Things I Wish They Taught Me: Budgeting
Growing up, I was always pretty frugal. I definitely would categorize myself as a saver back then, and as a result I was never short on money for the things I needed. Because of this, I never really thought too much about a budget. I was vaguely aware of the term and I got the idea of what it meant, but it never really seemed applicable to me since budgets were for “broke people”. Thinking like that was a mistake.
Flash forward to my mid twenties and I started keeping a “rough” budget. This was a quick review I would do maybe two or three times a year just to compare how much money I had coming in versus how much money I had going out. This became a sort of encouraging practice as I always kept my expenses lower than my income, so two or three times a year I’d get to pat myself on the back for having a positive green number at the end of this comparison. A few years later — as I get older and wiser — I started running a detailed budget every month. This means actively tracking every single one of my expenses versus every single source of income each and every month. This practice has allowed me to optimize my spending, take the time to consider the value of my purchases, and recalibrate to make sure my spending and savings rate align with my values and long term goals. This has been a game changer, and as I get older it pisses me off that the importance of a budget wasn’t made clear to me growing up.
What Exactly Is A Budget?
A budget is simply an account of your money in versus your money out. Not an account like a bank account — more like a “record”. There are a couple of ways you can do this, and the effectiveness is going to really depend on which method works best for you and your preferences. Remember — the best way to run a budget is the way that you’ll stick to.
Loose budgeting: This can be done on a computer or by hand, and it’s simply a very rough overview of what your money is doing. You add up all of your expenses over a period of time, then add up all of your income over that same period of time. You subtract expenses from income and voila — you’ve got your over/under number at the end of that period. This is a super simple way of doing it, and probably not the ideal method. This is better than nothing, but I’d recommend going a little more in depth.
Expense tracking: Ok, I call what I do “budgeting” but in reality it’s more like expense tracking. I do this because I’m frugal with my money and I am naturally disciplined with how I spend my money. That being said, what I do probably isn’t the most efficient method of handling my cash. Basically what I do is I review my expenditures and my income every single month, and based on how I did over that month I make adjustments for future months. So for example, if I ended a month in the red $300.00, then I know next month I have to really be careful with my spending to make up for it. If I was green $2,000, then maybe next month I can buy myself that kettlebell I’ve been looking at… A drawback to this method is you won’t be able to make adjustments in real-time. If you aren’t disciplined you might not realize how deeply in the red you’re getting yourself until it’s too late.
Active budgeting: Active budgeting is kind of like expense tracking but done in real time. Every time you receive money or spend it you enter that information into an app or spreadsheet so you can see how you’re doing in real time. In fact, the ideal practice for doing this way would be to actually categorize your spending. For example, an active budgeter would have different “buckets” for various expenses such as groceries, gas, insurance, utilities, cell phone bills, mortgage, etc. You would figure out the rough estimate of these costs ahead of time and assign what you project that dollar amount to be every month (or whatever time period you choose) to each “bucket”, and as you input your expenses your budgeting app would automatically fill your buckets giving you a real time display of how close you are to being under budget or over budget. The biggest benefit to doing it this way is: say you were halfway through the month and you had a look at your budget and realized you were high on your grocery budget, and you didn’t think you could finish out the month and still be on budget. This method actually allows you to steal some of you budget room from other categories to balance out your budget. So for example, you’re high on the grocery budget and you’ll be in the red by end of month at this rate — you could simply take some of that budget room from a category like “dining out” or “entertainment” or whatever you could reasonably sacrifice to keep you overall in the green — meaning you have excess money at the end of the month.
The Importance of Budgeting
Now that you know a couple ways to run a budget, you really should know why It’s so important. Did you know that according to a survey by the National Foundation for Credit Counseling, 65% of people who budget are reported to feel more confident in their financial future than those who did not budget? The same survey found that 72% of budgeters were able to pay their bills on time each month, compared to only 42% of non-budgeters.
Budgeting helps you manage your money by making sure you’re informed about your income and expenses. you can’t fix a problem is you aren’t aware it exists, and you definitely can’t optimize your situation if you don’t even know the baseline from where to start looking for efficiencies.
Budgeting helps you save money. By seeing all of the things you spend your money on, it forces you to consider what you’ve bought, and decide if some of the purchases were stupid. If you see a lot of stupid purchases, that might be your wake up call to be more mindful about your expenditures and ask yourself — will this give me lasting value, or just a fleeting couple of hours of pleasure before I forget about it entirely? By saving more than you spend you’ll be able to build an emergency fund — a vital tool that EVERYONE should have — and be able to save for your long-term goals like retirement, home buying, purchasing/starting a business, or whatever else your heart desires.
Budgets reduce stress. I know, it’s a bit more work but trust me, being absolutely broke with maxed out credit cards and not being sure if you can afford to pay for groceries is a lot more stressful than taking a minute or two here and there to update your budget. In fact, when you’re on top of your budget and have your money situation streamlined so that you’re consistently green at the end of the month your budget can actually give you permission to spend! You can set goals for your budget — maybe you want to take a dream vacation. Some people just throw that on a credit card and end up absolutely burying themselves in debt paying hundreds or thousands of dollars in interest. Smarter people set long term goals and actually plan for them. By budgeting a certain amount every month to squirrel away to save for your trip you can avoid taking on debt to have that dream vacation, that way you can actually enjoy your vacation instead of being on the beach stressing about how much debt you just took on.
Even if you’re not a bad financial position, budgeting can help you optimize your cashflows for the things that matter to you. When I started reviewing my expenses I found I was paying for some subscriptions that I just wasn’t getting value out of. I also would find the odd stupid purchase every month that weighed on my cashflows a little bit. I usually ended up ahead every month, but not as much as I could have been. I have since made some adjustments to make sure that the money I spend goes towards things that I value. As a result, I now am significantly in the green pretty much every month which allows me to invest more money which aligns with my goals of retiring early and being in control of my own future. Those are more important to me than having the newest cell phone.
Some Tools to Help
There are a number of tools you can use to help you out with budgeting. Hell, you can even do it with a paper and pen if you like!
I use a Google Sheets template — you can get a copy of exactly what I use HERE.
Also, if you’re unclear about how to use it, I’ve got a video explaining it HERE.
There are a bunch of apps out there, some premium, some free. One that my business partner really likes is Dave Ramsey’s app that you can find HERE.
With a quick google search you can find a number of budgeting apps, and many banks include these types of services. In fact, many apps and banks these days will link you accounts and even credit cards to the app so it updates the information for you automatically. This may save time for many people, but I guess I’m old school — I prefer the spreadsheet approach. By doing the work manually it forces me to take a few minutes to actually mindfully consider how I’ve handled my money, and that makes it clearer to me where I can make adjustments versus if an app did all that work for me I’d probably barely even glance at it.
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