How to create a budget that works

An easy 7-step process

For the better part of this week, I have been struggling with anxiety which has led to a poor appetite. I have been eating less and less. Because it’s important to talk about these feelings since this pandemic is novel to all of us, I sent my friend a message to tell him how I was feeling.

I was expecting an empathetic reply and a how-to guide to get through my challenge.

“You need to decouple food from your feelings. Think of it as medicine. Eat because it’s time to eat, not because you feel like.” “You don’t want to weaken your immune system when corona is a possibility. At the very least, make sure you’re eating fruits, vegetables and nuts.” “Give yourself a fighting chance.” “How can you not be giving your body the raw materials to protect itself? Just coz you don’t feel great? “What have feelings given you in your life so far? Well, however much it is, throw them out of the window.” “Your life could depend on it. It’s best to get well before heading to the hospital.”

This sounded like those lectures we got while growing up from our African mums. Zero chills.

As much this wasn’t the empathetic reply I was expecting, I loved it. I immediately put my phone away, made myself some healthy meal and ate, distraction-free.

With all the stories we’ve been reading on the media about racial segregation in hospitals, of healthcare workers having to choose who gets a ventilator and who doesn’t-which literally means they are making tough decisions on who gets to live and who dies, we cannot afford to get reckless especially if we have the resources needed to do the right thing. And let’s not forget that it’s not cheap to pay for the COVID-19 test if the free ones don’t get to us.

Feeding your body with the right nutrients at this point in time is the same as having a budget for your finances.

I wrote in last week’s article on Minimalism-A guide to spending less that living without a budget is like driving while blindfolded-sooner or later, you will mess up.

How I created my budget

I’m one of those people who for years, would use the excuse ‘ I cannot stick to a budget.’ This excuse was mostly driven by the fear of Math. The thought of coming up with a spreadsheet was scary for me.

When I moved to UAE late last year, I was determined to sustain a healthy financial lifestyle. I had enjoyed a year of living debt-free, I wasn’t going to get sucked into that mud again.

Here’s an easy step by step guide on how I created my budget from December 2019.

1. How much do I earn?

This is rule number 1; your budget should fit within your income. You could have more than one income which is great. Either way, your budget shouldn’t exceed your income. That would be financial suicide.

A budget will help you differentiate between how much you make and how much you spend. Without this, you’ll be living in a financial cloud.

I used monthly income from my 9 to 5 job to get started.

2. Started with the basics

At the time, I wasn’t good at budgeting. So I wasn’t going to complicate the process because that would make me give up along the way. I kept things simple. I didn’t even use an excel sheet, I used what I’m most comfortable with-word documents.

This is how my first budget looked like:

• Rent
• Electricity and water bill (In Dubai, this is sent as 1 bill)
• Gas bill
• Food
• House supplies ( cleaning materials, scented candles, etc)
• Transport to work
• Hair, Beauty & Grooming
• Internet
• Savings and investments

Since I was new in town, the only figure I was sure about in the list above was rent. All other figures were estimates deduced from talking to people who’ve lived here for longer.

If you’ve been reading my other articles, you will notice that Emergency fund (and other items) are missing from the budget. It was a starting point.

As James Clear writes in my fav book Atomic Habits,

“The truth is, a habit must be established before it can be improved. If you can’t learn the basic skill of showing up, then you have little hope of mastering the finer details. Instead of trying to engineer a perfect habit from the start, do the easy thing on a more consistent basis. You have to standardize before you optimize.”

3. Tracked my expenses

At the back of my mind, I knew what I should be spending my money on since I already had a budget.

Again, I went for the non-scary option for this step. I used the Notes app on my phone.

Every time I made a purchase, whether using cash or card, I recorded it immediately. With this, I didn’t care about categorizing using my budget categories. If I bought a Cappucino, I recorded ‘Cappucino — $ 6.’

I categorized the expenses at end month.

I learnt this from the accounting course I’m taking under the ‘Bank Reconciliations’ module. Accountants in companies record cash immediately when it’s received or spent. This ensures the company manages cash efficiently. They don’t rely on their memory as this is likely to result in more errors. You shouldn’t rely on your memory either!

Doing this will save you from the most painful personal finance question ‘Where did my money go?’ which you’ve been asking at midmonth.

“Habit tracking keeps you honest. Most of us have a distorted view of our own behaviour. We think we act better than we do. Measurement offers one way to overcome our blindness to our own behaviour and notice what’s really going on each day. When the evidence is right in front of you, you’re less likely to lie to yourself. “ — James Clear, Atomic Habits.

4. I adjusted my budget over time

Budgeting is like peeling back an onion. You start with the highest level and keep going deeper into the core of the onion until you understand what works for you.

After 2 months of tracking my expenses, I noticed that there were key budget items that were missing from my initial list. These items include:

• Emergency fund
• Black tax/Charity — causes I care about
• Recreation — life is for the living!
• Taxi — For commuting at night or when it’s more convenient as compared to public transport.
• Self-improvement (Books, online courses, etc)

Also, since the figures I started out with were estimates, I adjusted them based on the actual figures I got from tracking my expenditures.

For example, I had budgeted for home internet connection when I moved in. Internet costs in Dubai cost an arm and a leg and I honestly wasn’t willing to pay for it.

I still needed internet connection though, so I gathered my courage and asked my next-door neighbour if I could use her internet (the bars were full from my house). I asked if we could split bills. To my surprise, she gave me her password and asked me not to pay.

Don’t be afraid to ask for help. The goal is to keep our expenditures low.

5. Didn’t care about perfection

When we think of budgets, we think of perfect and balanced spreadsheets. If we aren’t already good at it, we give up altogether. I was all about learning along the way, do the same.

Most of us are stuck in the motion stage as opposed to actioning our plans. Motion and action is not the same thing.

Motion: You’ve been thinking and planning to create a budget. Which might be the reason you’re reading this article, thanks 😉

Action: Opening your notebook, word doc or spreadsheet and creating a budget.

The accounting course has a whole module on excel sheets. I’m now good at it, so I moved my budget to a spreadsheet. We live and we learn. And we move.

6. Excel labels matter

The identity you give yourself matters. Instead of saying ‘I read books’, call yourself a reader. This motivates you to work towards defending your identity.

I like to label my money spreadsheets ‘My financial responsibilities’, ‘The Investor’

It keeps me motivated to show up and do better for myself.

I also encourage my clients that I’m guiding towards getting out of debt to use the same trick. Need help? I can walk with you through this process. (Email: agatha@thewealthtribe.com)

7. Fine-tuned my budget using custom-made budgeting questions

A budget is not meant to be a jail term. Our spending habits and priorities change over time and so should our budgets. It’s okay to make adjustments so that you can make the most out of your paycheck.

I have been fine-tuning my budget for the past 7 months using custom-made questions adapted from Chelsea Fagan & Lauren Hage’s book The Financial Diet.

I’ll share these in my next article because by now you’re already tired of reading and you want to go action the above lessons. Yes?

So yes, it’s going to be terrible and messy at the beginning. With time, you’ll be happy that you chose to take charge of your finances. And you’ll be proud when you’re finally able to live well and within your means

NOTE: This is the first article on budgeting. I wrote 3 of them. Click here to read the second and here to read the third one.

How to audit your finances

Budgeting 101

Originally published at https://www.thewealthtribe.com on April 23, 2020.