As a small business owner, crap really hit the fan in 2020 and forced me to get really, really clear on what was essential to keep for enduring success, and what could be cut. It was incredibly painful to cut staff and pare back recurring expenses as my consumer products business took a sizeable hit.
As painful as it was, I'm grateful for the lessons it taught me—one of which was getting even more clear on my own personal finances.
While I've considered myself somewhat savvy with my money and have always lived within my means, getting figuratively punched in the face really woke me up this year.
As with everything on the internet, use any of my ideas at your own discretion, or just throw it away...but hey, it works for me!
As Mike Tyson says, "everyone has a plan until they get punched in the face". That happened to me in 2020 and left me reeling for a few months.
And another quote that I think accompanies it well is "when everything is a priority, nothing is a priority".
2020 has taught me that creating an action plan (aka a monthly and annual budget) for how you'll act when you get punched in the face is SO MUCH EASIER than trying to do it when you're in a state of emotional stress or anxiety. And, that a budget is so much more effective if you have true clarity on WHAT IS MOST IMPORTANT in your budget.
If you haven't tracked or prioritized what your actual expenses are in a way that is clear and simple to you, I believe it makes "rolling with the punches" almost impossible.
If the business took a turn for the worse again, and I elected (or was forced) to reduce my personal income, I already have a plan in place on where I would make cuts and how deep I would make cuts.
I decided this year to anticipate the worst and make a plan for it, and it gives me a lot of peace of mind. I could effectively reduce my income down to about 75% of my current income before it started to feel really, really "uncomfortable" (I know, first world problems).
What I did was took a page out of Steven R Covey's book and set up my budget categories like a cascading waterfall of importance, based on his principle of "Rocks, Pebbles, Sand".
I did this by naming my budget categories with priorities, or tiers, in mind. Seeing these new category names acts as a constant, literal reminder of what is more important, and what is less important. I currently track all of it in YNAB, but you can use other budgeting apps, too. What's important is that the naming sequence helps keep things in perspective despite how silly the names may be.
With that all in mind, here are my budget categories that follow the above principles:
- Need To Have (Mandatory Fixed Expenses). These are expenses that MUST be paid every month, otherwise, it would either be a significant hit to my credit, or, a major dent in my lifestyle. These are the "rocks". These are typically things that I am contractually obligated to pay (like mortgage, HOA, utilities), insurances (life, auto, fire), and obviously food. I've grouped them here because I either can't change the rates and they stay consistent month to month, or, I absolutely need them. Before I reduce my spending here, I'll be reducing in the other less important categories.
- Nice to Have. These are all lifestyle choices that I recognize I choose to spend. They're not quite as voluntary/luxurious as the next category, but they are all elective for the most part. These are the "pebbles". The key is that these are NOT contractual and I can elect to turn on/off fairly easily, but, are typically consistent every month and make planning easy. These expenses include things like our dining out budget (groceries are in #1 above because it's much cheaper to make your own food than to buy it prepared), car gas (you can stop driving or drive less when necessary), haircuts/grooming, a medical fund (has a goal tied to it), and anything recurring (like iCloud/Google storage) that isn't necessarily entertainment or "just for fun". I also think it's important to create "funds" in this category for things like irregular or one-time annual payments for things like auto registration, new tires/ auto maintenance fund, property taxes (outside of the mortgage), or other expenses that you know you will have sometime in the future.
- Want to Have. The key here is identifying what is a necessity (group 1) vs lifestyle (group 2) vs pure excess (group 3)...the things that are hard to justify as "need/nice to have". This is the "sand". This includes, for me, gym membership, clothing, maid/lawn service, family activities, fun stuff for the kids, entertainment (like movies, online TV subscriptions), babysitting, car cleaning (not necessary maintenance like tires, oil changes, etc.), birthday gifts. I also have "funds" in this category for things like family vacations where I want to build up to a goal. In terms of pure survival, these things fall on the bottom of my list. Some of you may find these essential, and that is your own determination, but this is just what I have prioritized into this category.
- Just for Fun. This is similar to group 3, but are typically non-recurring. This is the "water" that can fill in any remaining volume of the jar ;) This for me is kind of a "don't ask" fund that my wife and I each fund an equal amount each month that we get to spend on whatever we want. It's not much, but, it's mutually recognized as pure excess when we want to go buy something silly purely because it was fun and we don't need to ask permission or justify it later.
What's important is that you find what works for you. The above approach simply helps us in a way that provides both clarity and simplicity.
Hope this helps!
Submitted December 28, 2020 at 01:14AM by fstezaws https://ift.tt/2Mc6bD0
