In Blog Post #2, I talked about your budget as your best financial friend. It’s also the boss of your money because you’ve assigned your Money In to specific Money Out line items such as bills, spending, savings, and debt. Now it’s time to put those assignments to work by way of budget implementation. I want you to pay close attention to implementation, because from my experience, it’s the #1 reason budgets fail.

Why do budgets fail at the implementation phase? First, what does a failed budget look like? Have you ever built a budget only to find yourself saying “what now?”, or find yourself running out of cash two weeks into the month, or overspending and just giving up altogether on trying to follow it? Have you found yourself at the end of the month adding up your income and expenses only to find that you spent more than your income? All of this looks and “feels” like a failing budget. But the budget didn’t fail. The implementation of the budget…also known as your actions related to your spending… failed. But once you know how to implement your budget, it will not fail you. So let’s get started.

Successful budget implementation depends on three factors: Cash Flow, Tracking Your Spending, and Trusting Your Budget. I will cover Cash Flow today, while Tracking Your Spending and Trusting Your Budget will be covered on my next blog post.

The reason Cash Flow is so important in successful budget implementation is that it shows you how your bank balance changes as your Money In and Money Out flow through the month. Most important, when you can see your account balance in advance, you have the ability to see in advance when you might overdraw your account. And this lets you make changes now to avoid the overdraft. (Remember, overdraft fees are a staggering $35-$40 for each one! As a side note, do not fall for overdraft protection plans, as they are simply debt disguised as help. Nor do you want your emergency fund linked to your account as overdraft protection. All these supposedly helpful tools do is enable over-drafting – if you don’t have them available, you won’t do it!)

So, seeing your cash flow over the course of the budgeted month is key to avoiding running out of money. Let’s take a look at how you use Cash Flow to successfully implement your budget.

Think of Cash Flow as a schedule of Money In and Money Out from the first day of the month to the last day of the month. It is a listing of the dates when money is coming into your account and when it’s going out of your account. Cash Flow also begins with a balance in your account, say today, which happens to be the last day of November. Conveniently list out when December Money In (your paycheck) and December Money Out (your bills) will occur, adding Money In to your balance, and subtracting Money Out from it as you go. While it’s easiest to do this on a spreadsheet, you can just as easily do it on paper. Nothing should get in your way on this is important step. In addition to bills, Money Out also includes your spending: food, shopping, commuting, flex items such as post office, dry cleaner, etc. It is typically this part of the Money Out section that causes implementation to fail the fastest. So let me show you how to prevent that.

Let’s look at an example of how Cash Flow guides you to a successful monthly budget experience. The implementation below is for a budget that has $2,000 in income and $1,975 in expenses – its profit is $25.

Remember the budget had a $25 profit? Notice your bank balance at the beginning of the month was $1,500 and at the end of the month was $1,525, after all of the income came in and all expense was scheduled to go out. The $25 profit is sitting in your balance at the end of the month!

Notice also the following:

• Food/grocery spending as well as gas/commuting are weekly expenses in specific amounts to prevent running out of money before the month is over. This means you can’t go to Costco and spend all $500 of your December grocery money on 12/1, or you will overdraw your account.
• Bills and payroll are listed in chronological order. This way, you can see how the bank balance changes as these line items hit the account. Notice on 12/4 that your bank balance goes all the way down to $10 after the heating bill is paid. While this is low, it is not overdrawn. But if any of the line items above it are overspent by more than $10, the bank balance would overdraw. This knowledge about the “low point” in your bank account is really important, and is typically a motivator to keep spending within your budgeted numbers.
• I place line breaks between the weeks to to make the cash flow list easier to follow. Most important, breaking the month down into weekly segments…meaning 7-day increments…makes managing money week to week much easier. It only takes a few minutes on, say, a Saturday morning. All you do is make sure the bills for that week are scheduled, then know what your spending allowance is for that week, and you’re done! You do not have to look at your implementation schedule until the next Saturday when you do the same thing for the new week.

Let me address the “budget week.” I like budget weeks to begin on Saturday and end on Friday. Let me explain why, through trial and error, I landed on this crucial win with implementation.

Why Sunday – Saturday…the typical calendar week fails
Two reasons. First, your bank will not date your Saturday transactions until the following Monday. This means your Saturday transactions are going to show up in your bank as next week’s spending! This causes time, tracking and potential human error as you manually figure out which of Monday’s transactions are actually Saturday. Plus, since you can’t change the date of the transaction in your bank’s reporting function will not be correct. The second reason this typical calendar week fails is that Saturday…one of the most high-spending days of the week…falls at the end of your week when your spending money is probably gone. This sets you up for overspending, because the chances of you not spending on Saturday are extraordinarily low. I’ve tried it, and I failed.

Why the Monday – Sunday week fails
This weekly schedule fails exactly same as reason #2 in the Sunday-Saturday schedule above. Your weekend…when most spending is done…falls at the end of your week when you are likely to have already spent your money.

Saturday – Friday is the answer
This brings us to the magical Saturday – Friday implementation week. It works! It sets you up for success! Your spending is available at the beginning of the week, on the highest spending days of the week. It’s much easier to stay out of the stores during the week when you’re at work and focusing on family, school, homework, etc. I often spend a large portion of my weekly spending money on Saturday, leaving a little bit during the week for incidentals. I don’t even like going to the stores or spending money during the week. For me, that’s what the weekend is for, and as long as I stay within the budget I have for that week, I am guaranteed to win. Oh, and the other reason this schedule works for implementation: bank transactions automatically show up in the correct week. Zero time is needed to adjust transactions or manipulate spending reports.

Whenever you are trying to fix or change what’s happening with our money, the most important thing you can do is to create a budget. It tells you exactly what you need and can do with your money month to month. It’s honest. I call it the boss to spending; and to me, it’s my best financial friend.

The budget tells you where you are starting from. It answers important questions that enable you to make decisions about your day to day handling of money. Questions like, “Am I living within my means?”, or “Are my expenses higher than my income?” or “Do I have subscriptions/recurring expenses I’m not using?” or “Do I have room for savings or a special purchase?”

When you create your budget, you suddenly have information. You have knowledge. And as the saying goes, “Knowledge is power.” You now have the power to make decisions with your money that will resolve issues, improve your financial condition, and allow your financial dreams to start becoming goals. Here’s the key: doing a budget is not difficult, should not be intimidating, and requires no special technology.

A pen and paper is all you need to write out your budget. It’s the simplest, most un-intimidating way to do a budget in my opinion. But there are seemingly infinite (free) resources available on our computers (spreadsheets and templates) or online (budgeting tools) to help. If you have access to and are comfortable with technology, it can be an efficient approach, depending on the technology you choose.

I find the most efficient technology approach to be a spreadsheet due to use of mathematical formulas for totaling, and the ease of modifying, adding or deleting line items. Online tools and templates can be helpful; however, I find most to be too detailed, causing the process to take too long and the resulting budget to be filled with far more line items than necessary. I know from my own experience and that of my clients, that the simpler the budget, the easier it is to follow. For example, you only need one line item for food/grocery, and it should include non-food grocery items like paper products, toiletries and cleaning supplies. And it should include eating out/ordering in. One line item for food/grocery is easy to track and gives you spending flexibility within that category.

Whatever method you choose to create your budget, the important thing is to start. I can assure you, you will feel a sense of increased control over your money with every line item you document.

As you put your budget together, remember that every budget has these three sections: Money In (Income), Money Out (expenses and savings), Balance (profit or loss). You are living within your means if your Money In is greater than your Money Out, meaning your budget is balanced with a Profit. You are overspending if your Money In is less than your Money Out, meaning you have a Loss. Your job every month is to plan your budget so that you are living within your means. The resulting Profit is what you put towards your financial goals. It’s that basic.

The bigger your monthly profit, the faster you achieve whatever financial goal you are working on. The more you spend, the less profit you will have, and the longer it will take to reach your financial goal.

But what if your budget shows a Loss? What if Money In is less than Money Out? You are living BEYOND your means, and your budget is not balanced. You are falling backwards financially.

There are two options to turn the Loss into a Profit: reduce expenses or increase income. Start with reducing expenses. How? First, if you have debt, bring all of your debt payments down to minimum payments only. Don’t pay extra on debt just yet. Next, in my experience, we as a society tend to spend more money than necessary on food, shopping and subscriptions. Reduce your spending here. Go as low as you think you can. Then, look at luxuries like lawn service, cleaning service, etc.

If you are still showing a Loss, look to increase your income by reducing the number of deductions coming from your paycheck or getting a second job (my least favorite way of making your budget balance). But focus on expense reduction first; it is usually the answer you need. In extreme cases, you might need to cancel things like the cable bill, or delay paying unsecured credit cards.

Once Money In is equal to or greater than Money Out, you have a balanced budget. Congratulations! Hopefully, you have a little profit (my first budget had a profit of just $5). Take a look at your work. Doesn’t it feel good to know your bills can get paid, and that you know exactly what your spending can be in order to live within your means? I found this knowledge really empowering when I did my first budget. And I still feel it today. I hope you do, too.

In a future post, I will talk about how to build key components into your budget that move you to what I call financial stability. But for now, you are in control under the guide of your budget. Trust it. Let it be the boss to your spending. In return, it will also be your financial best friend.