Money Monday 9

A Musician’s Guide To: Tracking Expenses, Budgeting & Cash Flow

Part 2:  Budgeting

INTRODUCTION:

• Do you know your net worth?

• Do you know exactly how much money you spent yesterday, down to the cent? 

• Do you have a mental spending limit?

• Do you know how much profit you are making each month?

If you answered no to any of these questions, and want to get a better handle on your finances, this mini-series is for you.  

As self-employed musicians, it's important for us track our expenses, budget, and manage cash flow, not only for keeping our business finances organized come tax time, but also to maintain/manage our financial stability and ensure the longevity of our career.

Many of the principles and practices that are important for us as musicians to manage our finances effectively can be applied to anyone in any profession.  

By tracking our expenses, creating a budget, and prioritizing cash flow, anyone can maintain financial stability and ensure long-term financial success.  These are universal principles that can benefit anyone looking to manage their finances effectively, regardless of their profession. 

Step 1:  Net Worth

Step 2: Track the $ OUT

Step 3: Budget the $ IN

Once you have a clear picture of your net worth and you’ve begun tracking your expenses, you can then make an informed decision on creating a budget that takes into account your income.

Creating a formal budget plan takes some mental prep work, but it can help you to gain control of your finances and achieve your financial goals.  

Here is a simple step-by-step breakdown:

1. Determine your income: Start by calculating your total income for the month or year. This can include your salary, freelance income, rental income, or any other sources of income you may have.
2. List your expenses: Make a list of your expenses, including fixed expenses like rent, utilities, and car payments, as well as variable expenses like groceries, entertainment, and travel.
3. Prioritize expenses:  There will always be new opportunities and expenses that arise.  It's important to prioritize these expenses and evaluate whether they align with your goals and budget.  Anything can be worth the expense if it helps you on the path to achieving financial freedom.
4. Categorize your expenses: Group your expenses into categories such as housing, transportation, food, entertainment, and savings. This will help you to see where your money is going and identify areas where you may need to make adjustments.
5. Determine your spending limits: Set spending limits for each category based on your income and expenses. Be realistic and considerate of your financial goals when setting these limits.
6. Track your spending: Keep track of your expenses as you make purchases. This will help you to stay within your budget and make adjustments as needed.
7. Review and adjust: At the end of the month or year, review your budget and compare your actual spending to your budgeted amounts.  Identify areas where you exceeded your limits and make adjustments for the following month or year.

Creating a formal budget plan can take some time and effort, because it often involves predicting how much money things will cost, but it can be a valuable tool for some who prefer to micro-manage their finances in order to achieve financial goals.  By following these steps, you can gain control of your spending, make informed decisions about your money, and work towards a more secure financial future.

To me, budgeting can feel like dieting; a sacrifice.  Limiting the amount you spend on certain things over others can also be stressful, and even depressing.

If you are like me, and formal budgeting isn’t your thing…

Create A Spending Plan

While budgeting involves a more formal and sometimes rigid way of categorizing your expenses, a spending plan is a more flexible and less detailed approach to managing your money.  

Similar to a budget, a spending plan can be as simple as a mental note-to-self about where you want your money to go.  What do you value most in life and how can you align your spending to achieve the future you envision for yourself.

Even if you don't have a formal written budget, simply keeping track of your income and expenses can help you to identify areas where you may be overspending and make adjustments to your spending habits accordingly simply by actively noticing them and being mindful of your monthly “mental limits.”

A spending plan involves setting broad mental goals for your spending, such as saving a percentage of your income each month or allocating an amount of money to disposable income.  Simply being aware of what money is coming in, what can be spent, and what can be saved. 

While a budget can be a very effective tool for managing your finances, it can also be time-consuming and overwhelming for some people.  A spending plan can be a more approachable and flexible way to manage your money, particularly if you are just getting started with financial planning.

Ultimately, whether you choose to create a budget or a spending plan will depend on your individual needs and preferences.  The key is to find a system that works for you and helps you to achieve your financial goals.

Up Next:

Part 3: Cash Flow