by Liz Frazier Peck
Everyone hates the B word. It’s easy to see why; your budget restricts what you do and judges every little mistake you make. As much as we hate budgets, without them we have no method to save for our goals or any concept of what and where we spend. Although a budget is an important part of our financial health, often times a budget can cause more harm than good. It all depends on why and how we create it.
It’s similar to dieting. You’ve been overeating and want to lose weight, so you decide to eat nothing but kale and quinoa salads for a month. You will probably lose some weight in the beginning. However, you are almost guaranteed to break it; it’s just not realistic (plus no one really likes kale and quinoa anyway). After a few days on this restrictive diet, you are dying for a treat. Anything. And you’ve been so good; you deserve just a teeny little cheat, right? A few hours later you wake up to find yourself laying in a pile of M&Ms, with no idea how you got there (this happens to everyone, right?). Diet is history.
Same with budgeting. We overspend. Or we’re not saving enough. We decide we need to go on a tight budget. Mainly to restrict our spending, but also as a form of punishment. But the budget is too restrictive and you resent it because you can’t buy any of the things you want, and it interferes with your normal social life. It’s impossible not to cheat. And once we cheat a little bit, we’ve broken our budget; so what’s the point in continuing? We’ll just try again next month.
The definition of a budget is: an estimate of income and expenditure for a set period of time. Nowhere does it say: a form of torture and punishment, or a tool to keep one from doing the things they love. So, like dieting, don’t wait until there’s a problem to create a budget. Instead, look at your budget as a way to track where you spend, establish healthy habits for the long run and meet your goals. To keep a budget that you can live with, try following the below simple steps:
- Goals: Define your goals. Short term goals are within two years (travel, pay off loan), mid term are 2-5 years (buy a home) and long term are 5+ (retire at 62).
- Income: Start with a blank spreadsheet (don’t go anywhere, I promise it’s painless). Or, you can use a free budget template, like the one Mint provides here. Enter in your total, net monthly income, including bonuses, rent received, dividends, etc.
- Expenses: Look at the past three months of spending from checking and credit cards. Separate the expenses into fixed and discretionary. Fixed are expenses you have to pay each month and are usually consistent amounts, such as: mortgage, utilities, rent and car payments. Discretionary is everything else. List all the fixed expenses, and the average you’ve spent on them for the past three months. Categorize each discretionary item in groups such as: food, gas, entertainment, clothes, baby supplies, household, travel, transportation, etc. List each group on your spreadsheet, with the average you’ve spent on each over the past three months. Add a line item for savings, and include any money you put towards emergency fund, 529, retirement, etc.
- Evaluate: The first part of evaluating your budget is to determine if you have a surplus or deficit at the end of the month. Add all the fixed and discretionary expenses, plus savings. Subtract that from your income. If you’re in a deficit, you are spending more than you make and need to make some cuts. Evaluate each expense individually. Which ones can you reduce? Which ones can be eliminated?
- Savings: Now look at your savings. Are you saving enough to reach your goals? Easy math will give you ball park figures. If you want to put a $50,000 down payment on a house in 5 years, you need to save about $830/month.
- Be Realistic: While evaluating where you are spending and where you need to cut down, be realistic. Give yourself some wiggle room, and include “fun” money each month. Play with the spreadsheet to get the numbers to work for you.
- Review: Re-evaluate in 3 months and see if you’re following it. If you’re cheating, figure out where and adjust. Your budget is a living document, so continue to fine-tune it so it works for you.