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Are you wondering how to budget? Are you feeling like you are always trying to play catch-up with last month's expenses? For so many years, my husband and I didn't budget. We were scared to… and honestly, it was because we didn't know how to do it. We tried several times, and each time – we totally sucked at budgeting.
Keep reading as I show you how to budget and actually stick to it this time.
We hit rock bottom one day….
But I gotta tell ya, hitting rock bottom has some benefits. Because we had no other choice, we HAD TO make our budget work. So we finally figured out these four simple rules, our budget-following fortunes changed for the better.
Here they are:
Number 3 was perhaps the most significant change to our budgeting success. In fact, rule #3 is what has allowed us to achieve success in rules #1 and #2.
It was difficult and daunting at first; I remember asking Mark – “How can we predict what next month's expenses are going to look like?”
We did go back and look at our previous 3 month's bank statements to see how much we had been spending, but since our past spending habits were precisely what we wanted to change, we didn't dwell too much on the past. To be honest, it was depressing. But we had to do it anyway. It provides a good baseline, and from there, you can make cuts.
I don't think that you need to go crazy categorizing every single little expense down to the penny. The fact is, you decided to start budgeting because you already know that your money has been going to the wrong places. You are ready for a change. And you should spend the bulk of your time with some prospective planning, rather than retrospective discovery. When Mark and I began this process, we already knew that we were spending WAY too much going out to eat. Did it matter that we had been spending $300 a month or $250 a month? To us, not really.
But there are a few expenses in your spending history that you should really have a good idea of: food, gas, and bills. These are purchases that you've been making and will continue to make. You likely can't make a huge immediate change in these expenses, so your past history is a good starting point.
Much to our surprise, after spending about an hour discussing finances and everything coming up in the following month, we came up with a pretty good estimate of that month would look like. Many things are already “set in stone”, like bills, housing, etc. Most of our discussion centered around things like:
Once we felt pretty good about our plan, we THEN went back and perused the past 2 months of online spending. This was only to look for things we might have missed. Things like a Netflix subscription, app-store purchases… those expenses that might be automated and could easily slip through the cracks.
Now for that rule #4… and this only applies to married folk – DECIDE YOUR BUDGET TOGETHER. When you agree to a budget, you are effectively agreeing how you plan to live your lives together – things you value as a family, what is important and what is not important. There will be gives and takes, but do not end your “budget meeting” until you have your pact – next month's budget.
Oh, and NEVER stop doing it. Years after our very first ‘budget night', it is every bit as important as it was back then. Every month, yes EVERY month, we sit down together for our budget night. So what does our budget night look like? I'll try my best to break down our philosophy into steps.
But before I get to these steps, a moment of honesty. Your first couple months of budgeting will probably suck. You will forget things, you will go way over budget in some categories because you were probably overly optimistic. It's ok. It will take a few tries to get this process down. Just start and decide to stick with it!
So here we go….Let's start learning.
(or if you're self-employed, estimate the best you can). And depending on how much cash you have available in your checking account, you will want to know when those paychecks will go in there.
Whether it be to your local church or a charity, remember that you are deciding your values as a family. Being generous is something that we should all strive to be. No matter how unfortunate your financial situation is, there is always someone else in greater need.
Things like rent/mortgage, utilities, insurance, car payment, etc.
Your budget should always have long-term goals mixed in with your short-term cash flow planning. Are you saving for an emergency fund? Getting out of debt or saving for retirement? These are all goals that you should be making monthly progress on.
These are those large expenses that you should be saving for on a monthly basis. For us, we have a Christmas fund; and money is pulled directly out of our account. A great way to save for these items is through Betterment; their services make it SO easy to save for anything, from retirement to a vacation.
This is your attempt to minimize unplanned expenses. Most of the time, we find that unforeseen costs can be caught and planned for ahead of time when we sit down and spend time thinking about it. What is unique about this month that will cause this month's budget to be more or less expensive?
Here is where the bulk of the discussion during the budget night takes place. How much will you spend on food? How much will you spend on clothing? What about all those other little expenses? For these types of expenses, I STRONGLY recommend using cash. Green, physical paper money. I cannot tell you how helpful it has been for us to use cash. For us, we simply spend less money, have less arguments, and it just makes our lives so much easier. Here are the categories that we use cash for:
At least weekly (daily is recommended), make sure to log into your account online and check to make sure that things are progressing as expected. If your month is off, you might need to make adjustments. Any adjustments are better made sooner rather than later as mistakes have a way of compounding.
As a spender, this is the hardest one for me. This is the step that requires real self-control. If all of our miscellaneous money has been spent, and I want to buy a bottle of wine… too bad. But that's a good thing. If you view your budget as constraining, you will fail. If you view your budget as your path towards freedom, you will succeed.
My book, The Recovering Spender, discussed how I accomplished this mind shift, and how it changed my family's financial future.
Being unable to account for unplanned expenses was one of the reasons that I never thought budgeting could work for us. Something ALWAYS comes up, right? Whether the car breaks down, you get an unexpected medical bill, one of your kids takes a trip to the emergency room, etc. Things happen outside of your control, and many of these things cost you lots of money.
So how do you plan for these? You don't. But because you have control and a plan for where your money is going, you can revisit your budget to figure out the best way to absorb the cost. These unplanned expenses are the primary reason why we recommend saving for an emergency fund. I cannot imagine the thought of dealing with an unplanned expense while not budgeting.
Here is a question that often comes up – how often does your spending go exactly as planned?
Answer – not often. We usually get close, but it seems as though there's always something we either overlooked; usually it is small. Usually it is a parking ticket. Or two parking tickets (our street has alternating parking, and we have a wonderful ticketing police officer who REALLY loves her job).
So if we miss our budget target consistently, why do we go through this exercise? Because long-term, we will NOT miss. According to NASA, the difference between weather and climate is a measure of time.Weather is what conditions of the atmosphere are over a short period of time, and climate is how the atmosphere “behaves” over relatively long periods of time.
Weather is erratic – there are a billion weatherman jokes for a reason – despite all of the state-of-the-art weather technology and years of schooling, the accuracy of weather forecasts can only be so good. Ask a weatherman to predict the temperature 3 weeks out. He could easily be 20-30 degrees off, and forget trying to predict precipitation that far our. But climate is the average of all of those anomalies, and it is not erratic.
The same applies to budgeting. I can't predict what will happen in the short term, but just by planning, talking and acting on the short term, our long-term trajectory is not erratic.
When you ask the question “how should I budget?”, you will get vastly different answers from many different people. I have simply shared what Mark and I do, and it has worked very well for us – especially for me as a spender.
Just start. As long as you decide to stick with it, you will do awesome.