You Have to Know Your Numbers to Change Your Numbers
The easiest way to put your financial life in order is to start budgeting, yet most people are still resistant to it. In fact, only 4 in 10 American adults would be able to cover a $1,000 emergency using their savings. Not only is financial security good in and of itself but getting your finances under control can also lead to better sleep at night, sturdier romances, and greater overall happiness.
Where should you start? We’ll show you, but first, there are two truths that you must address to get in the right mindset for financial health. First is understanding that, when it comes to your money, you are the one in the driver’s seat. The bad news is that no one is coming to save you—this is all on you. The good news? Budgeting is not that hard, as long as you dedicate yourself and commit to change.
The second truth is the importance of delaying gratification. Humans were designed to move toward pleasure and away from pain, even if it costs us more pain down the line. This instinct toward pleasure is called instant gratification—evidence of its existence can be found in the Stanford Marshmallow Experiment of 1972. In the study by Dr. Walter Mischel, a group of children were each given one marshmallow on a plate and told that it was theirs to eat. Then they were told that if they waited a certain amount of time before eating it, they could have another marshmallow as well and get to eat them both.
Plenty of children ate the first marshmallow instead of waiting for the other. In follow-up studies, children who waited for the second marshmallow were found to lead better lives overall—they had better SAT scores, lower amounts of substance abuse, better responses to stress, more educational achievements, and more success in relationships. These children were practicing delayed gratification, and their lives were better for it.
Luckily, your willpower can be strengthened like a muscle. It is never set in stone. “The ability to delay gratification for the sake of future consequences is an acquirable cognitive skill,” according to Dr. Mischel. We budget to reverse our human conditioning—getting the pain out of the way early and enhancing our reward later in life.
Identifying Your Needs and Wants
To budget properly, you must first learn the difference between the things you want and the things you need. Wants are the things that give you pleasure, such as a beach home, the latest fashions or a nicer car, while needs are all the things you have to buy to survive, including food, shelter, basic clothing and transportation.
Before making any purchase, determine whether you’re satisfying a want or a need and whether it will bring you closer to your financial goals or farther away. Cover your needs first, and then, with the money you have left, you can move toward your wants. Don’t be fooled, though! Think carefully—sometimes something that looks like a need can actually be a want in disguise.
How to Start Budgeting with an Irregular Income
1. Track Your Expenses
This helps create financial awareness—if you don’t know where your money is going, how will you know which habits to change? To make your money work for you, you have to make sure you aren’t wasting it. For the next two weeks, keep track of every dollar that you spend, and write it down using our downloadable Expense Tracker.
2. Know Your Baseline
The following expenses make up your baseline:
- Groceries – include the lowest food cost that is reasonable.
- Housing and Utilities – mortgage or rent, utilities, insurance, taxes.
- Medical costs – copays, cost of medicines.
- Transportation – car payment, gas, maintenance, insurance.
- Miscellaneous – expenses you were not anticipating.
With an unpredictable income, you must work “backward” by starting with the money you’re spending and figuring how much of that you really need. Knowing your baseline will give you that number.
3. Separate Your Bank Accounts
Keeping your money in different bank accounts ensures that you know the specific purpose for every dollar you have. You should have the following bank accounts, at the least:
- Business checking account – this is where your commissions will be deposited.
- Personal checking account – pay yourself with every commission by transferring money from your business account to your personal checking account.
- Savings account – this is for personal goals, long-term savings, and your emergency fund.
- Tax savings account – this is for the money you owe the IRS. Keeping this money separate is essential to keeping track of tax payments.
Start by doing some research in your hometown to find out which banks have fewer fees and more advantages and go from there.
These tips will help you build a foundation to start budgeting. Use this week to track your expenses and get an idea of what your baseline looks like; in the meantime, set up your bank accounts. Next week, we’ll provide you with our budgeting template, available for download during our next webinar * and in the accompanying blog post.
Until then, remember that you’re the one who has to take control. Practice delaying gratification, keep track of every dollar and identify your wants and needs. Recruit a “budget buddy” to help hold you accountable, and don’t be afraid to ask your family for support. Remember: keep it simple! There are no more excuses—if you start budgeting, even you can have financial security and peace of mind.
Read our other article in the Focus on Your Money series to get tips on budgeting.
* Webinars are available to current FFS Agents.