I’ve always been pretty good with numbers, and it’s served me well in my career. I earned a master’s degree in accounting, and I’ve been lucky to help a lot of families with home loans and budgeting.
I’ve learned a few things along the way—some of them, the hard way. As we kick off 2021, I put together some of the lessons I’ve learned. I hope they are helpful in these unusual times.
Income is often uncertain—budget monthly
Many of us this past year faced an uncomfortable truth—that even if you’re a great employee in a strong industry, unforeseen events can disrupt your income stream and wreak havoc on your financial health. For some people, including many of the talented Loan Officers I work with day in and day out, income is always uncertain due to the nature of commissions (let alone a global pandemic).
That’s why I recommend budgeting month by month in uncertain times, or even one paycheck at a time. To win with money, make a plan, be realistic, and work with what you really have.
Make a short-term plan
Whether you’re working toward a big goal such as a down payment for a house or just want to have more control over your finances, planning is the first step.
First, figure out how much you have coming in. If you’re a salaried employee, this part should be pretty easy.
If you work hourly or on commission, this step may be a little more difficult. In that situation, I recommend starting with the minimum amount you expect to receive. Then, list your expenses from most important to least important. If things go your way and you earn more than your minimum, you can get further down your expense list. If you still have money left over, you can always put more away for your savings goal.
To win with money, create a plan based on the worst-case scenario.
Pay yourself first
Once you know how much you have coming in, you can start deciding what to do with that money. And since it is your money, I recommend paying yourself first. For many people, that means paying off debts. Start with minimum payments, but pay more if you can.
If you don’t have debt but do have goals such as a mortgage down payment or retirement, figure out how much you need to stow away each month to make that dream come true.
Pay for your needs
The top four needs for anyone are housing, utilities, food, and transportation. There are ways to be more or less thrifty in each category, but everyone needs a warm place to stay, a way to get around, and enough to eat.
If you don’t know how much to budget for these needs, I recommend getting an estimate by looking at your past bank or credit card statements. This can be daunting for people who haven’t budgeted before—I know from personal experience.
When I first started budgeting with my wife in college, we were sickened by how much we had been spending on groceries and eating out. Although it was an uncomfortable experience the first time we tracked our money, it was a valuable and necessary moment to be able to take control of our money instead of wondering where it all went.
Sometimes, you need that kind of shock value to change your behavior going forward. Budgeting really is more about behavior than math—if you can make a plan and follow through, you’re well on the way to winning with money.
Our first budget was not perfect. It took about three months of budgeting before we became comfortable, realistic, and were better able to predict and control our spending.
Give yourself permission
A budget can feel like a punishment, but I prefer to think of it as permission to spend. After you’ve calculated how much your needs will cost, you can start giving yourself permission for wants. If you budgeted for four dates during the month, you now have permission to go on four dates without feeling guilty.
In times of plenty, wants could include everything from new clothing to digital streaming services or high tech toys—whatever brings joy to your life. As long as you’re reaching your savings goals and paying your bills, you deserve to enjoy your money!
When times are a little more lean, you can cut out almost everything from this category. Win with money by prioritizing your needs and cutting back on wants when necessary.
Grant yourself a little grace
Even when times are lean, I recommend leaving at least a little bit of fun money in your budget. Here’s why: budgets, like diets, often go off the rails when you make a small mistake and decide all is lost.
If you’re dieting, you might plan to give yourself five M&Ms every day so you don’t end up eating an entire bag on Saturday (speaking from experience of course). The same principle applies to budgeting: you should set aside $20 a month or more (as your budget allows) for some impulse buying.
What to do with found money
When you receive money outside your normal income, I like to call that found money. This category can include tax returns, bonuses, inheritance, or unusual sums such as federal stimulus money.
When you receive this money, I highly recommend paying off any debts you have. That way, you can pay less and less toward the cost of borrowing money, freeing you from monthly payments.
If your only big debt is your mortgage, make extra payments to shorten your payoff time. Once you have no debt, you can start putting found money into investments.
The faster you can get out of debt and stop making interest payments to everyone else, the sooner you can invest and start putting interest payments created from your own money in your pocket – that’s when you start winning.
Getting ahead and starting to win
Whatever your income level—or your spending level—making a plan, following it through, and tracking your money are the keys to winning with money. Like Benjamin Franklin said, “If you fail to plan, you are planning to fail.”
If you have financial questions or want to get a ballpark figure of how much you might need to save for a down payment, your loan officer can help. Happy budgeting!