This post is Part 2 of a 3-part series on finances, excerpted from the upcoming book, Reclaim Your Creative Soul: The Secrets to Organizing Your Full-Time Life to Make Room For Your Craft. To read part 1, click here.
Why am I talking about finances in a book about making room for your craft? Because finances are one of the major areas that can hinder your creative process. I want to relieve you of your stress about finances so that you can better manage your money and can focus better on your art, whatever your art might be.
I have 4 steps to set you on the path toward financial freedom. Today I will share 2 of these steps, and tomorrow I will share the final 2 steps.
Before you do anything, create a list of everything you spend in a month. Don’t leave anything out. Include regular bills, debt bills, food costs, money spent on entertainment, clothing expenses, and anything else you regularly spend money on throughout the month. If an expense varies, write down the average amount you would spend on that item. Be honest in this process. You are the only one seeing this list, and any discrepancies will only make it harder to gain the upper hand with your money.
Once all you have listed all your expenses, place them in one of four groups: primary living, secondary living, debt, and extra.
Primary living expenses will include things like your rent, food costs, utility bills, and any other bill that is vital to your life.
Secondary living expenses will include bills that you need to pay, but won’t impede your quality of life if you don’t have it. For example, this could include things like gas money or car payment and insurance (since you could take the bus), or your cell phone or Internet bill (since shutting it off would be an inconvenience, but you’re not going to die).
Debt includes bills that you can eventually pay down to a zero balance. This expense list will include your mortgage, car payment, credit card bills, and student loans.
Your extra expenses will include items like beauty (hair care, makeup), gym membership, clothing costs, entertainment costs, gift-giving costs, and vacation costs.
Once you feel like you’ve itemized every one of your expenses under these four groups, scrutinize it even further. Are there costs you’ve included in your primary living expenses that could actually go under secondary living expenses? Are there secondary living expenses you could classify as an extra cost, instead? Prioritize the items of each group until you are satisfied with the complete list.
2. Create a budget
Here’s where this list is going to come in handy. Create an excel spreadsheet that lists every single one of your expenses. I’ve created a handy one that you can access at bit.ly/CreativeSoulsExtras to help you get started.
Note: This link will add you to my mailing list, and will offer you a preview of all of the resources I offer in Reclaiming Your Creative Soul. Please enjoy this gift from me to you, but don’t share it with anyone else! Once I email you the link to my resource page, click on “Financial Budget” to learn more about handling your finances, and to download your free expense sheet.
On your budget list, write the expenses in order of the groups I had you list in the first step: Primary living, secondary living, debt, and extra. Now that you’ve done that, there are a few more expenses I want you to add to your budget: an allowance of pocket money, and an emergency savings fund. The pocket money is yours to spend as you like. But remember, when it’s gone, it’s gone. You do not get to borrow from other funds if you’ve used up all your pocket money. The emergency fund is for all those expenses you weren’t expecting. These are the things you would normally grab your credit card to pay for—a new car transmission, your dog’s broken leg, a chipped tooth, a new washer…. Ideally, this fund will hold $1000, but don’t let that number scare you. With a strict plan in place, you are perfectly capable of saving enough to cover emergencies (just a side note: please be clear on what an emergency is NOT. For example, a night out on the town or a new outfit is NOT an emergency).
Next, pay attention to the grand total of these expenses. How does it line up with your income? Are the expenses less than what you bring in every month? Great! You’re in the minority! Put that extra income to use by adding it to your savings. For the rest of us, we have some work to do.
One of the biggest stresses about money is that we often feel managed by it. With a budget, you are essentially taking back that power. You make the money, so why is your money controlling you? Tell your money where to go, as Dave Ramsey, the creator of Financial Peace University, often says.
Your goal is to create what’s called a zero-based budget. This is where your expenses and income will cancel each other out completely so that the total equals zero.
I understand this is kind of a terrifying concept. The first time I heard about zero-based budgeting, I wanted to take my paycheck and run. Are you telling me that I can’t have any of the money I just earned? Thankfully, that’s not what it means at all. It does mean, however, that you are going to need to budget your extra money instead of just spending whatever you have left over.
Now that you have your expenses listed and see that they equal more than your income, seek out areas where you can trim. I recognize this isn’t easy. You are going to have to sacrifice a little to ensure you aren’t spending more than you make. First, look for the things you can give up easily. Can you live without eating out? Can you let go of your Starbucks obsession? Can you decrease the amount you are spending on clothing? Is your food budget too high?
If your expenses are still more than your income after you’ve trimmed all the extra costs, you are going to have to dig deeper. If there’s nothing left on your list of extras that can be reduced or deleted, you are going to have to start scrutinizing your secondary living expenses. Can you reduce the services on your cell phone? Can you live without television and/or Internet? Can you start taking the bus instead of driving, at least until your finances are more manageable? Or the extreme—can you sell any of your belongings to reduce any of your debt? Can you sell your car and take the bus permanently? Can you hold a garage sale? Can you put a few items on Craigslist that you no longer use? You may need to make some hard choices, and it won’t be comfortable. But these sacrifices are only until your debt is paid down and your budget is much more manageable.
When you have your budget zeroed out, you can move on to the next step: reducing your debt. Warning, the budget you just created is going to continue to change.
To read the final 2 steps toward financial freedom in part 3, click here.