At the beginning of every month, I take about 30 minutes to organize our finances. In this post, I will walk you through my eight-step process.
As Eisenhower famously said, “Plans are useless, but planning is everything.” Writing down what you expect to happen gives you the baseline to compare what actually happens. This process provides an opportunity to improve your understanding of yourself, and to find areas where you would like to improve.
Before we dive into my monthly planning, I have two considerations to keep in mind:
- Separate Spending and Investments. I’ve tried many times to track all our finances in one spreadsheet. However, I always come back to wanting normal, every day finances separate from investments. We’ll come back to investment tracking later, but for now, let’s keep investments out of mind and focus on the rest.
- Don’t Use Cash. I don’t like Big Brother any more than you, but the benefit of easy tracking so I can improve my position out-ways my desire to boycott the NSA tracking my every move. That doesn’t mean I don’t keep cash. I do. But for everyday spending, we keep it digital.
Have ready before we begin
- Download my Monthly Ledger and have it open and ready. Download the Monthly Ledger (Excel) (save it to your hard drive), or open the Google Docs version and make a copy by clicking “File>Make a copy” (you need a Google account for this to store the document in your Google Drive: www.google.com/drive.)
- I highly recommend Mint.com for creating your monthly budget (it’s free). Have your account open and ready.
Here is my eight-step process for planning spending every month
- Update Cash Flow Balances. In my Monthly Ledger, the first table has our “Cash Flow” accounts. This is where our normal spending happens. This is our primary checking account and all of our credit cards. I log our current checking balance and negative values for each of our credit card balances (I also include any pending charges). Below is the “Net Cash Flow.” My third action from 10 Ways to Get Rid of Negative Income is paying off all your credit cards. Once you’ve done that (a big milestone to celebrate), your net cash flow should always stay positive. After getting completely out of debt, we now use credit cards for monthly purchases (to rack up points), but always keep enough cash in checking to keep net cash flow positive, and always pay the full balance off every month.
- Update Savings Balances. The next table has any cash we have set aside, our savings account balance and our emergency fund balance. Below is the “Net Savings.” Below both of those tables is “Net Cash,” which is the sum of the rest.
- Pay or Schedule all Bills. We have every bill possible set up for auto pay. The first of the month I pay everything else. You can also schedule payments using Bill Pay in your bank account if you don’t have the positive cash flow to pay everything yet. We called our credit card companies and had them change our payment dates to the 10th of each month. That way I have some margin if I don’t get to my monthly planning right away.
- Create a Unique Monthly Budget in Mint. Logged in to Mint, click on the “Budgets” link at the top takes you to your budget for the current month. I have gotten detailed at times, creating budgets down to sub-categories. Always looking to simplify things, I now only budget primary categories (e.g., just “Food & Dining” and not “Groceries,” “Restaurants,” “Coffee Shops” individually). When you look at your spending “Trends” you can still drill down to those sub-categories. For the budget, this is much easier track, and much easier to set goals for improving.
- Put Income and Spending in the Ledger. Before I paid off all my credit cards, the ledger balance in my Monthly Ledger started with my checking account balance (now I use my Net Cash Flow here). Put your expected monthly income in the first line and your total budget left as a negative value in the second (from the “Overview” page in Mint, the first line of the Budget shows the total; to the right it shows how much is spending is left… if you’re at the beginning of the month what is left should be your entire budget). If the final balance is negative, you need to cut spending somewhere in your budget.
- Expand Detail if Required. At first, I needed to have more detail in my ledger. I had to arrange my pay dates and expenses line-by-line to make sure I had the cash to pay for bills. After a lot of effort cutting spending and saving, I now start the month with all bills paid, or the cash in checking to pay for the rest of the budget. Start with the detail you need and make it a goal to start the month with cash to pay for your budget.
- Plan Savings. To the right of my ledger, I keep track of any big spending items (such as vacations) that are more than my monthly budget can handle. We try to project out for the entire year. Whatever the total of these big items is becomes our savings goal. Now that we can see our monthly income and budget, we can see if our goal is realistic. Or if we want it bad enough, we may need to chop more off that monthly budget.
- Save and Invest. My final action is to see what is left over from my starting balance (either checking or net cash flow, see #5) minus my budget. It took me a long time to get my starting balance above my budget, but once you’re there, it is just the forward-looking difference between your income and spending. I move enough of the difference to my savings to meet our savings goal (this may be also to build your emergency fund), and the rest is transferred to investments.
What keeps you from budgeting?