How To Turn Around Your Finances in One Day: Guest Post by Finance Superhero

finance superhero

[Millennial Moola: This blog doesn’t accept paid posts. I do however love to share really useful perspectives with my readers from across the personal finance blogger world. I asked the Finance Superhero if he would stop by Millennial Moola today for a take on how much you should consider spending on different budget categories to have financial success. Here’s his post below.]

After lurking on many personal finance blogs for years, David launched FinanceSuperhero.com in March 2016. He is on a mission to “Restore Order to the World of Finance.” He would be honored if you would check out his blog, follow FinanceSuperhero on Twitter, and “Like” the FinanceSuperhero Facebook page.

Note: Special thanks to Travis for allowing me the opportunity to publish this guest post on MillennialMoola!

HOW TO TURN AROUND YOUR FINANCES IN ONE DAY

Sometimes I tell people I’m a Michigander, even though I have lived in Illinois for the past 12 years. While Michigan may always remain near and dear to me I am a de facto Illinois citizen. I’ll be the first to tell you that this is often a major embarrassment.

Recently, the state of Illinois finally passed what I would describe as a “Band-Aid” budget. Politicians largely celebrated this move and patted themselves on the back,  but their budget does very little to solve the gaping wound that is the state of financial chaos in which Illinois currently finds itself.

As you may or may not know, Illinois recently went an entire fiscal year without a budget. This standoff made previous budget delays (18 days in 1991, multiple delays of several weeks in the 2000s, and the bitter standoffs of recent years) look like small blips on the radar.

While there are many reasons for the state’s financial woes – corruption, closed door deals, gubernatorial scandals, and an underfunded pension system – many of the problems can be traced back to improper and unrealistic budgets.

BUDGET EARLY – AND OFTEN!

In Chicago lore, the phrase “Vote early — and vote often” is legendarily attributed to mobster Al Capone and former mayors Richard Daley and William Hale Thompson. Many people fail to realize that this practice was, in fact, legal and encouraged by the Illinois Constitution until 1980.

If you’ll allow me the latitude to do so, I would like to modify this oft-quoted phrase so that it may be ethically and practically applied to personal finance:

Budget early – and often!

BUDGET BASICS

In September 2009, I was a newly-employed, engaged bachelor, living independently for the first time in my life. Less than one week before the new public school year started, I accepted a job offer to teach music about 25 miles away from my university campus. With a week to prepare, I scrambled to locate housing, sign my contract, and prepare for a radical life change.

At the time, I had barely a tiny inkling of how to responsibly manage my money. I had recently read The Total Money Makeover in record speed, but I didn’t know the first thing about budgeting an “adult” paycheck. This was going to be the first time I had ever earned a paycheck which included a comma in the amount field!

At this point, I realized that I could not afford to go another month without a budget. I knew it could be the difference between one day reaching financial freedom and remaining in bondage to debt. If you don’t feel urgency and understand the importance of a budget, thus requiring more convincing , start here.

Depending on your personality and degree of tech-savviness, you may wish to create a budget the old-fashioned paper-and-pencil way. You may prefer using Excel, or even an automated program, such as Mint, YNAB, EveryDollar, or PersonalCapital.

If you are a budget rookie, I cannot understate the importance of creating a budget and crunching the numbers yourself without the benefits of an automated program, at least for your first few budgets. I highly recommend the pencil-and-paper or Excel methods for your first few budgets simply because these methods will force you to pay attention and be precise.

Before we get into the specifics of your budget, let’s review some pertinent basics.

  • You need to create a new, unique budget at the beginning of the month, every month. Why? Some expenses occur on a bi-monthly or quarterly basis, and you will want to capture this within each unique budget you create. Remember, some expenses are fixed, while others vary from month to month.
  • Your budget should be based upon your net income (after state and federal taxes, employer deductions, and insurance premiums). Whether you are paid bi-weekly or weekly, this figure, too, will vary from month to month.
  • You should create a budget which utilizes categories and closely adheres to recommended percentages. I personally use the following categories, which are recommended by Dave Ramsey. You should use the categories that represent areas of significant expense in your budget, delete those which do not, and add any pertinent categories which may be missing.
Category Recommended Percentages
Giving/Charity 0-10%
Saving 5-15%
Housing 25-35%
Utilities 5-10%
Food 5-15%
Transportation 5-15%
Clothing 2-7%
Personal 5-10%
Health/Medical 5-10%
Recreation 5-10%
Debt 0%

 

It is important to note that your figures may or may not fall squarely within the suggested categorical ranges. For example, if your Housing costs represent 24% or 36% of your monthly budget, this is not a serious problem. Please view the percentages above as suggestions for a healthy budget. Clearly, room exists for give and take, particularly if you are a very low or very high income earner, as long as your percentages add up to 100%.

A SAMPLE BUDGET

Here is a sample budget based upon a $5,000 monthly income:

Category Dollar Amount Allocated Allocations as Percentage of Budget Recommended Percentages
Giving/Charity $500 10.00% 0-10%
Saving $250 5.00% 5-15%
Housing $1,500 30.00% 25-35%
Utilities $500 10.00% 5-10%
Food $700 14.00% 5-15%
Transportation $400 8.00% 5-15%
Clothing $150 3.00% 2-7%
Personal $500 10.00% 5-10%
Health/Medical $200 4.00% 5-10%
Recreation $150 3.00% 5-10%
Debt $150 3.00% 0%
Totals $5,000 100.00%

 

As you can see above, the total of all categories combines equals $5,000. This budget adheres closely to the recommended percentages, and it even manages to stay below the recommended percentage ranges in the Health/Medical and Recreation categories.

In the previous section, we allocated targeted spending amounts based on our categories. Next, reconcile your actual monthly spending with these estimated allocations. In order to utilize accurate expense figures, it is advisable to download copies of your monthly checking, savings, and credit card statements from your financial institutions. If you are doing a paper pencil-and-pencil budget, I recommend adding expenses by category using columns.

Once you have calculated categorical totals for the entire month, the final step is to add all categorical totals and compare the final sum to your allocated final sum. Again, in order to have a zero-based budget, these figures should be identical.

POSSIBLE PROBLEMS

As you are doing your first few monthly budgets, you are likely to encounter the following problems or trends:

  • Spending more than the allocated targets in one or more categories
  • Spending less than the allocated targets in one or more categories

Why? A budget is a rough prediction. Think of it as a rough draft of an essay. You will return to it and refine any errors at the end of the month. The previous mistakes you made will influence and impact your thought process as you create later budgets.

A CALL TO ACTION

Now that you understand the nuances of a zero-based budget, get started on yours today. A budget only takes a few minutes to assemble, but you truly can get your finances on the right track in one day by creating one. Getting on the right path, understanding your money, and controlling your money are keys to successfully managing your money. A budget doesn’t require sophistication, manipulation, or secret wisdom. It requires patience, intentionality, and a desire to be in control of your money.

Readers, how do you plan your monthly budget? Do you use automated software? Excel? Paper and pencil? How much time do you spend on your budget each month? Share your thoughts and questions in the comments section below.

[Millennial Moola: If you have an idea for a guest post for this blog, feel free to reach out to me at [email protected]. Again, I’m not interested in getting $200 so a bank can write about how awesome their new checking account is on my site. However, if you have a cool perspective that you’d love to share and either don’t have a blog of your own to write it on or want to expand your own personal finance blog audience, feel free to hit me up. Thanks again to the Finance Superhero.]

5 thoughts on “How To Turn Around Your Finances in One Day: Guest Post by Finance Superhero”

  1. Nice detail here for those looking to get a better handle on their finances. Coming out of college most of us begin making more money than we’ve ever had in a matter of a few weeks. The importance for a budget cannot be understated. I really like the recommended percentages and actually fall in most of those ranges if not less which helps me up my savings rate.

    1. I like to write about the nitty gritty of budgeting now and then, as I think a proper budget is foundational for those who are just starting to turn around their financial situation. It may be less important further down the road, but I still enjoy putting together a budget each month.

  2. Nice topic David & Travis, really good to get your teeth into the details of a budget. We use an excel, which has budgeted yearly income and expenses, broken down into months (and we overestimate the expenses). It works well for us, we’re spending a lot of our budget on housing (over 30%), but as our income increases, this amount will come down.

    Tristan

  3. Nicely done. I think a proper budget is really important for people starting out of school so they get off on the right foot. For us, we don’t really need to budget anymore. We have a good feel for how much spending is “too much” and our other expenses are very predictable. We’ve been married for 20 years and been in this house for 10, so the expenses roll in pretty regularly.

    That being said, I track all of our expenses each week in Quicken and keep a close eye on our spending, especially when we do have the unexpected $1,500 car repair or the like.

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