Bite The Bullet: Start a Budget

It’s the personal finance management strategy that no one wants to talk about – budgeting. Budgets get a bad rap with the instant gratification crowd. They’re for kids, not professionals, grumble the naysayers. We’re adults, we are perfectly capable of making responsible financial choices. The prevailing attitude seems to be “we don’t need no stinkin’ budget.”

Budgeting isn’t sexy like investing or cryptocurrency. There’s no adrenaline rush from avoiding impulse purchases or brown-bagging lunch once a week. They are not new, or innovative, just practical. Budgets are what your mom used to do to make money last longer. That leaves too many people with the wrong impression – that budgets are for poor people.

Actually, budgets are for everyone who wants to manage their money. It’s a basic tool that helps you plan for retirement, establish a good credit score, and build wealth. Yet the people who don’t have a budget claim not to need one. Meanwhile, almost 80% of people who do can’t stick to it. According to the Motley Fool website, the average amount of budget overspending is around $7500 a year.

While we’re busy blowing our budgets or defending the right to not have one, there are some statistics to consider. From a recent report by PWC on Retirement in America:

  • 42% of people 18 to 29 years old have zero in a retirement plan
  • 36% of people ages 30 to 44 have zero retirement funds
  • 17% of people 45 to 59 have no retirement savings
  • 13% of people 60 and up have nothing saved

Why are we talking about retirement in regards to budgeting? Because a budget is where you set your financial priorities. A budget is where you make decisions about how much to spend, how much to save, how much to invest. Budgets may not be sexy, but they empower your financial health and well-being.

Why Don’t People Budget?

man thinking about money

There are all kinds of excuses to rationalize not having a budget. The first is the “I want what I want when I want it” approach to money management. Good luck with that. Without visibility into how your spending, it’s much easier to overextend yourself. One a job loss or medical emergency and you end up with critical bills – mortgage, car loans, you can no longer afford.

This plays into the next excuse. Some people avoid budgeting to escape that visibility. Even if they know they’re in trouble, they don’t want to look. The ostrich “head in the sand” approach does not bode well. Whatever fears you may have, it won’t help to avoid them. Fix them with a budget.

The next one is probably the reason why it’s hard to stick to a budget. People are worried it’s going to cause family problems. In other words, there’s gonna be some fighting about spending. Conflict isn’t fun, we get it, but neither is bankruptcy nor is living on Social Security when you’re 65. Get your spouse or life partner on board. Get rid of “authorized users” on your credit cards and get control of spending.

Pride is a biggie. This goes back to budgeting is for poor people. Just because you’re making decent money doesn’t mean you know how to manage it. In fact, having more money makes it easier to spend more money. As Forbes points out in the article, you may end up with none.

It’s time to stop making excuses and start setting your financial goals. Be like rich people – that’s what they do.

(Read: Want to Know if F.I.R.E. is Right for You?)

How to Start a Budget

The first step is changing your mindset. Life on a budget does not have to suck. It’s not a plot to keep you from buying a latte at Starbucks. Your budget is a spending plan. The whole idea is to consider your financial priorities and direct your money toward them.

What Are Your Financial Priorities?

Some budget resisters see this as a “gotcha” question. It’s not. If you’ve never thought about money beyond the day-to-day, this is how you start. It’s one of the benefits. A budget pulls you out of the weeds and lets you look at the big picture.

The goals you set need to be doable based on your income and expenses. Remember this is a spending plan, not a “starve-myself-of-joy-and-happiness” plan. Start with some preliminary goals. You can tweak them as needed once you have a more detailed look at your current financial state. Here are a few examples:

  • Put the max in your 401k
  • Start a 3-month emergency fund
  • Explore refinancing options for mortgage
  • Reduce credit card spending by X%
  • Create an annual vacation fund
  • Transfer savings to a high yield savings account
  • Set aside money for investing

What Are You Spending & Where

This is the part where some people get cold feet. It somehow feels easier not to know. Especially, when you’re bringing home more money than you’re spending. Leftover money sounds great, but what are you doing with it? That money sitting in your checking account isn’t going to help you build wealth.

Back in the day, trying to figure out where your money is going was a pain. Not anymore. Most banks let you export your monthly statements as a CSV file or Quicken-friendly files. If you prefer, here are 40 Excel/ Google Sheet templates for budgeting and money management here.

You need to rely on more than one month to make your determination. Look at your spending over at least three months. If there are significant seasonal changes in your income, analyze capture the previous year. Your budget is built from after-tax income, aka your take-home pay.

An App for That

If you don’t want to deal with all the tracking and analysis, there’s an app for that. Many of them, in fact, and some are free. Budgeting apps sync with your bank account. They categorize and track what you spend. The only limitation is they start from where you are right now. They can’t pull in historical data, so it takes time to see the patterns of your spending. Here is a list of budgeting apps to review.

There is one workaround from a different app called Wallet. When you add your bank account(s) they upload three months of data as a baseline. We don’t know much about this app, but you can check it out here.

The point of a budget is monitoring what you spend. Once you have some data to work with, it becomes easier to see if your spending is aligned with your financial goals. The areas where you can make adjustments are clear. With that kind of transparency, you can budget yourself into a positive financial future.

How to Start Budgeting

There are different methods of budgeting. They all work. The mission is to find the one that works for you. There’s no point in going through this process if your budget is not doable. Depending on your income, you may need to make choices about what you can and cannot do.

Be careful not to be so stringent that your life feels miserable. It’s better to make some progress and keep at it than quit because the budget can’t be followed.

50/30/20 Budget

This is a well-known budgeting approach. It’s based on how much of your income goes where. Necessities, like mortgage, rent, food, is 50% of your money would be spent. In the next bracket, 30% of your income is spent on things you want – vacations, tickets to a concert. The last 20% of your income should be saved.

Using your data, you can see if how close you are to this breakout. If you are spending more than 50% of your income on necessities, adjust the 30% bracket to 20 or 15%. Do your best to maintain the 20% going to savings.

If you have a higher income and don’t need the 50% for necessities, add the extra to savings. Once you have 3-months saved for an emergency, begin shifting this to other financial goals, like investing. Too frequently higher-income people will add that extra money to buying more of what they want. It’s understandable, but not if you’re trying to build wealth.

Zero Sum Budget

This budgeting method is much more detailed than 50/30/20. Every dollar that comes in must be categorized. Housing, entertainment, debt, and transportation are examples of categories. The idea behind this budget is purposeful spending. There’s no money sitting around that isn’t designated for something.

Zero Sum budgeting is almost impossible to manage without tools. You need to set up a spreadsheet or use an app that categories spending. It’s a very detailed spending plan with granular visibility into your transactions. As you capture the data, it’s immediately clear where you can make adjustments.

If you’re spending too little to pay down debt, you can cut back on entertainment. The categories don’t change but the amount you spend does. When this budgeting approach is aligned with your financial goals, it can boost your financial well-being.

Money Flow Budget

This approach is the opposite of Zero Sum budgeting. It’s for people who are comfortable with automated payments. This is a spending plan approach where users set up “money buckets.” These buckets are related to all your standard monthly expenses, from your mortgage to Netflix. Once you know what those payments are, you set up a money flow. A money flow is just the recurring payment system many people already use. Bills are automatically paid by withdrawals from your checking account.

Once those expenses are paid, whatever money you have left is discretionary income. This is where you can find areas to adjust your spending – things like groceries, dinners out, babysitters. You will still need to set up some type of categorization and tracking. Some people use a debit card for all their discretionary purchases. This provides them with more visibility.

Though your monthly bills are automatically paid, it’s up to you to monitor your discretionary spending. You may want to set up monthly transfers to a savings account.

Regular Budget Tweaks

budgets are smart

Your initial take on the budget might be too loosey-goosey or too miserly to live with. The whole point of this process is to create a manageable budget. Don’t get too overzealous in either direction.

Over the first couple of months, monitor your spending to goals. Are you making progress? If not, you need to uncover the reason. For some people, reining in their discretionary spending is hard. Even a small incremental change can help you get on track. One less dinner out? One less latte? You don’t give up everything, but what can you give up?

If the answer is nothing, then you’re wasting your time pretending to budget. There is a point to a budget. To spend your money in ways that help you to secure a better financial future. You may not be thinking about the future right now, but you will be. By then, gaining ground will be much harder.

Budgeting is a decision. You can make changes as necessary. Indulge yourself occasionally or get out of debt – both are good choices. The point is a commitment to the process. You are responsible for managing your money. No matter how much you make, your financial future all comes down to what you’re doing now.

Bite the bullet. Make a budget.

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