Starting a budget is a fundamental part of personal finance and I’d be remiss if I didn’t write about it.
I’m fortunate enough to be out of debt but I realize debt is a reality for many. Luckily, smart budgeting can help you tackle it. So I’d like to share some of the tools that have helped me manage and ultimately tame my debt in the hopes that they will help you too.
Budgeting isn’t an attractive term. At its core it’s about limiting our wants. And who signs up for that, right?
Whenever I ask my friends or family whether they budget, they often reply with yes. But when I pry a bit, I find that for them budgeting means on the fly decisions. If it’s too expensive at that given moment, they don’t buy it.
But the process of spending shouldn’t be a spur of the moment decision. It should follow a basis and one that you’ve planned for.
Budgets are Inherently Painful
Budgets can be fun killing demons. Limiting our wants is counter to our nature as humans. But budgets are also the way to financial happiness. And unless you’re rolling in it, itemized budgets play an integral part in personal finance success.
Yes. You can’t keep track of all your spending in your head. It’s unrealistic. Think of your last weekend – what did you spend money on? Did you buy gas? Enjoy a night out on the town? Buy a new dress for a date? Can you tell me how much you spent exactly?
Expenses add up quick. I guarantee if you look over your past expenses you’ll discover you spent more than you had originally thought.
The Key to Budgeting is doing it in Real Time
Calculating your expenses at the end of the month doesn’t help you. The damage has already been done. That’s why it’s imperative to know where you stand every day with relation to your budget.
If you haven’t been keeping a budget, it’s understandable if you find the task initially overwhelming. Tracking, recording, and planning expenses isn’t all too difficult but doing it consistently is. The good new is there are tools that make the whole process easier.
How to Start a Budget: Getting Started
In an ideal world you should account for every dollar you earn and spend. If you think your money is already too tight for a budget, you have all the more reason to start one. Knowing where every cent is going is incredibly useful information.
I track every item. To make tracking easier, I break each item into a broader category. For me these categories include:
- Transport (Gas, Bus Fares)
- Travel (Airfare, Hotels, etc)
- Everything Else
Looks pretty simple, right?
It is. But there’s also an extra layer to all these categories. I have subcategories for smaller purchases that fit within the main category.
Here’s an example of my subcategories within Utilities:
- Internet/Cable TV
- Cell Phone
- Auto Insurance
- Health Insurance
You might be saying to yourself that Auto and Health insurance aren’t really utilities. And you’re right. But it works for me – utilities in my mind account for stable recurrent monthly expenses.
And at the end of the day, your budget has to work for you. So arrange it as you see fit.
A Simple Budget to Work With
If you don’t have a budget, it’s probably because budgets seem intimidating to you, or they are a hassle to set up and maintain. I hear you.
That’s why my goal with budgeting is to keep it as simple as possible.
One of the simplest budgets to work off of is the 60% Solution. Basically, this budget asks you to fit your regular monthly expenses within 60% of your gross income, so you have room for savings, retirement, and spending money(fun money). These percentages aren’t concrete but here are the rough guidelines of the plan:
- 60%: Monthly Expenses
- Includes housing, food, utilities, insurance, Internet, transportation.
- 10%: Retirement
- You might already be automatically deducting from your paycheck for a 401(k).
- 10%: Long Term Savings or Debt Reduction
- If you’re debt free you can invest this money into something like stocks or an index fund. If you just got out of debt this can be your emergency fund. And if you’re in debt this portion can be used to pay off your debts. You can even tweak this plan so that you draw from retirement and allocate 20% towards debt reduction.
- 10%: Short Term Savings
- This is for periodic expenses such as auto maintenance and repairs, home repairs, gifts, etc. The idea is to use this savings account when you need it. When these expenses come up, you will have money for them, instead of pulling them from other categories or adding them to your debt.
- 10%: Fun Money
- My favorite section. You can use this money to splurge on yourself – eating out, movies, video games and more. Treat yourself here, guilt free.
Tracking your Budget
As I mentioned before, the hardest part about budgeting is to consistently track it. I use a mobile app on my iPhone to help. It’s convenient as I always have my phone and can update my budget either immediately after making a purchase or in my down time.
That said, here are some others ways to track your budget.
The envelope system is a basic tracking system. You create a budget and allocate your funds between various categories. Then set aside an envelope for each category, and put the money you’ve allocated for that category into the corresponding envelope.
The idea here is you pull money from the envelopes as you spend. And when an envelope runs out, you’ll know you have spent your allocated amount.
Positives: This system is simple and effective. It has quite the psychological effect too – seeing your envelope’s content shrink makes it much more difficult to continue spending.
Negatives: If you’re a heavy credit or debit card user this cash-only system is less effective.
If you use cash for only a few categories, it’s still helpful to adopt the envelope system. It works particularly well for groceries, gas, and fun money. As an example, if you go grocery shopping take with you the designated groceries envelope. Peek in and you’ll know how much you have left to spend before you go shopping. Then after shopping, you’ll see how much is left. It’s simple and effective.
An Excel Spreadsheet
If you’re familiar with using spreadsheets this is a solid option. You can either create your own Excel budget or find a pre-made template online and customize it to your liking.
If you want to share your spreadsheet(via the cloud) I recommend using Google Doc Sheets, which is essentially a copy of Microsoft’s Excel platform.
Positives: Excel is an incredible platform for analyzing data. Budgeting with a spreadsheet is flexible and makes looking back on past months easy. You can track to see what’s working and what’s not.
Negatives: Excel requires discipline to use. You have to set aside time to input your expenses into Excel. If you’d like to enter your expenses in real-time this isn’t the best option. Sure, there are mobile apps that allow you to access spreadsheets, but they aren’t too intuitive and friendly to use.
If you’re looking for an automatic budget tracking system this is the best product out there today. Connect your debit, credit, and other accounts into Mint and let it track all your financial activity. If it sounds too good to be true, you’re correct. Mint isn’t without its own kinks. But the Mint team is making strides everyday.
Positives: Mint is fairly accurate with auto categorizing your spending which makes the entire budget tracking process automatic.
Negatives: Mint isn’t perfect with it’s auto categorizing process yet. Additionally, Mint removes you from actively dealing with your budget. Which in my experience, leads to poorer budgeting success.
I track my budget with my iPhone. You can take a look at some recommended apps here. There’s a variety of options available – from paid to free.
Positives: If you’re like most people, you have your smartphone with you at all times. That allows you to enter your expenses in real-time and track your budget anytime, anywhere.
Negatives: There are a lot of budgeting apps to choose from. Finding the right one for you can be a challenge. Every app I’ve used has some limitations or quirks.
I also highly recommend taking a look at You Need A Budget (YNAB) for a fantastic desktop and mobile budgeting tool.
Some Extra Advice
The following points are items that I’ve experienced firsthand to be helpful:
- Pay in cash when you can. Making payments with credit cards and debit cards is fine and convenient but physically feeling your money and giving it to someone is powerful. It makes overspending much less likely to happen.
- Automate Savings. If you can, try to set up a system where every time your paycheck is deducted you transfer a set amount to a savings account. Use a high-yield online account such as Ally or ING Direct.
- Pay bills online. Paying bills online is faster than using the Postal Service and hopefully helps ensure your payments aren’t late. If possible, consider making these payments automatic too.
- Dump unused credit cards. Having multiple credit cards is a headache. Simplify, and you’ll have less to monitor. You’ll also decrease the chances of forgetting to make a payment.
- Set aside time every week to budget. Devote about 15-20 minutes per week to ensure your finances are all in order. It’s all you really need to simplify your financial life, reduce headache, and prevent messes from happening.
If you have any other tips or tricks you’d like to share, please leave a comment below. I’d love to hear how you track your budget too.