Understanding Your Numbers for Financial Control

We've talked before about how important it is to have a budget for your business, and for your household. But we find that the word “budget” itself has a bad rap. It feels like a punishment or a restriction. That’s why I like to call it a spending plan. A spending plan isn’t about limitation; it’s about being intentional about where your money is going. It's about understanding your numbers your income versus your expenses so you have a bird's eye view of your spending habits and can make better decisions.

It's astonishing how many business owners we run into who don't know their numbers or have stopped keeping track. They often operate on the "bank account balance" method: if there's money in the bank, they're good; if not, they're not. They only do their numbers for taxes, which is a major problem. This reactive approach can keep you from seeing the bigger picture and planning for growth.

The Problem with the Bank Account Balance Method

A common mistake is thinking of budgeting as simply not spending below a certain threshold. For example, a business that makes $50,000 might think they are "good" as long as they keep $20,000 in the account. While they may have done the math in the beginning, they often forget to factor in growth, new staff, or other expenses. Their expenditures grow without them noticing, and what was once a healthy profit margin shrinks, leaving them with far less than they thought they had.

This is why I'm a big believer in the saying, "When you know better, you do better". A lot of people don’t have a spending plan either because they don’t understand its importance or they don’t know how to create one. We’re going to help you with that.

A Backwards Approach to Budgeting

One effective method we've found is the backwards approach. Instead of starting with your income and limiting your spending, you start by listing all your expenses first. This is especially useful for a household, as the categories are often easier to identify.

Start with your fixed and biggest expenses first:

Rent or mortgage, Utilities, Childcare or daycare, Medical care, Food and groceries

Listing all your expenses and totaling them can be eye-opening. It tells you how hard you really need to run to cover your costs. Once you have that total, you can compare it to your income. If you find your expenses are too high for your income, it’s a clear sign you need to either make more money or cut some expenses.

Prioritizing Your Spending: Needs, Goals, and Wants

A great way to refine the backwards approach is to organize your expenses by priority. We define three categories:

Needs: These are non-negotiable, essential expenses that keep you afloat. Think rent, mortgage, and cell phone bills.

Goals: These are expenses that help you achieve future financial freedom, like paying off debt, saving money, or investing.

Wants: These are discretionary expenses for enjoyment that are not essential to survival.

We also recommend treating your savings and retirement contributions as a "need." It should be an automatic transfer that comes out of your paycheck before you even see it. We like to have bills on autopay and savings in a separate, less-accessible account so you don't even have access to the money for things you consider necessities.

The Great Debate: Needs vs. Wants

There's a saying:

You can make a want a need if other needs are not there to take its place. This came up when we were discussing a monthly massage. While one of us saw it as a “want,” the other argued it was a “need” because it helped with stress, allowing the person to operate at a higher level. This highlights a key point: everyone's definition is different. It's why we suggest couples each draft thier own spending plan first before combining them. It reveals what each person truly values.

For businesses, the concept is similar, but instead of "wants," you deal with variable expenses like marketing and staffing. While rent and payroll are fixed needs, marketing spend can be adjusted based on growth phases. Consulting a financial strategist or CPA can be a game-changer here, as they can help you benchmark against industry standards and identify areas for optimization.

Tools to Get Started

Creating a spending plan is easier than ever thanks to technology. Tools like Rocket Money, Mint, and Credit Karma allow you to link your bank account and track your expenses automatically. For businesses, many industry-specific software programs and even tools like ChatGPT, Gemini and Grok can provide valuable insights and reports.

Ultimately, the goal is to know your numbers and gain control. Don't be afraid to face the reality of your finances. This discipline allows you to manage your family, plan for the future, and grow and scale your business.

We hope this helps you get started. Let us know how you typically go about your spending habits. And if you're feeling brave, share your biggest financial lesson.