Without a personal budget, most people have a hard time gauging how much money they spend and where their money goes. But you can learn how to better manage your money. Pay heed to budget strategies that can make a difference. Be mindful about the pros and cons of budgeting. And be sure to create a personal budget.
“A budget is telling your money where to go instead of wondering where it went.” —Dave Ramsey, financial author
Without a personal budget, most people have a hard time gauging how much money they spend and where their money goes. If you have ever gone to an ATM to withdraw money and been surprised to discover how little you had left in your account, this section is for you. It is also for anyone who wants to learn how to manage their money better and smarter – which is an invaluable skill to have during the penny-pinching years of college but also later on in life.
Even if you are conscientious about paying your bills on time and generally have frugal spending habits, creating and following a budget can put so much further ahead. In essence, a budget is a plan for how you want to spend money. It details how much money comes in each month and how much you have allocated for spending on each thing. The virtue of a budget is that it puts you in control of financial decisions – so you can avoid surprises at the ATM or at the end of the month. Let’s look at some strategies for creating a budget:
While budgeting can be a useful financial tool, it may not be for everybody. Some people may feel more confident by balancing their checkbook to see how much they have at any given time. Still, many argue that budgeting helps people stay on track and avoid overspending on “wants” such as restaurant food, clothes, and entertainment, so they always have enough money for “needs,” such as rent/mortgage, utilities, and food. The following lists summarize the advantages and disadvantages of budgeting:
Although you may be persuaded by the downsides of budgeting and think, “It is not for me!” do not give up until you have tried. Tracking your income and spending is a good exercise for anyone, and if you follow the basic process, below, it is easier than you think.
The first strategy for creating a successful budget is to determine why you are creating a budget. Setting goals will help stay focused and on budget: something “real” to look forward to or achieve.
Try to set both short-term and long-term goals.
If the thought of making a budget too dreary to contemplate, begin with your dreams. Sit down with a pen and paper and list out all your hopes for what you want to do in your life. Consider how the stress of financing these dreams will affect you in the short-term and long-term. Be understanding of yourself, but also be realistic by asking, “Will you be able to do the things you listed at the rate you are going?”
Make categories to help make the budgeting process easier and quicker. Create a category for each of the areas you spend money or save money by grouping similar items. Tracking fewer categories makes it easier to budget overall.
Make a list of all the things you spend money on and save money for. Once you have your list try to group items together.
Potential categories might include:
Getting a budget up and running often works well for a month or two, and then encounters mysterious problems. Spending may balance out well initially, but grow harder to predict or control.
A key secret: budgets need attention and adjustment every month.
You will have the same expenses every month, but they will not always be for the same amounts. Therefore, your categories of spending will stay the same, but you will make adjustments to the amount you budget every month .
For example, if your significant other’s birthday is coming up, you need to consider what would like to do and buy, and how you will adjust your spending habits for the month.
Each month, consider:
If you need to increase spending in one category of your budget, you need to decrease spending in another category for that month.
Another challenging area for budgeting concerns things you know you will have to pay for, on an infrequent schedule. These items include:
You do not want April to roll around and suddenly have to come up with a big amount of money to pay your taxes.
To prepare ahead of time, start setting money aside every month in a savings account. This will become a new category for your spending. You can divide things like insurance premiums into monthly chunks and sock that away ahead of time, to have enough for the lump payment when it comes due. Add an additional amount for less-predictable spending. That way, if you encounter a big sale at your favorite store, then you can stock up and not wreak havoc on your budget. It will take several months to get a cushion, so take that into account now.
It does not matter what precise system you use. You just need to have a plan for these expenses.
The hardest part of budgeting for most people is unexpected expenses. These may be unexpected, and sometimes unpleasant, but you can still plan for them.
Types of unexpected expenses include:
If you have a car, plan to have it repaired. The unknowns are when that will be and how much it will cost. To prepare, set money aside ahead of time. You may think, “Easier said than done!” But putting aside as much as possible (and as realistic) will reduce your debt as well as lower your stress level!
Two ways you can set money aside:
Note – This is separate from your emergency fund. Most financial experts recommend that you have three to six months’ worth of income in savings for emergencies. Unexpected expenses are not emergencies. Emergency funds should be untouched and on-hand for dire situations like losing a long-term job or encountering a major medical issue.
How much money should you set aside?
The best way to figure how much to budget for unexpected expenses is to list all the unplanned expenses you had last year, plus ones you can predict are coming soon. For example, you might predict that if you have a dog, he will have to visit the veterinarian at least two times a year for unexpected reasons.
It might take you a while to get enough money set aside. Keep working at this, and do not give up if you do not always meet this target each month.
Still not convinced that making and following a budget is doable? The following video describes a budgeting technique that is easy and straightforward to follow: the “envelope budget.” Simply placing cash in labeled envelopes (one for each category or purpose) each month can be an effective way to build healthy spending habits.
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