The How-to’s of Budgeting
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When I mention the idea of living within a budget, I often get strange looks. I hear things like, “Why would I want to do that?” or “Budgeting requires too much work” or “Budgeting takes too much time.” These common myths are usually believed by people who don’t know how to budget. Ignorance about budgeting is understandable because basic financial education is not part of our education system. Unless a parent or friend showed you how to budget, you probably don’t know how.
Budgeting is Like Dieting
Maybe you’re thinking ‘I’ve tried budgeting before and it didn’t work for me.’ Budgeting is like dieting – the most important step to being successful is keeping track of what you consume, or in the case of budgeting, spend. If you don’t know how much money you’re spending or what you’re spending your money on, it’s easy to buy on impulse and live beyond your means without realizing it.
A 2012 study shows that 56% of adults in America do not have a budget, including 22% who don’t know how much they spend on basics like housing, food and entertainment. It is my goal here at Frugal Rules to help bring down the myth that budgeting is difficult and pave a path to financial freedom.
Where Do I Start?
You can start budgeting for your family with materials as basic as a pen and paper, or you can take advantage of one of a myriad of budgeting tools available on the web, such as Mint . I prefer to create my own budget through Excel. Once you have your method selected, then start out with the income you make in a month. If it is not a static number, then try to approximate the amount you make each month. Now that you have your income, the very first thing you want to do is pay yourself first. Experts recommend saving 10 percent of your income; if you are unable to save that amount, pick another. The remaining amount is what you have to spend on your expenses. Write down all of your known expenses, mortgage/rent, groceries, utilities, etc. Keep an eye out for frivolous expenses that you can trim or cut altogether. The more you trim, the greater surplus you give yourself. What’s left over after you allocate income for all of your expenses is your surplus and it is yours to spend as you choose.
Although living by a budget requires discipline, it doesn’t mean you need to live like a pauper. As a matter of fact, if you don’t allocate funds in your budget toward entertainment or fun, you will fail to live within your budget. If taking an annual vacation is important to you, allocate funds for that. Or, if eating out when you feel like it is a must, then plan for that. A budget does not have to be burdensome, and by allowing yourself money to have a little fun, you’ll avoid the kind of overspending that can happen in reaction to depriving yourself of anything fun or entertaining.
I’ve Got My Budget, Now What?
The work does not stop once your budget is established; you’ll need to track your expenses for a few months and revisit your budget for any necessary adjustments. This will help you see if you’re spending more or less on something than originally planned. If you do have a variance in spending habits, address it so that money can now be allocated to or come from another area of your budget. A budget is not a static tool, but a living, breathing tool that can and should be changed as situations warrant.
What is The Cost?
The only cost to set up a budget is your time. The true cost is intangible. By choosing to not live by a budget you can never truly know where your money is going, or how it’s working you. The frugal life is one that looks at your means and decides the best way to live within them. Once implemented, a good budget will give birth to financial freedom as it will help you separate your spending from your emotions and that is the very reason why I love to budget.
What tools do you use to budget?
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.
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