Peggy Doviak, Ph.D., CFP®
Have you ever run out of money before you ran out of month? It’s bad enough when you can’t eat out or buy something you want, but even scarier if you’re short before you have paid the mortgage or insurance.
With a traditional job, if money is tight, the beginning of the month brings a paycheck. However, if you make your living as an author, you probably don’t get paid just because it’s the first. In fact, income varies in both timing and amount. This cash flow uncertainty can lead to a real crisis as you plan to pay the bills.
To help with your organization, the common wisdom from financial advisers is to make a budget. They remind that if you know how much you can spend in each category, you will stay on track. Unfortunately, I think this approach is somewhat backwards, so I want to propose a different strategy.
Don’t begin with a budget—instead, write down your monthly spending. For thirty days, I want you to list every purchase and its cost. This exercise should be completed by everyone who lives in your home. Your list should include items like your mortgage or rent, car payment, utilities, phone, groceries, household expenses, gasoline, and eating out. If you spend money on it, I want you to write it down!
To keep harmony at home, when you share the list with your family, don’t be judgmental toward others or yourself. If you grab drive thru on the way to the game, buy seasonal decorations, or practice retail therapy—include it. Changing your typical habits to “look good” won’t lead to long-term success.
At the end of the month, divide your expenses between the money you spent to maintain your basic standard of living (called “nondiscretionary”) and the money you used for items you wanted but didn’t really need (called “discretionary”). Most purchases fall in obvious categories, but if you go to a superstore, try to split the receipt.
If you believe you couldn’t possibly spend that much every month and the expenses over the 30-day period are not representative, then complete the exercise for another month.
Now, make your budget. Knowing your nondiscretionary and discretionary spending helps the plan become realistic and sustainable. The problem with most budgets is that we don’t allocate as much money as items cost. By knowing your cell phone, cable, and electric bill to the penny, you can set aside enough money to pay them. Remember, too, you may want to increase your budget to include gifts and vacations.
Have you ever made a budget and failed? I have, and often, the results are catastrophic. When we fail in keeping the budget, we give up in despair and wind up spending more money than ever. Put more bluntly, we tend to buy everything we ever wanted, and we completely derail our finances. Budgeting with realistic numbers makes you more likely to be successful.
If finances are tight each month, see if lowering discretionary purchases would make your budget more manageable. If those cuts aren’t sufficient, then look at the nondiscretionary expenses for additional potential savings (like a lower cell phone plan or utility use outside of peak hours). Once you see your spending levels and habits, you will be less intimidated and able to correct your course where necessary.
When income fluctuates, it’s very important to know your monthly costs, as you may have to divide checks to cover expenses for several months at a time. Making money last is always tough, but it’s downright impossible if you don’t know your financial bottom line.