Before we begin, I’d like to introduce you to the Pyramid of Financial Awesomeness.
The Pyramid of Financial Awesomeness, lays out everything you need to do to get your personal financial life together in order to reach the zen-like state of financial awesomeness. Here’s how you use the pyramid: you start at bottom, focusing on one block before moving to the next. Once a layer is completed, move onto the next block in the next layer.
In this post, I’m going to walk you through the three things you can do to build a solid foundation.
Step 1: Get Primed
Set aside weekly finance time
First, prioritize and make space for your finances: schedule weekly finance time for an hour each week. Make a regular appointment for the same day and same time. I know - you’re busy. I know - being a slave to your schedule sucks because you’re a free spirit; you’re an artist; you’re Pauly Shore’s character from Encino Man. But you can always make time for the things you prioritize. So stop just thinking about it and start being about it.
What you need to do: Look at your schedule and find an hour of each week to dedicate to weekly finance time. Here’s a step-by-step in case you’re still struggling.
Get your mind right
A few years ago, I taught a finance workshop at a creative retreat in Bali, Indonesia. Every morning, there was a kundalini yoga class. It was the first and only time I’d ever done kundalini, but it had a profound impact on me. It wasn’t the movements, it was the philosophy of our yoga instructor. He told us a yoga practice was important because it was an opportunity to learn how to deal with adversity. And that it was a chance to face ourselves. That all of our baggage and crap could bubble up and we could deal with it there in a controlled environment. He cautioned that if we didn’t make space to deal with our crap right there, we’d still have to deal with it, but it would come out in our work, in our relationships and all these other areas of our lives.
Your old narratives, limiting beliefs and the bullshit of your past will also show up in your relationship with your finances. So while we can try to simply address your symptoms - like you are spending too much and not saving enough - it’s a much better solution to actually deal with your root issues - you feel like you don’t deserve to be wealthy.
Getting your mind right is a work in progress, it’s a continual process. It starts with understanding your mindset and then taking steps to shift it.
What you need to do: When you sit down for weekly finance time, be open and positive. Tell yourself this is easy. Tell yourself that it’s a joy to make and manage your money. Say it out loud.
Goals vs. Habits
Goals are great at helping you translate the qualitative into the quantitative. You can go from saying, “I want to have financial freedom,” to calculating the exact number that would help you achieve that feeling.
Yet, I still fantasize about not having goals. I’ve noticed that sometimes trying to achieve goals makes you lose sight of why you had them in the first place. For example a goal of earning $120,000 to support your family because you love and care about them is great, but if you’re neglectful and unavailable because you're overworked and completely focused on the number, then you’re achieving the metric, but losing sight on the feelings and the reason driving them.
Goals are great, but habits are better. In the long run, goals can’t be achieved without great habits. And instead of feeling bad about not hitting the goal, you can feel good about having a good habit.
What you need to do: Write down your financial goals. Rank them by when you'd like to achieve them. Anything you can to achieve in less than a year, are short-term goals; 1- 5 years are intermediate and 5 years or more are long-term. Look at your short-term goals. Re-write these goals as daily habits. (Example: Goal: save $10,000 in your emergency fund. Habit: Save $28/day) Can you start any habits today? Do the same for your intermediate and long-term goals.
Step 2: Get to Know Your Numbers
After you’ve gotten primed, the next step is to figure out how much money you really need by reviewing your expenses over the last 3 months.
First, determine your tool of choice. The tool is what you’ll use to sort the last three months of your expenses. If you regularly use more than one checking account and credit card, using a tool, like an app will make this part of the process less painful (in theory).
An app like Tiller HQ is a great tool for tech-oriented people (it’s like a spreadsheet, but better).
A classic pen and paper works if you prefer to stay analog.
Once you’ve picked your tool, it’s time to grab the data. With an app like Tiller HQ, once you get your account set up, it’ll automatically pull the last three months of transactions. If you’re going old school, you’ll need to log into your accounts to download the last 3 months of personal bank and credit card statements.
Start categorizing your expenses, but only use three simple categories. Categorize every single transaction into one of the following three:
Bills + life: for essential expenses like rent, student loan and debt payments, utilities and groceries (sometimes I call this category bills, bills, bills).
Fun + b.s: for the fun, non-essentials stuff like shopping, hobbies and vices
Savings/investments + goals: this is money you put away for future goals like retirement, putting on a wedding, starting a business, buying a house, traveling, etc.
Just a note about categorizing: If you want to categorize everything more specifically you can, but make sure you still use the three categories as the main or parent categories. I think it’s easier using only three categories, but I realize some of your totally insane and you want to be more specific for some reason that is unclear to me.
After everything is categorized, it’s time do some math.
Monthly Totals: For each month, add up the category totals so you can see what your monthly totals are for bills, fun and savings. Add up all the categories each month for monthly totals.
Get a Monthly Average: Find the monthly average total for each category. You get the average by adding the 3 monthly totals in each category and dividing by 3. Find the average monthly total for the combined three categories. This is your monthly nut - the amount you’ve spent, on average, each month.
Add a Buffer for Good Measure: If you want to add a 10% buffer to the averages, that’s cool and it’s totally optional. Overachievers, I’m looking at you!
Map It Out Nicely: Use a clean spreadsheet or a new chart or new piece of paper to map out your average monthly expenses.
Step 3: Budget Without Budgeting
Fill in any gaps and make any changes
Review your mapped out monthly expenses. Did you miss any one-time expenses, like insurance that you pay for in full or annual bills like car registration? Make any one-time expenses a monthly expense by dividing the one-time payment by 12. Then add the expense to the correct category. Example: $120 car registration / 12 = $10/month in the bills + life category.
Do you want to add anything or take anything out?
Budgets can be aspirational. Add in expenses you want to have or goals you want to reach; like a super bougie gym membership or an additional savings for a down payment on a house.
You can also reduce or get rid of expenses that you no longer want to have. After cutting expenses, shift that money into another category. For example, reducing your fun + b.s. spending by $100/month and increasing your savings by $100/month.
What are the new totals? With the new changes, recalculate and find out your new monthly totals. Make sure your totals don’t exceed your income; if they do, go back and make adjustments so you’re living within your means.
If you’d like to download a PDF of this checklist, drop your email in the box below and we’ll send it your way
Restructure your accounts and how you spend your money
Bills + Life: Use a separate checking account for all the expenses in the bills + life category. Only use this account to pay for these expenses.
Fun + b.s: Open a new checking account for fun + b.s. You should only be using this account for your non-essential, fun and b.s. spending. The amount you put in here is determined by the budget you made, but also what happens each month with your spending. If you don’t have enough for savings or your bills, considering cutting back here.
Savings, Investments + Goals: If you get paid the same amount regularly, you should set up automatic savings directly from your paycheck. If not, make your transfers during weekly finance time.
How does the money flow?
Here are you two options. You can dump all the money into an account and then make the transfers or you can have your paycheck split among the accounts. Go with what works for you.