How to Budget
When we talk about how to budget, we're really talking about how to plan. So when you're thinking about how to make a budget, you're basically figuring out how to plan what your money should do. There are five basic budgeting tips you'll need to know when learning how to budget.
- How to Budget for Large Purchases
- Your Savings is an Expense
- How to Budget in Flexibility
- Facing Budget Reality - Cut Back or Increase Earnings
- Creating Breathing Room by Cutting Back on Debt
In "How to Make a Budget", Jon outlined the steps to setting up your initial budget: (1) tracking expenses (2) grouping them into categories and (3) creating the budget to live within your means. These tasks are all ongoing as you continue to plan, modify your plan, and try to stick to your budget from month to month. But, you will also need to understand the Five Basic Budgeting Tips listed below to be truly successful at following your plan and achieving your financial goals.
Five Basic Budgeting Tips
Tip #1: How to Budget for Large Purchases
When planning for large purchases is to make sure you include not only the fixed, known expenses, but also the variable, unknown expenses. Your six-month car insurance premium is a fixed, known expense. Your tires needing replacement is a variable, unknown expense.
The key is to estimate these purchases and break down your obligation into monthly increments, then make sure you're setting aside those amounts each month. With the traditional envelope budgeting method, you would set aside $100 into your Car Insurance envelope each month for six months if your 6-month premium is $600.
Back in the days of pencil and paper, tracking these types of things was doable, just not enjoyable. In these days of computers, software built with budgeting in mind makes handling large purchases a breeze. You simply budget that $100 into your Car Insurance category in the software, and it tracks the balance accumulation for you.
Tip #2: Your Savings is an Expense
You would never dream of not paying your electricity bill, rent, or gas bill. But, we see a lot of people not paying themselves. The key is to treat your own personal savings as a legitimate top-line expense. You want to pay yourself first, before you set aside funds for your other obligations. You're basically paying yourself now, so you won't have to work later!
If you're using software such as YNAB or Quicken, you can create a Savings Expense category and record all outflows to savings as an expense. Doing this also lets you run meaningful reports. For example, a great number to know would be what percentage of your gross income is being saved for retirement.
Tip #3: How to Budget in Flexibility
An important principal in budgeting is to make sure you give every dollar a job. You must make sure every dollar is accountable. This does NOT mean that you're required to only spend the minimum possible in every single spending category. If you need more flexibility in your budget (you'll feel it if you do) then you should build that into your budget. Don't like counting pennies while you're at the grocery store? Budget a bit of padding in there and be content with that!
Budgeting is planning, and you can plan some padding into your budget so you don't emotionally rise and fall on every over or under in your spending categories.
If you are using personal budget software, make sure it allows you to modify your budgeted amounts. What you don't want is to be restricted in how you assign your dollars jobs just because the software won't let you make a few adjustments. Adjustments are a part of life -- if you are not having to make adjustments, you are probably not budgeting!
Tip #4: Facing Budget Reality - Cut Back or Increase Earnings
Most of the time when people learn how to budget, and implement these basic principles in their life, they find they have "more money" than they did previously. This appearance of more money stems from the fact that their awareness has changed, and they are being more selective about where they are spending their money.
On occasion however, people realize that they have being living beyond their means. If this is your case, then feel comfortable in the fact that you at least KNOW where you stand. You are faced with two options -- and you can choose both if you want to.
Your first option is to cut back. Evaluate discretionary spending such as subscriptions, eating out, entertainment, etc. If the discretionary expenses are not offering any wiggle room, it's time to evaluate larger commitments such as the car you are driving -- even where you are living.
Some data analysis can go a long ways here. If you can run a report showing all of your category expenses, you'll quickly see what may be reduced, and what is fixed for the time being. The YNAB Software lets you run multiple reports that show you your categories as stacked bar charts, or pie charts. Use budgeting software to show you where you may need to make adjustments. Whether you actually make those adjustments is still up to you.
Your second option in facing your budget reality is much more enjoyable. You can actively search for ways to increase your income. If the expenses are temporarily higher, you can look for temporary ways to increase your funds by selling things on ebay, working some overtime, or picking up some side jobs. If you're looking at an expense situation that is longer-term, you may consider these short-term tactics, along with some longer-term tactics such as job searching, education, etc.
Tip #5: Creating Breathing Room by Cutting Back on Debt
One of the biggest strains on a budget comes from a person's debt load. If you can pay down your debt, your monthly cash flow situation will improve immensely. Consider implementing the debt snowball method, where you pay extra toward your highest interest rate debt, and minimums on all others. Once that debt is paid down, you roll its minimum and all extra funds toward the debt with the next highest interest rate. You may consider using a debt reduction calculator to do all of these calculations for you.
How to Get Budget Help
One of the great ways to get help when learning how to budget, and then implementing those practices, is to find a support group -- whether it be local or online. Finding like-minded people all striving toward the same goals can be very motivating. I'm obviously a fan of the YNAB Community -- friendly people committed to budgeting!
About the Author
Jesse Mecham is the founder of You Need A Budget, a money management methodology that helps people start living a richer life. His money management methodology has helped tens of thousands of people gain control of their money, improve communication in their marriage, save more, and pay down their debt.