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Making Sense of Money

Budgeting Is Easy!

Budgeting Is Easy!

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I think budgeting is easy!  The traditional definition of a budget is an estimate of income and expenses for a set period of time.   A budget for me is a structure for achieving a financial goal.   It helps you track your income and how you spend your money.  My approach is to start with my financial goal and I make changes in my spending to achieve it.  Do you use budgets?

Step #1

Before you can make changes to your expenses, you first need to be aware of where you spend your money.  If you were trying to lose weight, you would make a food diary.  You would create a diary of everything you eat.  Tracking your expenses starts with a diary of where you spend your money?  You have to know where you spend your money in order to manage your money.  You have your list of your expenses, what else you spend your money and what you would like to spend.  What is your financial goal?  Is it to reduce debt, increase savings, make investments or just control your expenses?

Step #2

Analyze your expenses!  Where can you reduce your expenses without changing much?  For example, you could replace your lights with compact fluorescent lamps (CFL) and save some money on your utility bill.  You are not giving anything up, but you will need to invest some money in CFLs.  Aside from significantly reducing your utilities, CFLs last 10,000 hours.  You could take your lunch to work a few days a week and save over a hundred dollars per month.  Small changes in your expenses can yield huge rewards.  I wrote an article called “10 Changes Can Make Millions” that provides ten small changes would yield enough to earn over a million dollars over your working career.

Step #3

Some people use budgets to control their expenses.  I don’t think you need a budget to control your expenses.  Establishing a budget, you will set spending limits for categories of expenses and you can use those limits to control your spending.  In fact, I regularly check my spending every time I pay my bills.  I have the additional motivation to wring out every extra penny from my expenses.  Never accept the status quo!  You can either cut the expense such as cable TV or find ways to reduce it or cut somewhere else so you can keep it.  Extra money can be used to pay down debt or add to savings.

Budgeting can force you to get organized, but you do not need a budget to get you organized!  Systematically looking at where you spend your money will help you reduce or change your expenses.  Automate where you can such as mortgage payments, car payments, loan payments, and insurance payments to name just a few.  The more expenses you can automate, it will help organize your finances. It will save your time and avoid late fees.

Step #4

Since you are starting with the goal in mind, Steps 1-3 will help you achieve your goal.  For example, you want to save $2,000 per month.  Up to now, you have only achieved $1,000 per month.  Your task will be to find that additional $1,000 by cutting or changing your expenses.  Another choice would be to find an additional $1,000 in income.  If you are increasing your contribution to your 401K, there will be a reduction in taxes that will help approximately 15-25%.  By starting with the goal, you can be more focused at a specific number to achieve.  If the dollar amount is for retirement savings or debt reduction, set up a payroll deduction to make it automatic.

Wrap Up

Spend less than you earn is the advice most people will tell you.  I will take it a step further that you should include savings in your budget.  Savings can range from 10% of your gross wages to maxing ($17K 2012 contribution) out your 401K.  If you start with your goal, it will help you quantify how much you must cut or reduce your expenses.  Remember that your budget should include those yearly expenses that come up once or twice a year.  Insurance, real estate taxes and tuition are not monthly expenses; however you can set aside the monthly portion so you will have it when it is due. You see, budgeting is easy!

Photo by:  Vectorportal

Carnivals

Broke Professionals hosted the Yakezie Carnival and included Landlord Nightmares!

You see, budgeting is easy!

Comments

  1. Spend less than you make, pretty simple concept but difficult for many people to do.  Sometimes I think it may come down to having difficulty distinguishing between a want and a need.  I want the bigger house or I want the new car when you could get by with what you have.

  2. I agree that you should budget for savings too. If you don’t, often that will
    slip through the cracks. I am still deciding how I feel about the difficulty of
    budgeting. I think budgeting is a skill set, like many other things, so its ease
    changes and is proportional to your familiarity.

    • I think that is somewhat true since I am real comfortable with it. Budgeting can be intimidating, but savings should always be a priority.

  3. This is easy the way you’ve laid it out here. I’m not a serious budgeter, but that’s mostly because I find it boring. I know I know, it’s important, but it’s hard to convince myself to sit down and do this stuff all the time. Glad to see you’ve got it down!

    • Start with how you spend your money and make sure it is less than you earn. Don’t let your feelings about budgeting stop you.

  4. Good, sensible points; and only four points at that. Two things: 1) to automate our budgetting I have three categories of expenditure: constant (this are the bills that don’t change much and there is not much one can do to change them), changeable (this are bills that can be negotiated and have to be reviewed regularly like car and house insurance fi) and variable (this is food, drink etc, which one can vary depending on the month). 1&2 can be automated; is best done in cash (this is what I am finding anyway). And yes, our savings and the ‘I’m so worth it’ line are included in the budgetting tool (this is on my blog btw). Thanks, KC!

    • Many people are intimidated with budgeting or feel it is very confining or too difficult. It is much easier than they think and it is a great way to reach your financial goals.

      • Agree! Budgeting is easy – only it has to be kept flexible. Rigid budgets can be counterproductive.

        • My approach requires the least effort, but it works for me. Budgets or diets are only good if they work.

  6. Even better that CFLs are LEDs but they are still quite expensive.  In the UK the govt has recently withdrawn subsidy of such things, along with feed tariffs (where you get paid if  you generate your own electricity).  That is a really backward step but not surprising.

    Yes you need to know how much you are spending and on what.  Only then can you start making sensible spending plans. 

    We don’t have 401K’s in the UK but there are similar schemes.  One that has recently been squashed is that you could put up to 100% of your income into a retirement plan in the few years before you retire and effectively draw it all out again with tax.   It is not so easy now and anyway retirement seems to be getting further away not closer!

    • It is more up to the individual than ever. Pensions are almost non existent in the U.S. If individuals would focus on savings and live reasonably, anything is possible. I did it (at 38 years old) on rather modest earnings.

  7. Budgeting really isn’t hard but it does take discipline which some people struggle with.  I like to set goals before I buy something so that I avoid impulse buying and also take advantage of the time delay to decide if spending money to buy something is really worth it or not.  I don’t like buying things that I don’t end up using. -Sydney

    • If I cannot get at least a 50% discount, I am not interested! I generally use shopping bots online to find the lowest prices. Sometimes the discount is not enough and I am no longer interested.

  8. Realizing and accepting that a budget will be beneficial is important. If you still need the instant gratification of shopping til you drop, then you probably are not ready to budget. 

  9. We use Quicken to make our budget and it works really well. We get to see what amounts aren’t working and where are spending our money. We use this information to make changes so that we stay on track. I find the best thing for budgeting is to have a record of transactions. It paints a great picture.

    • I watch my transactions by monitoring my expenses. Almost all expenses go on my credit card because I get frequent flier miles. Quicken is a good system too.

  10. We had a super simple budget for years and years – income and expenses tracked from one checkbook.  Now I used a simple spreadsheet but don’t track every nickel and dime.  We do a once a year health check to make sure we don’t need to change our spending habits (and of course keep an eye on it all throughout the year). 

    • Everybody approaches it differently! I was trying to show that it should not be intimidating and it can be simple.

    • Start with the outcome or goal and develop a plan to achieve it. I set up a payroll deduction for savings and that makes it automatic!

  12. Biggest challenges to me (us) – not the strategy but the execution, unexpected expenses, getting your partner on board.

    • One of the partners always needs to know the finances (CFO). One way is control of the check book. In my family, I act as the CFO and my wife is the COO. We check with each other on any expense over $50.

    • They say the money is one of the biggest things couples fight over.  Though, with clear communication and lots of practice such difficulties can (usually) be overcome. 

      • In a relationship, you both need to go fo the same financial goals or you will be in conflict. Conflict over money usually makes a relationship difficult.

          • Every partnership or couple needs to agree on the important things. For example, saving to buy a house may mean sacrifice of both partners.

  13. It does look easy when you break it down like that.  Don’t accept the status quo and thanks for the reminder on those annual or bi-annual expenses!

    • Taking control of your expenses through a budget can be easy if you start with the goal. It is just a matter of making the goal happen.