Budget isn’t a Bad Word
Does the word budget make you cringe? Maybe it brings up feelings of constraint, or even memories of past failures. Have you tried to set up a personal budget but then found you couldn’t stick to it? We have all been there. Maybe your past attempts at making a budget were actually just too strict. A workable budget shouldn’t feel like a shackle. It should feel like an accomplishment and a daily, reachable goal. Learning how to create a budget and make a financial plan should make you feel empowered and will help you reach your financial goals.
When I was first learning how to budget my money, I started small. I knew how much I made each month, so I took the money I had and divided it up into envelopes. The first one was Rent. Then Groceries. Phone. Gas. Insurance. Household Items. It wasn’t a perfect system. I often had to move money from one envelope to the next. Really, though, isn’t that what budgeting boils down to? It is making a plan that shows you what money you have and where it is going. It is dynamic. You can change the categories and the amounts that go into each one to make it as comfortable as it can be, and according to your goals. Even in this simple manner, it taught me a lot about where my money went.
My next step was to keep a piece of paper in my wallet that kept a running checking account balance. It started at the beginning of the month, and subtracted and added in order all my bills and income, so I would have an idea of what my account should look like if I was on track. It also made sure I didn’t miss a bill. I actually still use this method because I find it is such a reassurance to be able to glance at a piece of paper and see that I am where I want to be each month. My categories have expanded to include savings for emergency and vacation and entertainment, as well as a lot more bills since I own a house now instead of renting an apartment that had all utilities included. I don’t have to use the envelope method anymore because I have a steady income and the amounts that come out of my checking account are pretty consistent.
Using Credit Cards Responsibly
Once I was able to have a credit card, I began to use it to help me budget. I paid all my recurring monthly bills directly out of my checking account, using the methods I above. The rest of my spending when on a credit card that I paid off at the end of each month. I still use this method today. I like this method because it means that I don’t have to carry cash or worry about not having enough at the grocery store, and it also automatically categorizes my spending. I can just go to my credit card company website and it will show me how each transaction was categorized and show me overall spending categories. This feeds right into my next topic, budgeting software.
One word of caution before the software topic though, and that is that credit cards should only be used if you are able to pay them off every month, or for emergency purchases that you could not afford otherwise. They can help your credit if they are used wisely, but can be a black hole of debt if they are not paid off each month, as interest will accrue and your balance with skyrocket. Check out my pages on credit and debt to read more about this.
An invaluable tool for me once I could afford a computer and internet was budgeting software. There are a number of different ones out there, many of which are free. I personally love Quicken, Personal Capital and Mint. They take a little while to set up, maybe a couple hours depending on how many accounts you have, but they are an invaluable way to keep track of your money. The great thing is that you can see a snapshot of each account, the transactions that have come into and gone out of each one and their current balances. This includes your checking, savings, investment accounts if you have them, and credit cards. At any given moment you can look and see if you are spending more than you are making. It is also a great way to make sure no one has gotten a hold of your account information and is making unauthorized purchases, because you can see them all. I have caught many a fraudulent charge this way, and was able to call my credit card companies and get the charges written off and a new card sent to me.
One of my favorite features of Mint, other than it being a free app, is that there is a place in it where you can set up a goal. Say you want to save for a vacation, or pay off a debt. You can set up a goal in Mint, and each time you move money into an account set up for that purpose (a savings account usually), it will log it and keep a running total showing you how much progress you have made. There is also a lot of information on Mint.com about financially related topics. It has an area that shows you ways to save. You can see trends in your spending, like what categories you tend to spend the most in. There is a budget tab that allows for you to see if you are meeting your budget goals or adjust specific category amounts. You can even see your current credit score.
Quicken is a full service finance software. It isn’t free, but it is quite comprehensive. It has all the features of Mint, and more. It allows you to customize many of it’s features, including things like spending goals. It provides bill reminders and can forecast your account balances based on upcoming bills. It is also linked to TurboTax, so if you are using the two together, taxes become quite simple. Quicken has different subscription options, including ones for small business and investing. I used Quicken to help me manage my money when I wanted to pay off my student loans, and I met my goal. I don’t think I could have done it without it.
Personal Capital is another free app that works similarly to Mint. It shows a snapshot of all your accounts, with the added ability to connect you directly with one of their financial advisors, if you so desire. I find that it synchronizes easier than Mint at times, as Mint seems to not always update each account when I sign in. It does not have a goal set-up feature, but is a nice, simple app for tracking your spending and cash flow.
Tips about Budgeting
One thing that I feel is important is a simple tip: Always budget based on less than what you actually make. Don’t try to budget every penny you make. This would set you up for failure. Some months you may not make as much money, or you may have an unexpected expense. If you had budgeted every bit of money you brought in, you would instantly be in a budget shortfall. That can lead to feelings of inadequacy or failure, even despair. Rather, by budgeting always for less than your actual expected income you give yourself a little buffer. Then, you are setting yourself up for success, because most likely you will find that you still have a little extra money at the end of the month, or at least didn’t fall short. Even if you end up spending every penny because you just don’t make much money in relation to your bills, budgeting this way sets the stage for savings later as your income increases.
On a similar note, it is a great idea to overestimate your spending as well. If a bill is not exactly the same every month, then try to put aside more than you think it will really cost for that category each month. If you find at the end of the month that you consistently have left over money you can adjust how much you put aside, or put it into savings. It is a lot better to expect a big bill and end up with a small one than the other way around. If your bills don’t equal your income, remember to account for Fun Money. It is important to feel like you have some money that is just for your own enjoyment. Once in a while it is ok to give yourself a little reward. Just be sure it doesn’t happen so often that it gets you off track.
Budgeting doesn’t have to be scary, or feel too restrictive. It should be a way for you to learn about yourself and your money habits. It is a tool to help you reach your financial goals. It is dynamic and changes as your needs change. A good budget is a way to invest in yourself, and it is an accomplishment in itself.
Set yourself up for success by setting your budget based on less money than you actually make, and higher bills than you actually pay. Save whatever is left after a little reward for yourself and you will meet your goals.
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