How to Budget Principle #5
In Grandma’s days, budgeting was always a very tangible task. Either the money was in her jars or wallet to spend or it wasn’t. It was always very clear if you had the money to cover an expense.
In today’s world of virtual jars and online banking it is easy for there to be a disconnect between what our budget says we have to spend and what our bank account says we really have available.
This is especially true at the start. We may have carefully calculated how much we need to have set aside in our budget to cover expenses but knowing what we should have and actually having it in the bank are two very different things.
Whenever we take on new coaching clients at Grandma’s Jars, we follow a process we call our “Road Map to Financial Peace”. The first step on this road map is to ensure that the client’s monthly income is greater than their monthly expenses – this is ensures we have a surplus.
Our second step on this road map is to help the clients work towards a point where their bank account matches what their budget says they should have. There is no point having an ‘Entertainment Jar’ that tells you that you have $200 to spend on Friday night if your bank account is running on empty.
It can sometimes take new clients several months to get their bank account to the point that it fully covers their budget. Our clients will often try to accelerate the process by selling stuff they don’t need or working a little extra overtime. A budget is only as good as the funds backing it.
Once clients have achieved this milestone we then turn our attention to things like building cash reserves and paying off debt. However keeping our bank accounts matched with our budget isn’t a set and forget task but rather an ongoing process.
Even the most dedicated budgeters falter from time to time and changes to recurring expenses, over expenditure, or failure to record an expense can easily cause our bank accounts to fall out of sync with our budget.
At the end of every month, we take our clients through what we call the End of Month Summary. This process adds up how much money is left in each of the clients ‘virtual jars’ and reconciles it with the funds in their central bank account.
If they have more in their bank account than is required to cover their jars they have a surplus that can be used for building savings, paying off debt, investing or having fun.
If they have less in their bank account than is required to cover their jars then we have a deficit. In this instance we will explore options to bring the Central Account and budget back into balance. This may mean pulling back savings or putting future goals on hold until balance is achieved.
The validity of any budget is the money you have backing it in your bank account. People in their eagerness to pay off debts and save for important goals will often try to skip this step but this will only lead to a budgeting disaster.
Having the exact amount of money tucked away in your bank account to cover your budget will mean you always have enough money to cover your future expenses as they turn up.
By having your future expenses covered, you can be sure than any surplus funds are true savings and can therefore be allocated to building a cash reserve, paying off debt, or putting it towards the financial goals that are important to you.