As part of our financial series, we would be remiss if we didn’t talk a bit about budgeting. Budgeting means different things to different people, but making and strictly sticking to a specific budget is the best way to have your money work for you and to achieve your goals (both long term and short term). It is also critical to establish budgeting skills now. Like any habit, it takes time and practice to become a normal part of your life. Of course, there are some wealthy people who have never budgeted, but the vast majority of people that achieve financial independence have done so through budgeting. My parents still have a budget because they feel like their money goes much further when they are on a budget. Budgeting is a key process to be committed to in order to achieve your financial goals, regardless of how much money you make, but the earlier you establish these patterns in your life the better.
A budget is a plan for how you will use your money for a certain period of time. Most people who budget do a monthly budget, as many things are paid monthly. It will take several months of adjusting and improving your budget before it will be right for you; no one creates a perfect budget their very first try. The first step to building a budget is to look at all your expenses on a monthly basis and put them into categories. A lot of programs recommend looking at the last 3 months of expenses so you can get an idea of what you spend in each category on average. You also will want to divide your expenses into Fixed Expenses and Variable Expenses. Fixed expenses do not change month to month; variable expenses do. Here is an example of some common expenses, divided into fixed and variable amounts to get you started:
| Fixed Expenses Mortgage/Rent Car Payment Insurance Payment Emergency Fund Internet Bill Netflix Other Bills | Variable Expenses Utility Bills Groceries Eating Out Fuel/Transportation Home Supplies Entertainment Miscellaneous |
Once you have an idea of what your monthly expenses look like, you can compare them to your financial goals. Looking at your spending versus your goals can help you adjust what you do to be more in line with what you’d like your budget to look like. Then you can set realistic financial goals and use your budget to help you achieve them. Some goals you might want to achieve include building up an emergency fund, getting out of debt, investing for retirement, being able to give generously to a cause or organization you believe in, or saving up for a dream vacation. Whatever your goals may be, make sure they are included in your budget. A wise person once said “if you fail to plan, you plan to fail”.
Side note: most financial advisors or books or classes advise this order on some of these goals.
- Save a 1 month emergency fund (equal to 1 month of income)
- Eliminate high interest consumer debt (usually credit cards, furniture loans, etc.)
- Save a 3 month emergency fund (equal to 3 months of income)
- Risk management (ie insurances)
After figuring out what your goals are, look at how much you make and subtract out all of your expenses until you know how much money you can put toward each category. I ended up canceling several subscriptions we had and started extra couponing to put more money towards the things that are priorities to us. I feel like our money is actually going towards our goals instead of randomly being spent on things we didn’t use, want or actually need! I still don’t love working on our finances (does anyone like paying bills?), but I no longer have stress and anxiety when doing it. Our money is working the way we want it to!
There are now a lot of different ways to make and stick to a good budget for you and your family. I personally use the “Every Dollar” app, because it’s free and it is very easy to use and intuitive. I set up my budget on the computer, and my husband and I each use the mobile app to log transactions. Then, when deciding to make purchases in a specific category, we check how much is left in that category before buying anything. You also have the ability to make funds to put away a bit every month, or to log how much debt you have and make payments towards it every month and the app will track how much debt you have left or how much money you have in each fund. I find it a lot easier than doing a spreadsheet or putting cash in envelopes, but those are legitimate systems too, and different things work for different people.
At the end of making a budget, make sure you stick to it the best you can! It won’t be easy at first and there is definitely a learning curve, but it just gets better and better. And once you are good at it, you can really use it to your advantage. When you get a pay raise, for example, you don’t have to act like you did; you can just put that extra money towards getting out of debt faster, or towards saving up for moving expenses, or your dream vacation when you’re done with training.
Let’s have some comments on this post! What systems do you use for budgeting? How has budgeting helped you? What challenges have you faced with starting or sticking to a budget?
Special thanks to our sponsor Bobby Scott for editing and correcting this post.
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