How To Make A Budget

Lotsa talk about money these days. Tightening the old belt. Sticking to the old budget. But how can you stick to a budget when you don't actually have one? Good question, huh?

Financial health is easy -- there are just three questions you have to answer: What have you spent in the past? What do you make? How much can you spend in the future?

So, take out three blank pieces of paper. On the top of one, write "Actuals". On the second piece, write, "Income" and on the third, write "Spending Plan."

Actuals: To figure out your actual spending, you'll need to look at the past three months. Take out your past three checking account statements and credit card statements. On the Actuals sheet of paper, make categories: Housing Expense (mortgage/rent; utilities; repairs), Food Expense (groceries; eating out), Transportation expense (car payment; insurance; gas; maintenance), Clothing Expense, and Other. If you have your own, particular big spending category, such as Education or Medical care, go ahead and list those expenses in a category of your own design.

Now, look at your expenses in each category for the last three months -- add each up and get an average monthly cost. Write down the average monthly spending by category, and get your total.

Somewhere on this sheet of paper, write down the balance for each credit card you own and note your average monthly payment and the interest rate on every account. Think back to the entire year -- did you have any big one-time expenses, like vacations, or orthodonture, or rebuilding a 1965 VW Beetle? Make a note of those expenses, too.

Now, let's move to Income.

On the Income sheet, write down your monthly income -- what you take home after all deductions. If, like me, you have your own business and income fluctuates, make an average of the last three months. If you have a regular income, this part should be easy.

Now, look at the total on your Actuals compared to the total Income.

How does it look?

If your income exceeds your expenses, you're doing great and can continue to the Spending Plan at your own discretion.

If your expenses exceed your income, honey, we've got a little work to do. You can either increase your income or reduce your spending. Just a note here -- if you're not doing everything you can right now to maximize your income, you need to start doing so right away. That may mean you have to start taking a different kind of client (those who pay are a good start), or ask for a raise, or take a different job. If you're working at a discount, you're not doing yourself any favors.

Let's look at reducing your spending. On the top of the Spending Plan sheet of paper, make a note of how much you need to trim from your expenses to come into line with your income. Start by transferring the information from Actuals. If possible, break out as much detail as you can in each category -- utilities, for instance, would be electric, cable, phone, natural gas/heating oil, water/sewer/trash, etc.

OK, so where is the largest expense you can control? Maybe you can lower your transportation expense by using less gasoline, changing the deductible on your insurance, taking the bus or subway, or washing your own car. You may be able to reduce your food costs by eating out less, buying what you know you'll eat -- which may mean the shopping duties go to the most disciplined person in the house.

Let's say, for the sake of argument, that you have some cash on hand. Take a look at those credit cards -- target the lowest balance with the highest interest rate and pay that sucker off first. Should free up your monthly cash flow.

On the sheet of paper, make a new target for your spending in each category.

You're not done yet, darlings. Now, the hard part.

Total your projected expenses. Add twenty percent. "But," you gasp, "If I do that, my budget won't work!" I know. I'm really, really sorry. You'll have to go back through and make enough reductions to fund this really important twenty percent -- your cushion. This is for when natural gas prices spike to all-time highs. Or your health insurance premium doubles. Or you need a crown. Or you underestimated your real expenses.

If you're really stoked and ready to play, put another ten percent into savings, ten more into charitable giving and another ten into your investments. Doing so means you may have to re-jigger your spending until you get to a truly workable spending plan.

"Too much trouble" is what some of you are saying. I hear you and know just what you're saying. Because I was once exactly like you. But while ignorance may be bliss, it doesn't help when the bill collectors start calling. Take charge of your money, and, believe it or not, you take charge of your life.

Managing At Home

There was a lovely Associated Press story this week about using business skills to make home life more efficient. The story was particularly lovely because I was quoted in it!

So let's expand on the idea in the article -- how can you use what works at your workplace to make your home life better?

For Single People: Planning is extremely important for a single person. Consider making your own Personal Strategic Plan, just as your business might. Where do you want to go? What do you want to do? What would success look like? Enlist a friend, family member or coach to help you through the process. And, while you're in planning mode, make sure you have your legal documents -- such as a will and a power of attorney -- in place. If the idea makes you feel icky, consider it your "succession plan." One more plan? Every business has an inventory. So, inventory your household possessions, and send a copy to whomever you designate as your executor in your will. And, if you ever have to file an insurance claim for your stuff, you'll have everything documented.

For Couples: Plan a weekend "leadership retreat" to have a meaningful goal-setting conversation (and if you sneak in some golf or spa time, that'll make it just like your company retreat). Use a format like the Personal Strategic Plan I mentioned above, but take into account what both of you want. The key to this kind of work is to put everything out on the table -- nothing is undiscussable, and all the ground rules around effective communication are enforced. That means you listen with openness, respect and kindness, rather than with barbed jabs, condescension and temper tantrums. Remember that mandatory training class you attended on "Difficult Conversations"? Well, use those skills here. Continue the discussion at home with monthly planning meetings -- you can boost the fun factor by making it a "date" at your favorite restaurant. Now, that's what I call "team building".

For Families With Little Kids: Think of little kids as interns or your new employees. As their manager and mentor, it's important to play to their strengths, so they can feel successful. When you give them tasks, make sure you're setting them up to do well. That means they stir the batter rather than take something out of the oven. That means they tidy rather than thoroughly clean. Little kids really have no sense of time, or of the value of money. So, rather than saying, "We're leaving in ten minutes" which has very little relevance to a three year old, say, "We're leaving after Mommy gets the diaper bag organized and your sister uses the potty." You can teach them about money if you let them select a birthday present for a pal and give them a dollar limit to stay under. Sure, it's easier to do it yourself -- but what does your kid learn from that? Let's call this "delegating" and "independent decision making".

For Families With Older Kids: Treat your teens or young adults as your senior staff. Provide them with the information they need to make good decisions on the family's behalf -- give them access to a family calendar, either using online tools, or, if they live at home, a large whiteboard. Pull back the veil and give them an understanding of the family income, expenses and financial goals. Do a performance review with your kids. Ask them what's working in their lives, and what's not working. Ever heard of Covey's Seven Habits? One of my favorites is, "Seek first to understand, then be understood." So listen to what your kids have to say. Too many times we parents reverse the order like an autocratic boss and risk undermining our kids' ability to be their own best advocate. Find a way to ask this kind of question: "How do you plan to handle your homework this year?" rather than telling them how it's going to be. With each of these steps, you'll be teaching them a ton, and giving them the confidence of your trust.

See, all those mandatory training meetings you've attended really pay off! Maybe not the way your boss or HR expected, but there you are.

Making your home life work well requires every tool on your belt. The good news is that you've already got plenty of tools and you know exactly what they can do. Now, go home and get to work.