If you are ever going to be comfortable with your finances and prepared for your financial future, you will need to have a budget. I am not sure that there is a better way for someone to become knowledgeable about the entirety of their financial situation. It gives you a great picture of your incoming and outgoing money all at once.
Now, having a budget may look completely different for every individual reading this post. If this is your first time creating a budget, it may feel really difficult to even start. Determining reasonable budget numbers for each area in your life may feel impossible. For those who have had a budget for awhile, it may be on autopilot, something that you look at every now and then to stay on track. For some, like Allyson and I, having a budget is more about tracking spending than planning spending, since we tend to avoid spending money regardless of what our budget says. And some of you may have a budget but find that it is almost impossible for you to follow it. Regardless of your personal situation, I hope I can provide some useful tips and tools for you to improve your budgeting skills.
First things first, how do you make a budget from scratch? There are a lot of options out there for tools that will help you do this. I’ve heard good things about the site youneedabudget.com, although I’ve never used them and I’m not a huge fan of paying for a budgeting software. Instead I would personally recommend Mint.com. Mint collects all of your accounts into one place and presents you with an intuitive interface detailing your income, spending, spending categories, and great graphs like your net income over time and net worth. My recommendation for starting a budget from scratch would be to set up an account on Mint. From there you will be able to see your spending from the past several months (assuming you don’t use cash for everything). Getting a picture of your current spending is a great starting place to budget and will help you set attainable, realistic spending numbers. Take a look at where your money is going and make sure that it aligns with your priorities. Use those priorities to then limit your spending in certain areas. Make sure that you are budgeting less than your income (obviously) and your priorities should be paying off debt and saving for retirement before spending money anywhere else. Even if you don’t have debt and are contributing to a retirement account, you should always challenge yourself to spend less and save more, since that is the simplest path to financial freedom.
If you have a budget already but find that you struggle to follow it, here are a few tips. If you spend more money than you make, it’s an emergency. A favorite method of Dave Ramsey is to use cash for everything. Since the only way to spend more than you earn is to use a credit card, this is a great way to get away from this habit. Get envelopes for every single one of your budget categories and put cash in each envelope corresponding to your budget for the week or month. As soon as you run out of cash you’re done. This should help make spending feel more personal and painful, rather than the emotionless swiping of a credit card. In fact, if you have credit card debt and still spend more each month than you make, it’s probably time to cut those credit cards up to remove the temptation. Maybe your problem is that you spend more than your budget, but you don’t spend more than your income. I would suggest setting up auto deposits of your income into a retirement account or savings account, rather than a checking account. Pay yourself first as they say, and only put money in your checking account that you have budgeted for and are planning to spend.
Regardless of where you are in your budgeting, there are always ways to improve. Allyson and I have learned a few things over the years. One key thing that we do is budget our priorities. I mentioned this earlier, but we want to spend money on things like home improvement and gardening that not every family spends money on. This means that we cut in other areas as much as possible, like in our eating out or shopping budget. We’ve also found that we feel more comfortable and on top of our finances when we plan ahead for large or surprise costs. This means that we have budget items for auto work, insurance, property taxes, registration. Every month we save some money for each of those items and put that money into our savings account. That way, those items become things like $50 or $100 a month items, rather than $600 or $1200 items when they become due. This has been especially vital for me personally. I used to get stressed every time we bought tickets to go on vacation or home for the holidays. Costs would be over $1000 and it was painful to me. Now, we set aside $200 every month for travel, so when we spend money on our trips I know that it has been planned and isn’t a huge cost that came out of nowhere. What are the big items that you spend money on infrequently? Make sure that you set aside money for those items each month. It will make sure you never have to go into debt for a big bill or surprise car repair, and you’ll feel more in control of your finances.