Do I really need a budget?

If you’re trying to stretch your dollars or find a few extra, you could start with looking for change in the couch cushions, but it would be helpful to know where your money is going. That’s the purpose of a budget – to help you track where each dollar is headed and if it’s going where you intend. So if you’re here because of that snappy title, let me answer the question simply – Yes, you need a budget.

Now making a budget may sound as appealing to you as rearranging furniture, but let’s see if we can break it down to make it seem less intimidating.

I can already hear the excuses – I can’t predict the future, how am I supposed to budget?  My income varies month to month, so I can’t make a budget.  I’m no good at spreadsheets…the list goes on.  Most of the excuses come from the wrong perspective though.  Making a budget may initially seem like trying to predict the future, but really, a budget is a spending and saving plan for money already in hand.  Then as more money comes in, those dollars get allocated to spending or saving as well.

Let’s start at the beginning. Gather up three months of expenses using your bank and credit card statements or receipts if you still have them.  Take all the expenses and put them into one of five categories.

• Essentials – food, transportation, shelter, and the associated insurance and taxes go here.
• Security—items that increase your financial independence like paying down student loans, increasing the emergency fund, or saving for retirement.
• Goals – this is where you put money you want to spend in the future, maybe it’s for a beach vacation or  Christmas presents like an official Red Ryder BB gun (with a compass in the stock, of course).  You might not have put anything towards a goal in the last few months, so after you get through all the expenses in your records, take a moment to think about anything you might want to save towards and list it as well.
• Lifestyle – think new clothing, personal grooming, pets, and other items important to your everyday life, but that don’t fall into the Essentials category
• Discretionary – this is where the fun stuff goes.  Dinner out, entertainment, and yes, your daily trip to Starbucks.

Don’t get tripped up on making sure things fit squarely in a particular category – it’s your budget, so make it work for you.  Things are placed in these categories for the simple reason that when you start planning where your dollars go, you’ll want to start funding the expenses at the top of the list first. 

Now that you know what you have been spending, it’s time to decide how much to spend in the coming month for each area.  A few things are probably going to be pretty fixed – for instance the house payment or rent probably won’t change much – so start with those easy ones then fill in the rest starting with the Essentials and working your way down the categories.  If you end up with some money unallocated after going through all your planned expenses, congratulations!  Put the extra towards one of your goals.  If you’re a little short, then you should plan to cut back on some items in Discretionary or Lifestyle to balance things out. 

As you go through the new month, continue to track expenses to see if you can stick to the plan.  If something is not working, you can adjust the budget, but try to stick to it for the first month.  Since you’ll be keeping an eye on things you might stay under budget on a few items – that money can roll forward to next month’s budget.  Once you get a feel for what is working it will be straightforward to copy the previous month’s plan over to the next month.  There are a few larger infrequent expenses that can benefit from budgeting a portion towards their eventual cost each month.  For example, if you have put a quite a few miles on your car over the last several years, you might know that your car will need new tires this year.  You can certainly make a “New Tires” line in the Goal category, but I tend to think of things that go there as a little more fun than that – a beach vacation comes to mind again.  Anyway, in my budget under transportation I have a “Car Maintenance” line that I budget a little for each month, but don’t necessarily draw from, so I let it build up until I need it.  That way I’m not raiding the emergency fund, which is more for unforeseen expenses, but I’m still prepared when it’s time to get some work done on the car or buy new tires.  But remember, your budget should work for you, so fit things in so they make sense to you.

So all of that might still sound a little overwhelming to do with pencil and paper – and honestly it sounds that way even to me.  I use an Excel spreadsheet to manage my budget, but if spreadsheets aren’t your thing, there are some apps out there that can automate a lot of the process for you. 

Mint is one of the better known and more widely used apps.  It is available as an online platform at Mint.com and as a mobile app. It is owned by Intuit – yes, the Quickbooks and TurboTax people – so you can feel comfortable that your financial information is secure.  Mint can link to your banking and credit card accounts to help sort your transactions and allow you set a budget for different types of expenses.

Other apps will also allow you to link your accounts and, although they may ask you to carve up your expenses in a different way, they all work on the same basic principles.  They’ll also have a tutorial to help you get setup when you’re ready to get started.  A few you might look at include:

• You Need a Budget – YNAB for short – focused on giving every dollar a job.
• Wally – built in support of most foreign currencies, useful if living abroad.
• Goodbudget – helps you think through budgeting around your values and has some additional resources for couples.

Many financial institutions like Bank of America and Central Bank have budgeting tools available if you have an account with them as well, so if you really don’t want one more app on your phone, check to see what your bank has available.

If you do most of your spending in cash, then using an app might not be that useful.  But you can still stick to a simple budget using a stack of envelopes and a pen.  This old school envelope system is how many people handled budgeting before the digital age and it is still highly effective.  You take the expenses you determined earlier – groceries, utilities, transportation, pets, etc. – and label an envelope for each.  Then stuff each envelope with the budgeted amount of cash.  When it’s time to go shopping or pay bills, grab the appropriate envelope and you’re set.  Put the receipts from the expenses in the envelope to help track specific purchases through the month.  The great thing about this system is the money is always literally in hand and you can’t overspend without having to physically take money from one envelope and move it to another.  This physical act creates additional spending awareness and helps keep your budget on track.

How to go about making your budget is up to you, but the bottom line is that you need one!  It’s the only way to make sure you’re in charge of your money and the first step down the road to financial freedom and making your dollars go further.

_{Dad and Mom made their first budget way back in college before mobile apps were a thing to make sure they could support themselves before getting married.  They have been budget buddies ever since.  😊}