If you have been struggling to get your budgets to work, you are not alone. This year I have really started to take budgeting more seriously, so I asked Brie Sodano of Sheep to Shark for some advice. Apparently, budgets don’t actually work in real life. Now don’t start losing your mind. Sodano doesn’t recommend going out and spending whatever you want. She has some pretty compelling reasons why your budget hasn’t been working and shares a bit about how to effectively manage your cash flow.
Starting in the Dark:
Brie says that most of us start our budgets with a blank piece of paper and a pen. Definitely sounds like me. She calls this starting in the dark. While you’re spending time giving your best guess on what your expenses are, Brie says that you’re going to be way off because you haven’t been looking at your actual numbers. Note to self? Your mental math is always wrong.
Truth is in the Transactions:
If you haven’t pulled your actual bank statements, you pretty much don’t know where your money has been going. Have you ever spent the time to look at the Starbucks transactions from the past month? Your “inexpensive” coffee habit might be adding up to quite a bit more than you think. And it isn’t just coffee. We might be spending a little here and there, but when it comes to the end of the month, we may be surprised (or even terrified) at the number that shows up on our statement. The truth can only be revealed if we take the time to review our spending history.
Most people have what Brie calls “habit blindness” when it comes to spending. Each of us has a mental “threshold” where transactions that fall below this number are easily forgotten. The thought process of, “it’s only 20 bucks” allows us to ignore transactions that are under this amount. Unfortunately, if we are making those $20 transactions multiple times a day each week, the total amount can add up quite quickly. Spending $200 one afternoon at Target might terrify us, but $20 each day for an entire month might go completely unnoticed.
Joint Accounts Become Confusing:
If you share an account with your significant other, it becomes increasingly difficult to track expenditures. The daily incoming and outgoing transactions between two adults can become exceptionally tricky to track, especially when not too many of us have the time to sit down each evening and go over our transaction history. With two people constantly varying the account balance, it’s very difficult to target poor spending habits.
So what can you do? Engineer your cash flow! This simply means making sure that your money goes exactly where you want it to go instead of figuring out where it went after the fact.
The Bucket System:
Sodano suggests creating a system of five “buckets” so that individuals become intentional about where their money goes.
The first is your “keep” bucket, which is the money you want to invest. For most people it should be about 10% of your income and is probably going to be focused on retirement. Although many people have this bucket setup through their company, some will have to coordinate this themselves.
The second bucket is your “consistent monthly expenses” bucket. This is the account where you might pay your mortgage, cable, water or gas bills. These bills tend to be pretty much the same, so it’s fairly easy to determine how much money to allocate to this account each month.
The third bucket is your “working capital bucket” which is the money you set aside for the stuff that isn’t a regular or consistent expense. You might put money in here to save for an upcoming wedding you’re in or an upgraded appliance.
The fourth bucket is your “important things” bucket. For most parents, this is pretty much the big college fund. Some people even use this account to save for a major home renovation or an extravagant trip or party.
The last bucket is your “pocket change” bucket, which is where you might pull your lunches or coffee out each week. This is a great bucket to allow each person to have some autonomy. Each person might have a little “free money” to buy what they like.
Cash Flow Day:
Want to spend some time putting this together? Brie is hosting an amazing event in April. Attendees will spend time actually working on their own “buckets” with her expert advice and guidance. By the end of this 5 hour event, each attendee will have the tools to implement their own cash flow management strategy. Each person will leave armed with actual numbers to setup direct deposits and percentages for each bucket. She will also include debt strategies to help those working with different kinds of debt. If you are ready to make some major improvement in your finances, sign up here for her workshop on Saturday, April 14 from 9-2 p.m. in Watertown, CT.