Budgeting is a powerful tool that can help you reach your goals and live life to the fullest. Instead if limiting and negative, budgeting can actually be empowering and positive.
This is the second in a series of posts about budgeting and how to use it to get the most from your money and your life. This post explores the concept of money awareness and how you can use it to manage your cash-flow and determine the best way to allocate your money (budget) for you. The first post discussed some myths about budgeting, what budgeting is and why budgeting is important. The next post will cover various budgeting methods you can use. I recommend you read all of the posts in order.
Before you can begin begin budgeting you need to know where your money is coming from and going to on a regular basis…your personal cash flow. To get started, collect the last couple of months of paychecks, bank and credit card statements and begin sorting the receipts/transactions into broad categories like take-home income, housing, food, entertainment, etc.
The goal at this point is just to account for where the money is coming from (income) and know where it is going (expenses), not to make any decisions about how the money should be spent. Be honest with yourself and account for every expense, good or bad.
When you get to the end you will either have a positive or negative cash-flow. What’s an easy way to tell positive from negative? If your credit card balances are increasing each month you probably have a negative cash-flow. On the other hand, if you are adding money to savings instead of taking money out to pay bills your cash-flow is positive.
Now that you have a general idea of how money is moving into and out of your life you need to begin to prioritize where the money should be going on a regular basis. If your cash flow is negative (more expenses than income) the emphasis should be on eliminating the over-spending. If you have a positive cash-flow the goal is to determine what is the best way to spend your money based on your needs and goals.
There are no right or wrong ways to allocate your money. Each of us is unique and the way we use money in our lives is different. From a financial planning standpoint I recommend that people actively save and invest a portion of their income in order to meet short-term emergencies and long-term goals. Outside of that though, it’s your money and it’s your life. How you choose to allocate your money is entirely up to you.
Ok, you’ve been honest with yourself and you’ve identified where you are currently spending your money. You’ve also determined if you are spending more each month than you’re bringing in. Now, how do you make the changes you want to make in your spending? Here’s a tip that I’ve found works for many people and it revolves around the principle of awareness.
According to Dictionary.com, awareness is “the state or condition of being aware; having knowledge; consciousness” . Having awareness when it comes to your money means you’re not just mindlessly spending money but instead are participating in the act of earning and spending it.
One of the keys to reducing stress and enjoying life is to live more in the moment, becoming aware of what it is that we are doing RIGHT NOW. Living in the moment can have a positive impact on our lives. When you raise your money awareness you are living more in the moment and its easier to see where spending isn’t aligning with your priorities. It doesn’t happen because you have tremendous willpower. It happens because you don’t want to spend the money. Once you’re aware of it, you naturally stop it.
To start building your money awareness, find those “black holes” of spending, those places where money seems to vanish and you don’t know why (or how). For many of us, eating out, entertainment and other “spur of the moment” activities meet the definition of black hole. Think about the money that goes to those things and determine if there are other areas that you might get more enjoyment or impact out of if you spent your money on them. Does the spending really align with your priorities? If so, great, feel free to keep spending on those areas as long as you are meeting your obligations and not over-spending. If the spending doesn’t really align with your priorities, make some changes and re-direct the money to something that’s more important to you.
At this point you’ve identified where your money is going each month and raised your money awareness so you can better determine how you want to spend your money. Now comes the actual budgeting part of budgeting. There are different budgeting methods you can use and next week’s post will explore some options and give you some recommendations on which method might be best for you. Stay tuned!
Setting goals and building and acting on a financial life plan takes work. While many people have the time, motivation and energy to do it all on their own, many do not.
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