“Business Problems are personal problems in disguise.” – Michael Port
Business success often mirrors personal success. Business failure often mirrors personal failure. If I were to ask you about the worst customer service experience you have had, my bet would be that your answer is a description of something that a person (employee, owner, etc.) did, not what the business itself did. As a result of personal actions, the business gets the glory or the bad wrap.
People do things or they don’t do them. A business success story will be filled with people doing things and doing the right things. Our brains push us into doing something or not doing it. Because of this, two identical business owners selling the same products or services, with identical education and resources will have very different results all because of the decisions they make and the actions they take.
How do you overcome your own weaknesses and self-doubt and do things in spite of yourself? The answer that author Todd Herman (The Alter Ego Effect) suggests is to create an alter ego and have the alter ego do it. This is a novel concept which I plan to study more about. It intrigued me.
I think back to my high school drama teacher John Whiting who said, “I am a thespian. Therefore, what you cannot be – I can.” There is also the old adage of “fake it ‘til you make it.”
Perhaps we can do harder things if our normal persona sits on the side and allows our alter ego who doesn’t have the same fear to do it. Our own secret identities may give us extraordinary results as we are able to bypass our own neural blocks. Suddenly we can become John the great marketer or Susan the fantastic bookkeeper. We may even eat our vegetables while Mikey tries it.
I was recently asked to share ways to create a budget to help someone reach financial goals. There are many budgeting experts out there and they each seem to do things differently. I thought I would outline my process.
Forecasting and Budgeting
A forecast is an estimate of future income and future expenses. A budget is an estimate of future income and how you intend to make future expenses. It is an exercise to help you live within your means and reach goals. It not a punishment. It is not torture. It is a tool to help you reach your financial potential.
Step One – Analyze
If you want to look at the future, you must first look to the past. Start right now or start on the first of the month to have a clean cutoff and track every penny that comes in and every penny that goes out. Do this for your real cash as well as your electronic cash. Track your debit card purchases. Track your credit card purchases. Track your paychecks. Track everything.
As you incur an expense, begin to assign a category for the income (salary, bonus, overtime, side business profit, interest, dividends, etc.) and assign categories to the expenses (Rent, Mortgage Principal, Mortgage Interest, Mortgage Insurance, Home Owners or Renters Insurance, Auto Insurance, Gas, Groceries, Dining Out, Utilities, Gifts, Entertainment, School Fees, Charitable Giving, Credit Card Payment, etc.).
After a month of tracking you will have a pretty good idea of where your money came from and where it went. You will see if your expenses exceeded your income or were under it. This gives you a sense of where you are at.
Step Two – Start with Zero
I prefer the zero based budgeting method which means that every dollar in is also budgeted as a dollar out or every dollar is accounted for. Open up your spreadsheet app and list off and total your income sources from the past month. Total your income. Then list off your expense categories and put in the amounts. Total your expenses. Chances are the total amounts of income and expenses won’t match so you have to figure out where the difference is. If you didn’t spend it all, you may have put some money in your bank account and it is still there or have some cash left in your wallet – you can add a row and call it savings. If you spent more than your income, you get to add a row and call it Debt Increase or Borrowing. All should be accounted for now.
Step Three – Determine Your Financial Goals
What financial goals do you have? Maybe you want to save a $1,000 emergency fund. Maybe you want to save 3-6 months of living expenses to be prepared if something bigger happens. Maybe you want to have a down payment for a house. Maybe you want to go on a vacation. Maybe you want to get out of debt. Figure out your goal and add it as a row on your tracking sheet. Determine a value that will need to go into the monthly boxes. If you want the $1,000 emergency fund and you want to have it in four months, for the next four months that row will have $250 in it.
Obviously you have already spent the money of the past. It is now time to think about how you will spend the money of the future.
Step Four - Brainstorm
Look at the month that you have documented in front of you. Take some time to think about things that you would like to change. If we keep the $1,000 emergency fund in four months example, this will mean that you have to figure out where that $250 is going to come from for the next four months – either more income (second job, selling unused items, etc.) or spending less in other areas. If your goal is to get out of debt, your row might read Extra Debt Service and after you put in a value you must find where that value fits in your zero based budget.
You are going to brainstorm where you can get that extra income or where you can change your expenses. You brainstorm what you can change. You don’t have to change everything that you have identified - you can but don’t have to. You should pick the changes that you can live with to help you meet the goal. This might be one less coffee a week and one less eating out a week to help you with your goal.
I need to be realistic and let the reader know that I understand there are those of you who potentially are looking at your list and feel completely discouraged because your income is below your expenses. This is generally a sign of underemployment (You have a job and are working hard but your income doesn’t meet your needs.) Every month is deeper in debt. Having that dire feeling is not fun but it can be a great motivator to help you make changes to improve your situation. In these cases, the changes required may be bigger than skipping a cup of coffee. You may need to look for a new, higher paid job. You may need to get a second job for a while. You may need to move to a place with cheaper rent. You may need to sell your car and get a bus pass. You may need to go back to school or a training program to improve your skill set. You are capable of making any change you really want to make.
I have helped people in this situation with their budgeting and brainstorming. Those who were committed to the change, made the hard change and it changed their situation.
Step Five – Commit
You have identified the changes you are willing to make and now you must commit to those changes. Plan your future month(s) with how you plan to earn and spend over the next month(s). Fill in the column and rows on your sheet. When the total of expenses and savings equals the total amount of your income you have a balanced budget and are ready to put it into place.
Move forward committed to the changes you decided and track what you do during the month and compare it to your budget. Compare the actual to your budget and note the differences. Determine if you need to tweak your budget or if you overspent and need to recommit to your changes. Repeat again and again and again.
We all have expenses that may not come up every month but may come up once or twice a year. These might be birthday presents, Christmas presents, school fees, some insurance costs, property tax, etc. You can total up these expenses and divide them by 12 to plan for a monthly amount to put towards those annual expenses. You can save these amounts and pull from the savings when the expense comes up. This allows some regularity in your budget. You can also put these expenses in the month that they will occur.
A Successful Budget Example
A couple determined they wanted to build up an emergency fund and get out of debt. They tracked their spending for the month and went through the zero based budget setup. They reviewed their income and their expenses and determined what they were willing to change. After a short while they had their emergency fund and began attacking their debt. They went through their garage and house and sold anything that they didn’t need or weren’t using anymore. They raised almost $3,000 from that exercise and put it towards the debt. If they were under in a monthly budget category (i.e. they didn’t spend the full grocery amount for the month), the leftovers went towards the debt. As the couples’ income increased, they put that increase towards the debt. In the course of less than two years of committed changes and following their budget, they were debt free and had paid off their entire mortgage.
The approach I have outlined above is only one of many methods. Other methods may not require as much tracking of the daily spend, although I suggest you do the tracking exercise at least once so you really know where you are on both income and spending. An internet search can provide many other options for you.
One such method is committing to one big change. You may just choose to change one or two big categories and stick to that and you will see results. For example, if you eat out a lot for lunch maybe you decide to bring your lunch from home every day. You just changed your expense from $10 per day to $1-2 per day giving you $160 a month to put towards your goal. If you seem to spend a lot at the mall on things that you don’t necessarily need, you may commit to make a change and not go to the mall anymore. You will most likely have improvements from the one big change.
There are many apps such as Mint and YNAB (You Need A Budget) that can help you track your spending and your budget. Feel free to use technology to help you in your budgeting process.
This blog allows you to experience the raw, gut wrenching drama of human conflict through accounting in each of its three stages: preparing to do battle, the thrill of victory and the agony of defeat.