Before giving specific budget tips, I’d like to explain what a budget is and why you should have one. If you’re a budget expert, you can skip down to the tips I outline below. However, before you start the budgeting process, I recommend you get real clear on why you’re setting up a budget in the first place.
What is a Budget?
A budget is simply a method to measure how much you spend (expenses) compared to how much you planned to spend over a given period. An effective budget will measure spending by category typically from month to month. If you stick with a budget for more than two year, you’ll be able to compare year over year spending. It’s much more than an accounting method. It allows you to see how well you “perform” over time in specific spending categories like housing, groceries, entertainment, and utilities.
A well thought out budget includes every expense that you might incur over a year’s time, even if it doesn’t occur every month. For instance, I get the oil changed in my car every three months. Instead of trying to come up with forty bucks when I pull into the local Jiffy Lube, I set aside fiften each month. I feel confident I’m taking care of routine, and necessary, car maintenance without the worry that I might be dipping into the grocery money.
Why Make a Budget?
The most common excuse I hear for not having a budget is loss of freedom. People are afraid a budget will limit their “fun and spontaneity”. It will cramp their lifestyle. But, if you’re living beyond your means, month after month, isn’t that living a fantasy life? A fantasy you’ll eventually have to pay for?
Need a little more convincing? The following are all positive reasons you should have a budget.
Paradoxically, a budget gives you more freedom. How? It takes away the guessing. It relieves the stress of not knowing. Of feeling proud and satisfied that all your bills are paid…on time…every month. How many times have you spent a miserable vacation knowing everything is being charged to your credit card? And knowing you’ll spend the rest of the year paying it off, or longer.
A budget gives you control over your life, now and in the future. It sets off the emergency sirens, warning you about serious money troubles approaching. Most hard financial circumstances don’t happen overnight. They start small and grow into monsters as finances take a back seat to other priorities.
Who’s controlling who? Having a budget means that you’re committed to controlling your spending instead of the other way around. You’re developing a habit that will serve you for life. Did you catch that? Serve you.
A budget allows you to spend your money where you choose. Years of overspending, especially debt spending, limits your spending later in life.
A budget helps you plug your spending holes which frees up cash for emergencies, vacations, car replacements, and fun activities.
Have you ever felt like you finally got your spending under control but then got whacked by something unexpected? Something that cost you money? Blown out tires, brakes that go bad, water heaters that go out. These are all unexpected expenses I’ve had within the last two months. Thanks to an aggressive savings plan, I wasn’t derailed. Don’t let everyday life sink you financially.
When is the best time to start a budget? Right now. When is the next best time to start a budget? Right now! Below is a road map to help you ride out a smooth budget setup.
Get the whole family involved.
If you’re used to buying whatever you want (or whatever your kids want) a sudden shift to “no, you can’t have that” will cause hard feelings. Sit down together and come up with your own savings goals. Saving “up” for something the whole family can look forward to is better than using typical, negative answers like “we’re broke, Johnny, we can’t buy stuff like that anymore.”
No blaming. No shaming.
I recently heard on the radio that many parents would rather talk to their kids about sex than about money. Amazing! We’re taught early in our lives that money is taboo. Never ask anyone their salary. Talking about money is especially painful for someone who has terrible spending habits. As married couples, we must come to a “meeting of the minds” on the financial front. You’ll never get out of a financial hole if you and your spouse are at odds with each other on this topic..
Lay it all out
Income, all expenses (yes, ATM fees are expenses), debt payments, bills you absolutely must pay. You want an anchor point to measure against your future successes. Make it a solid one.
I hate receipts. That’s why I shun them religiously. Use a personal financial software package. Most software is able to download transactions from your bank account as they clear. My advice. Track every expense every day. Every. Single. Day. If you know you’ll have to account for your spending each day, you’ll tend to spend less.
Focus on Your Big Expenses
It’s funny to eavesdrop on conversations about saving a few pennies on gas by driving ten miles out of town. I know others who check for gas prices online then spend their entire lunch hour filling out a spreadsheet to see which station is the “one cent lower” winner. There are forums out for these things, people! Nobody ever got out of debt by saving three cents on a gallon of gas.
So, what to do? Start with the biggies. Like housing. Are you struggling to pay your mortgage or rent? Moving is hard but it could mean the difference between barely making it and creating a much needed financial margin in your life.
Is it time to downsize your vehicle as well? I once had a friend who spent over a thousand dollars per month on vehicle payments—not including insurance. And that was twelve years ago. Other large budget items include groceries, entertainment, alcohol, cigarettes, and utilities. Cut out the cancers then trim back the fat.
Flexibility is the Key to Good Budgeting
We all make mistakes. And, with budgeting, most of those mistakes are made when you first start. So, what seems like complete failure “in the beginning” is really part of the process. Don’t stop!
Through my own trial and error, I’ve concluded it takes about three months to get a handle on your budget. That includes tracking your current situation and learning to live within your means.
I’ve seen many people, myself included, who gave up on the budgeting process because there was no “why” behind it. Why the heck are we depriving ourselves, right? Budgeting, by its nature, is constrictive. What I mean is, we create a budget because our spending is out of control, or unknown (in which case it’s probably out of control).
Let’s face it, Americans are overspent. That’s why we’re living with unprecedented debt levels. A budget will help you live the lifestyle your income allows and free you from the constant anxiety of financial ignorance.