Hi faithful readers! Welcome back, it’s Colin, here to talk some of the boring but hashtag Adulting stuff. Budgets. I’m not trying to lecture here, just inform. It’s taken us a while to figure out a system that works for us, so I thought it might be nice to pass along that information.
I didn’t have a budget for a few years after college. I didn’t think I needed one. I was in the lucky position of having a well-paying job, not much debt, and few surprise expenses. I’m also naturally frugal – as a kid I was used to saving carefully for months or years before buying that thing I wanted after extensive research and consideration. Also, I had this idea that not thinking about your money was some perk of having enough. Jump ahead to now. I’ve been budgeting consistently for more than a year, and it’s been an excellent adventure. Since we’re living abroad, it puts my mind at ease to know exactly how much we have to spend on travel. Here is some of what I’ve learned along the way.
Do you have income and expenses? Then you’ll likely benefit from a budget, and here a few reasons why:
- Insight. You want to know where your money is going. After starting our budget, I noticed some monthly subscriptions we had been paying for but not using. Instant savings! I also discovered that lots of our money was mysteriously being spent on cat nip. Strange.
- Reduced stress. Regardless of your financial situation, having a budget will take a load off. Trust me. When big unexpected expenses come, you’ll be ready. When you really want that new shiny thing, you can just buy it guilt-free knowing you have room in the budget. You can sleep well at night knowing that you are on track saving for that big down-the-road purchase.
- Defined priorities. Budgeting is all about figuring out what is important to you and making a plan to get there. I suggest remembering, if you have them, the cats should always be the top priority.
- Stability. Turn the natural ups and downs of your money into something smooth and malleable, month to month.
- Happiness. This is what it’s all about in the end. If you budget right, you will be always building toward the things you really care about, while making sure all the bills get paid. So you can spend less time thinking about money and more time enjoying life. At this stage in our lives, money can feel really overwhelming. Goals feel far off and unachievable. Watching even the smallest amount of money start to add up can really make you feel accomplished.
How to Budget
There are a lot of ways to budget. This is my strategy, heavily influenced by the You Need A Budget software we use (more on that in a follow-up post):
- Set goals. Are you saving for a house (I know, it’s a far off dream for most of us)? Looking to pay off your student loans? Now is the time to think about what really matters, and don’t be afraid to dream big. What would you do if money were no obstacle?
- Divvy it up. Write down what you typically earn in a month. Then write down as many of your expenses as you can remember. If you don’t know how much you usually spend, just put your best guess. You can correct this later.
- Categorize. Take your expenses and assign each to one of 3 categories:
- Obligations: things you must pay or suffer consequences (e.g. rent, cat food)
- True Expenses: things you usually pay but could cut back (e.g. Netflix, cat costumes)
- Goodies: truly optional things (e.g. dining out, movies, kiddie pond with fake fish for the cats to practice fishing).
- Divide and conquer. Consider expenses that don’t occur every month. For example, buying presents or car repair. Think of big expenses coming up in the next few months and goals that you want to reach (e.g. no debt, house down payment, cats fully appeased). For each, estimate a monthly amount and write it down. To illustrate, if you’re going on a big vacation in 10 months that you expect will cost $2000, you’ll want to set aside $200 each month. Then, when that vacation rolls around you’ll already have budgeted for it and can enjoy your time off. For presents (or anything else with a yearly cadence), estimate what you would usually spend in a year and divide by 12.
- Prioritize. Look at all your expenses and your income. Does it add up? If it doesn’t, don’t worry. Time to decide on your your priorities (remember your goals!), and figure out where you can reduce spending. Start with the goodies, and try not to touch the obligations. But know yourself and don’t sacrifice too much. If you can’t live without your coffee, perhaps it isn’t optional (though maybe you can trade a couple runs to the coffee shop for some home brew).
- Delegate. Once you have your monthly affairs in order, it’s time to tackle the rest of your money. You know, the savings (and debts) you already have. This money needs a job just like the money that comes in each month, or it feels left out. So go ahead and assign it (yes, all of it) to the categories you already have. Feel free to shore up something underfunded, or put it all toward your goals. For debts, just treat it is an account with a negative balance (and add interest as a monthly expense). You’ll move money here over time until it reaches 0.
- Get going. If you’ve made it this far (nice work!), you’re ready to hit the ground running and see where your budget takes you. Hopefully someplace nice. Try not to think too much about budgeting for a few days.
- Track. This is the tricky part. To see how you’re doing, you’ll have to record your expenses during the month. You could do it once at the end of the month based on your statement. But I recommend tracking as you go, at least once a week. Here, software can save you a lot of time. A note on cash: I recommend paying for everything you can on a card since it is much easier to track (just watch out for the interest!). But, if you’re cursed like us to live in a place that mostly runs on cash (or you don’t want to use cards), you can just have a separate category for cash. This keeps it in the budget without you having to record every cash transaction.
- Roll with it. This is the make or break part of your budgeting journey: you overspend one, or several, of your categories. Don’t panic. This is completely okay and expected. Just move money from another category to this one. Overspent on dining out by $50? Shuffle over $50 from clothes. Be careful not to steal too much from your obligations, or the cats will be really upset.
- Rinse and repeat. Your first budget is not going to be totally correct. Probably, you forgot some categories, others were higher or lower (yay!) than expected. Make whatever changes you need. A budget should be flexible or it will break. Don’t be too hard on yourself.
- Celebrate. Eventually, you’ll realize that you’ve entered budget zen, where everything is calm and happy. Enjoy this enlightened state, and add your success and personal suggestions in the comments!
Look forward to more details on You Need A Budget and other tips for become a budget ninja in part 2.
Cheers and happy budgeting!
***This post has been overseen and approved of by Kaylee, Evil Empress of Everything.