For most people, starting a budget can be hard and even harder to follow through. I think that a simple personal budget is always better than no planning at all and can drastically help your savings in the long term. Finding your own way is the first step to a clear and sound financial path.
Keep it simple
Most budgets include too many things to follow or are simply too tedious to maintain. I suggest a simple, easy to track, budget that you can actually follow month after month. I included a free copy for you to use at the end of this post.
The first step before starting your plan is to know where you are currently spending your money. Using a free tool such as Personal Capital will greatly help you track your income and spending and has a lot more to offer to improve your financial well-being! I suggest you get the Personal Capital app but if you really want something just to track your spending, a simple budget app or Mint will do the job. Once you know where your money is going, it is time to categorize your spending and create a simple budget.
Going through each little details will make it impossible to maintain and follow through. I suggest keeping track of major categories such as Groceries, Auto, Home, but skip the subcategories like Home Insurance, Home Maintenance, Home Lawn Care. You can use this free template and modify it for your own needs.
You need to account for the main categories of spending (in order of importance):
- Fixed Expenses (Rent, Utilities, Payments…)
- Variable Life Expenses (Groceries, Gas, Entertainment…)
- Investments (401k, Roth IRA…)
- Savings (Emergency Fund, House Down Payment…)
- Guilt-Free Spending (Restaurant, Gifts, Shopping…)
I would say that number 1, 3 and 4 should be fixed, I know exactly what my mortgage payment is every month and I invest a fix amount of my salary every paycheck to get my employer match and maximize my tax benefits. Then 2 and 5 are the most variables and the easiest to cut down. We eat well and spend about $500 a month on groceries but on the other hand, we have cut down restaurants and entertainment. If you are struggling to cut down, you can follow my money-saving tricks to learn easy alternatives to your current spending habits.
Keep your budget updated
This is the part were simpler budgets overcome larger, extended, worksheets. Going back to your file and seeing how you are doing over multiple months, or years, will keep you on track and give you a perceptive on where you stand. You can track it manually in excel or you can let aggregators like Personal Capital or Mint do it all for you.
You should also include goals into your personal plan. Having a goal in mind will motivate you and including it in your budget will show you how attainable it is. To come back to my previous point, keeping track of that goal month after month will motivate you to continue forward and push until completion. An easy way to track goals is having separate accounts for different goals. We have a vacation account where we save up for our next trip! 🙂
Stay out of debt
Budgeting is a perfect tool to increase your savings but your priority should always be to repay high-interest debt first. If you have credit card debt or high-interest student loans you should definitively include those into your budget and prioritize them. I also recommend you take a look at my tools to repay your debt faster.
Keep revising and rethinking
Once you completed your budget, rethink each and every category and their respective spending. You can make it a goal to reduce certain expenditures or to cut them out completely. From my personal experience, the easiest things to cut to reduce your spending are:
- Replacing cable with Netflix (around $50/month in savings)
- Bring your own lunch to work (around $200/month in savings)
- Not driving to work (around 200$/month in gas savings depending on the distance)
- Inviting friends for drinks at your place instead of bars (around 50$/night out in savings)
For each expenditure you should ask yourself; do I really need this?
As Maslow’s Hierarchy of Needs states, your physiological needs such as food, clothing, shelter are the most important. The second tier is safety; this includes insurance, utilities, and so on. Anything after those can be reduced, cut, or accepted as guilt-free spending. Once you attain this mindset and choose your luxuries, you will enjoy them even more. You should also take concrete steps to save money if you really want to cut down on your expenses.
Keep it loose
If you are not using a free tracking tool like Personal Capital, you will probably not get all your figures to the cent on the first try. Keeping some wiggle room in your budget will make it easier to follow. Keep in mind that setting unachievable targets or cutting unreasonably could demotivate you. We all need to budget for fun and luxuries.
When you get more advanced or if you are already comfortable with your abilities, you can try to reverse budget like me. I use reverse-budgeting where I plan to save first, then spend what is left. If you are like me and save more than half your income, you might want to plan things differently and start with a fixed amount of savings each month. This might force you to be frugal and inventive but it can drastically increase your savings rate!
1. Investments (or Debt repayment)
2. Essential Expenses
3. Discretionary Money
The whole point of a budget is to get you to save more (or repay debt faster) so why not prioritize that in the first place. Paying yourself first optimized debt repayment and savings goals and can be set automatically. The reverse-budgeting method teaches you to live within your means and avoid debt.
Good luck and happy budgeting, Xyz.