A budget is a plan of your future income and expenses, it's a great way to plan your day to day expenses to make sure you have enough saved for retirement or save for big purchases like a new computer, car, vacation, home or something you like.
A budget is typically comprised of 2 components: the income portion and the expense portion. The income portion is a summary of all the different ways you can make money, for example:
a primary income such as your normal day to day job,
a side hustle income such as your carpentry business, some type of Airbnb business,
investment income that you're generating from stocks/dividends,
and anything else that's putting money in your pocket on a regular basis.
The expense portion is a summary of all your expenses typically comprised of:
your credit cards,
eating out if you pay in cash,
and everything else that's taking money out of your pocket on a regular basis and even not on a regular basis.
And this also include things like Venmo, Pay pal, etc...
So who needs a budget?
Everybody needs a budget whether you're an expert, whether you're young, old, employed, unemployed, you need a budget because a budget gives you the ability to track and monitor your progress over time, set goals, and make sure that you're able to live and survive date to day and set yourself up for financial freedom in the future.
Why do you need a budget?
To be able to get out of debt, stay out of debt, save and eventually retire. The goal of this channel is to help you get to FIRE and no, not a dumpster fire like 2020, but Financial Independence Retire Early which is a movement that is very popular these days that helps you build income in a way that allows you to retire younger than you would expect so typically (before) 65 or 67. And finally budgeting allows you to keep track of all of those small bills, you would not realize how quickly going to Starbucks, you know every other day, every third day, 10 times a month for $10 a piece, that's over $1000 a year and many people just don't think about that. So it’s the beginning of 2021, there's no better time to do this let's jump into this journey together and just as a note you should try to update this monthly.
Types of Tools
There are several different tools that you can use, some of my favorites include Mint and Excel. Now when it comes to excel there's actually what I would consider 2 types of excels you can use:
excel's that have already been built and are open source which we'll talk about today and I'll share one with you, or
you can build your own custom excel if you're tech savvy or you need to customize, this'll probably be the route for you
otherwise the open source or Mint will properly meet your needs.
So looking at Mint
Mint is a great tool, it allows you to be very hands off once you set up the accounts. To link them you can log into the app, you can put all of your accounts with all of the main institutions, all the banks, all of the different credit unions and the like. Once you've added all of your accounts you can also add credit cards if they're not with banks like Amex, etc. and then it gives you a holistic overview and tracks your transactions, it categorizes them automatically for you which is nice, and allows you to track your net worth over time. Mint is a wonderful tool, it got purchased by Intuit a couple years ago. There are some potential drawbacks when it comes to the guaranteed insurance if you do some of your own research you can come up with your own conclusions, it's not exactly clear whether or not using Mint voids it so use at your own risk.
On the flip side you have excels
And one of them I’m going to talk to you about today comes to us from our good friends at “The Measure of a Plan”, check them out link below. They're the ones who built this wonderful spreadsheet. The spreadsheet allows you to import transactions into 2 tabs that you really need to focus on. There is the income tab, and the expenses tab. Now what I did was I exported all of mine from Mint which was nice because it automatically got categories, anything that wasn't categorized I went into the categories tab and added my own categories, and I'll suggest a couple that you should do that you'll probably also have. And on the flip side you can also pull them straight from your bank so you can log into TD, Scotiabank, CIBC, RBC, so on and so forth, and extract everything as a CSV. Once you've done that you'll probably need to hide a couple columns in the export and then once you've matched up the column so that it makes sense, you copy paste and “import as” or “paste as value”. By doing this you'll make sure that the spreadsheet doesn't have any glitches when it's copying everything over. Depending on how much data you're importing this process can take quite a few minutes or quite a few seconds depending on your computer. Once that's done and you've done that for the expensive side you should go to the income side. Now for the income side what you will want to do is you want to get all your pay stubs which will be going into the checking account likely of your financial institutions. You want to pull those records, filtered out to make sure that you don't have any transfers between accounts and cash deposits and such showing up, and once you've done that you'll have a good picture of your income. Once you've inputted both of those sheets you can now go to the overall budget page and this is probably the most important page. This spreadsheet is very powerful and I'm going to give a high level courtesy overview I recommend you play with and explore and really learn it so that it makes sense and if you need customize it for your needs. On the high level this page will show you how much money you've made, how much money you've saved, right off the bat in terms of percentage. Another beautiful thing is even if it's not categorized it's going to show up here. The difference is that on the budget page it's only showing up if it's been categorized, however on the overall page it shows you in aggregate all money that was put in on the income tab and all expenses that were put in, whether or not they've been categorized. However excluding anything that you put the “Y” for the hide column, which is the ability to hide anything that you feel doesn't need to be in there such as one time expenses or recurring expenses that you for some reason didn't delete and decided to hide. So once you set it up that way you can right away see what your investment percentages, or your savings percentages are. Remember this number because it'll be important for something that will talk about a little bit later on which is the saving strategy and how important the number is. So once you've done that let's go back to the budget page. On the budget page the goal is to try to manage and predict what your numbers are going to be. So oftentimes utilities fluctuate, but you have a rough feel let's say it's like $250 a month, you hopefully know what your mortgage or rent payment is that should be a fixed amount every month. You can have the app tell you or the excel will tell you based on the aggregate what your average spend is on clothing, food, and such for all of the different categories that you set up. Based on that you can figure out what your average monthly spend is and compare that against your current income. There's also some cool historical comparisons which I urge you to check out which will allow you to see year over year, but we'll stop here. This is a great way to look at your overall budget and the goal is to try and make sure that you are able to cover your day to day expenses, save some money for entertainment because life is meant to be lived, and enjoyed it's a journey. And of course save a little bit of money for retirement. Just to be clear the goal is to have the income to be greater than or at least equal to the expenses going out otherwise you're running into a deficit or just means that you're incurring debts and we want to avoid that as it is detrimental to our goal of FIRE.
Thank you so much for listening hopefully this has helped you learn a little bit about budgeting and help you get a better picture of your financial future. I'm looking forward to producing more of these episodes, if there are any specific topics you'd like me to cover please let me know. I'm looking forward to seeing you all in about 2-4 weeks.