. For a long time, I had the intense hatred toward budget.  And yes, I am an accountant by trade and I work in finance field. I can practically see you shaking your head and the judgement is clear in your eyes. I know, but that was how I felt. The reason for my avoidance of personal budget is my dislike for Excel and yet it is the most widely used program to create a personal budget. I dislike Excel intensely because it is the tool that I use 80% of my time at work.  So, after staring at spreadsheet for 40 hours per week for the last seven years, I HATE Excel! But deep down I knew that procrastination and avoidance was reason for not completing my personal budget.

I avoided creating my own budget so I didn’t have to deal with the real reason that causing me to use shopping as therapy and reducing stress. Karen doesn’t have this problem. She is crazy about budget. I mean CRAZY with the capital “C”. When Karen and her hubby decided to purchase their “love nest”, she created three budgets to determine their affordability and maximum purchase price.

It gave me a headache just thinking about the amount of budget worksheets that Karen created over the years. Oldest child and their obsessiveness with being responsible, I tell you…it is endless. But when I decided to purchase the townhouse I finally had to sit down and took a good look at my financial situation and created a budget on Excel! I learnt 2 things: Karen isn’t all that crazy and budget is actually good for you. It is a necessary evil that I must learn to love.

By honestly assessing my financial situation, I found out that I wasn’t living above my means but I wasn’t managing my finance effectively either. And by facing my financial situation and owning my budget, I took back the control of one aspect in my life. But procrastination was a mean beast that I had to wrestle and I wasn’t going to win this battle.

Under much dreads and duress, I ended up talking to Karen about how to create my own budget, why I avoided it for so long and more importantly how to stick to it. Needless to say, it made her very happy. However, after listening to my confession, she turned a bit pale. I gave her credit, Karen didn’t pass out. After she regained her composure (which took her a while), she tried to understand my reasons and perspectives. Then she worked with me to create solutions to help me confront my budget avoidance and procrastination. Admittedly, I thought Karen lost it when she proposed the idea of using visualization to help me overcome procrastination. I really thought that I pushed her over the edge with my honest confession, but the budget hawk actually had a good trick up her sleeve.

Visualization, the first step to fight budget procrastination

Though budget is a very helpful tool to plan your finance but you don’t see the actual money flow. What you see is a bunch of numbers on Excel spreadsheet which is very BORING. Yawn! I believe this is the reason that most of us started the process and just shut our laptop down after 10 minutes. Well, for me it was 5 minutes.  Let’s try out Karen’s method of budget visualization madness and see if it can help you and me to overcome this very necessary but boring exercise.

Now, close your eyes!  Now, imagine you are free of the money shortage. Think of how the weighing of financial burden that heavily pressing on your heart, shoulder and mind is slipping away from you. Keep that visualization as vivid as possible in your mind. Let yourself feel the small peaceful feeling that calming you down. Now create a picture in your mind how you will go above creating your budget. Now, I can practically see you rolling your eyes. Yes, I will admit I told Karen that this was the dumbest thing I heard. Because this sounded like a really silly method, but it can actually be quite effective because most of us aren’t particularly good at picturing how our immediate actions will affect us in the long term.

By visualising you in the future could be a simple way to beat procrastination. Karen got this idea when she came across Hal Hershfield’s work on “future selves” . In a nutshell, Hal believes that people often behave in ways that can be detrimental for themselves in the long term because they don’t see the consequences immediately.  For example, you know eating fried chicken wings and fat dipping burgers continuously over time will be bad for your health but you still do it. In personal finance, Hal thinks if you can interact with your “future selves”, you will more likely save for retirement because when you visualize and more deeply consider your future selves it increases the tendency for you to act in ways that will drive to that desired outcome. That sounds quite logical, right? Well, I didn’t think so at first. I told her that it was stupid to try visualizes me free off financial burden. How am I connecting with my future self? I had no idea how to conjure that image in my mind.  So, Karen and I dig deeper and tried another approach to help me to visualize. Yep! she was terrified that I would be penniless and she didn’t teach me better. So, here was the exercise that I did to help me visualizing and connecting to my future self:

  • First, do a simple visualization exercise to get you into the positive and blissful mind set. For me, it was eating an amazing dinner in Seoul. I love loves…love Korean foods. Cuba beach also did the trick for me. The purpose is to think of happy thought to relax your mind
  • Now, keep that visualization of your blissful state of mind vivid in your mind. Let’s the happiness sink into your mind. Breathe in deeply and relax! Also, a glass of red may also help you relax. Now that’s an image, slightly tipsy, happy and creating your budget
  • Tell yourself that it is within your control to make this happen and you will
  • Relax your mind and make a mental commitment to the budget journey. Say it out loud: I can do it. Say it with conviction
    • Visualize vivid picture of how you will do your budget. Step by step, how will you create your budget
    • Now, open your eyes
    • Keep that blissful happy feeling in your mind. Maybe a sip of red would keep that feeling a bit longer
    • Open up your laptop and let’s create your budget
    • Do all the steps that you just visualized above and then total your monthly income and monthly expenses. If your end result shows more income than expenses, you are off to a good start. This means you have left over cash to move over to savings, vacation or treat yourself a little. If you are showing a higher expense column than income, it means some changes will have to be made for you to balance your budget

All the silliness aside, the exercise did the trick. I had to honestly face my procrastination, connected with my “future financial stress-free self” and then mapped out steps by steps how I would go above to achieve my financial goal. It sounded a bit silly but it was the fact that I could visualize step by step how I would create my budget helped me to get it done. Hal Hershfield knows his stuff. Visualization can be very useful tool to get me overcome my procrastination.

6 simple steps to create a personal budget

Once I got over my procrastination, I begun to build my personal budget in Excel. Yes, you hear me right, Excel! Before I opened my laptop and faced my Excel dread, I had to do a few things:

    1. Gather information. Find every financial statement you can. This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense. One of the keys in the budget-making process is to create a monthly average spending, so the more information you can dig up the better
    2. Find your budget template. You can download a budget template that you like. There are many free ones. Here are some suggestions. I have one that I use. I also included it in this post. Feel free to create your own. Whichever template speaks to you, just use it
    3. Identify all of your sources of income and only use your net income. If you are self-employed or have any outside sources of income, be sure to record these as well. If you are employed, then record down your net income. Make sure you have the after-tax income (or net income) because that’s the money you have to spend. In another words, only the money you can take home monthly should be used in your budget for an honest assessment. Some budget templates I see ask you to use gross income and calculate tax. That’s just crazy; if you are not an entrepreneur then you are most likely getting a pay stub with taxes already deducted for! So only the income after tax can be used because that all the cash available for your spending. The other reason for using only net income is to train you to live with less money allowing more savings. Now if you get tax refund (YOHO!!!), then it is bonus for you. I see a nice trip to Portugal in my horizon with tax refund!
    4. Identify and create a list of monthly expenses. Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, student loans, retirement or savings. Essentially everything you spend money on.
      1. Always break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are must have for you (i.e.: electricity, gas, cable, phone, student loan payments). This will narrow down the exact dollar amount that you have to payout every month, also known as your “must have” list. You have to pay this amount of money every month or your creditors or essential service providers will stop their services.  These expenses, for the most part, are essential yet not likely to change in the budget. You have to pay this amount of money every month or your creditors or essential service providers will stop their services.Variable expenses are the opposite of fixed expense aka: must have. Variable expenses are for grocery, transportation, clothes, entertainment, lunch, coffee, restaurant, etc. and also known as: “nice to have and can be altered”. Unlike the fixed cost, you can make some adjustments to reduce the variable expenses. This is the area of the budget that you can cut to improve your saving.
    5. Establish savings goal. Most personal finance books will tell you that you need to have 3 months earning set aside for rainy day and you also need save for retirement. Gee! Cost of living is high and you still want to live a little, this is a nightmare! But one of the reason for you to balance the personal budget book is to find way to get a bit more cash set aside for the bad time, so try to squeeze in a goal of couple hundred dollars saving per month.
    6. Finally, balance the book and ensure that your earning is equal to expenses plus savings. So simple! Well………………not so simple.

I will end this post here because it is long enough and I suspect you will be reaching to the nearest glass of wine to drown your despair. I will post the part 2 of my personal budget journey giving you tips on:

      • How to cut your expenses
      • Maintain a balanced budget

So look for part 2 of my personal budget adventure!

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