I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.
Conquering Your Financial Empire
One of the essential tools in staying on track with your money is creating a budget. It’s incredibly simple to do, with many free and paid apps to help you along, and it is the single most effective way to get ahead financially. Sadly though, it’s one of the most neglected ways as well. A Gallop Poll from 2013 showed that only 1 in 3 families routinely use a budget – either through something they input manually or through an electronic app. The only consistent demographic that scored “better” were those making above $75,000 a year; political affiliation and education don’t make a large difference. A general principle in cash flow management is that the less money you have, the MORE often you need to track it. That’s simply because any unplanned outlay can mean catastrophe due to lower cash reserves.
So far I have only really mentioned the basics of constructing a budget. I mentioned it first when talking about the importance of saving and investing at a young age and then again when confronting the hard question about saving for retirement or paying off debt. However, to this point, I haven’t committed a great deal of time to it. I guess I figured with all the current software and technology we have that, with just a little encouragement, people would seek it out. That being said, I’ve received multiple questions about how to make a budget and when I would post on the blog about it.
A budget, at its core, is the allocation of money to fixed and variable (changing from month to month) expenses. You work at your job and your side hustles and bring in gross paycheck which should be hours worked multiplied by your pay rate. You then have taxes, FICA, and other deductions (like hopefully an automatic payment into an IRA) – that transforms your gross paycheck into your net paycheck and that’s your actual take home pay that you have to live on. So now comes the budget. I currently use a 60/30/10 plan for my own expenditures.
The Fixed Expenses – This is my 60%. I lump all my fixed payments which would include rent/mortgage, loan payments like a car or student loan (do not add credit cards into this section), monthly subscriptions like a gym or magazine, as well as any fixed utilities you may face like a phone bill or internet payment. Also include your insurance, specifically car or renters or any other umbrella plans you may have. I personally pay my car month up front every six months to receive a discount; however, it’s still in my budget to set aside each month so I’m not shocked by a $600 bill. Another pro tip is to try and sneak your variable utilities into this. Take all of last year’s water and electricity bills and average them out. This provides your monthly expense for the year, now multiply it by 1.02. That way, when, not if, the electric company raises your rates you will have already provided yourself a buffer.
The last thing I add into my fixed expenses is my food budget. I set myself a cap for how much I’m willing to spend on food each month. Generally, I’m around $25-50 under my budget which I’ll either use in my personal budget or roll it into savings.
Variable Expenses – This next part will have my 30% and 10%, which is savings and personal expenditures, respectively.
For savings, I currently am between 29-33% on any given month. For me this isn’t necessarily “cash in the bank”. I do bring home some cash savings each month; however, 6% goes directly into my employer based Traditional IRA, 5% goes into a Roth IRA, another 5% goes into my own personal brokerage account for me to trade equities on and the rest goes into cash savings. Currently, because I have a solid cash cushion in the bank right now, I currently spend 10% on aggressively paying off my car loan. Once that payment is gone in just a few months, I’ll likely put that 10% to my Roth IRA to bump it to 15%.
As for credit cards, your savings is where you should pay the extra money – kind of like how I’m using them to pay down my car loan. However, build up some savings first to pay for the unexpected. Once you have a little cushion though, start hitting any revolving debt that you have. The reasoning behind using your “savings” budget for spending on debt is because credit cards are somewhere between 17-26%. You will NEVER find an investment that good, so keeping cash on hand while outstanding credit card debt just doesn’t make sense. Your best use of available capital is to pay down debts that are over 4%. Plus, once those credit cards are paid off, you’ll free up your cash flow and really see your savings grow!
My Personal expenditures amount to 10% of my income. Technically, they’re probably higher when you consider the personal items I buy at grocery stores; however, because I’m too lazy to factor out my receipts by line items, I lump it all into my food budget. So while my personal expenditures should be higher, my food should be lower, so it all evens out. So what is this 10% for then? For me, it’s basically for eating out or splurge consumer buys – like the two awesome books I just got off Amazon! I’m simple folk. I also use my personal budget for networking expenses like entry fees or a beer at an after-hours networking event. Another way I use my personal expenditures is as a savings account for future purchases. I, my girlfriend, or the kiddo need clothes? I’ll save up for a month or two, and minimize these expenditures by not going out as much, and then I’ll buy them once the money is there. If it’s urgent, then I’ll buy now and minimize expenditures in the future.
Tools I Use
I personally use Google Sheets and my mobile banking app for on-demand glances at my checking and savings accounts. Google Sheets has a pre-built custom template for monthly budget and it’s incredibly satisfactory. It doesn’t link your months together though. That’s really my only gripe. However, I just use it as a tracker aide to make sure I’m on track for the month and to visualize my expenditures and I tend to update it three times a month. If I’m over or under a particular expense at any point in the month I know where I need to make changes. As my income grows, I’ll likely move over to my own Excel spreadsheet that I can link the months together so I can do a net worth and year over year analysis; however, I’m a government worker, and frankly, my income and assets just aren’t at that level to merit the time it would take to create a visually appealing and functional Excel sheet. I did just buy CFO Techniques: A Hands-on Guide to Keeping Your Business Solvent and Successful so it may spur me to go on a spreadsheet making frenzy – we’ll see. ((Edit: the book did spur me. I now track all of my income, expenses, and red M&M’s I eat a month…it got a little crazy for a while.))
Make a budget! They’re easy to do, they’re free, and they’re invaluable. You will need to find what works for you though, but try to get at least a 15% savings rate minimum. After savings, everything else is really flexible in how you spend your money. Just remember, putting in all this work to make a budget doesn’t do any good if you don’t keep the budget. If you’re still having trouble with getting your budget on track, be sure to contact me. I offer affordable consulting fees for cash flow analysis and budget recommendations.
Readers, after my article about the crisis in Venezuela I received multiple requests to inquire about a budget. So what things do you all do to make sure your income is greater than your expenditures? Be sure to discuss down in the comments below.
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