Budgeting for Dummies - Although Reading this is Smart
If you are going to control your money and not let it control you, then you need a budget. The core of any budget is knowing what money is coming in, what money is going out and if all of those numbers align with your goals.
While it sounds like an awful lot of trouble to develop and stick to a budget, it is actually empowering. Careful budgeting means you are making responsible decisions for a particular time in your financial life.
Budgeting for Dummies - Although Reading This Is Smart
If you had wanted heady academic advice about budgeting you would have consulted an economics professor. If you wanted to drill down deep into debits and credits you would have consulted a CPA. But you’re here because you just want some solid advice on creating a budget and sticking to it. Nothing too technical. Nothing too complicated. Let’s just call this Budgeting for Dummies.
Why Create a Budget?
A budget gives you a crystal clear look at how much money you’re making and how much money you’re spending. Hopefully the income column is more robust than the expense column. If it’s not, you can use the budget as a tool to change that. Building a budget allows you to work toward specific financial goals. They could be large goals like eliminating all credit card balances within the year. They could be more specific goals like pay in cash for that dream vacation to Aruba.
Deciding How Your Budget Looks
Your budget is going to contain information that is very important to you. Different types of people respond to and process information better in different formats. One person loves a spreadsheet and another can’t wait to dig into a pie chart. You have to find what works for you, inspires you and easily gives you the information you need.
Spreadsheets
You might want to start with something as basic as paper and pencil and a pad of paper. You can run columns of numbers this way with a calculator in hand. A spreadsheet is also a fine framework for a budget. The rows and columns allow you to add and subtract and you are never further than a few clicks away from having the spreadsheet do the actual math for you. Different people have different levels of spreadsheet comfort. If spreadsheets speak to you, by all means, use one.
Apps
For visual learners and those who love all things tech, there are many apps that are useful for budgeting.
Mint is a popular choice. It draws information about cash on hand from bank accounts, keeps track of credit card balances and other outstanding debts or loans. It allows you to create a budget and also reminds you when bills are due. The colorful graphics are punchy and maybe even fun.
YNAB, or You Need a Budget, is an app that is focused on what you are about to do with your money. Instead of only analyzing what has already been spent, YNAB encourages you to purposefully spend every dollar. The emphasis is not on spending less but spending better.
Budgeting for Dummies Tip: Find a budgeting method that is easy to use, is visually pleasing to you and is easy to access and update.
Get Organized
Now that you have picked your platform it is time to get organized. This budgeting for dummies process won’t work unless you have gathered all the information you need. This is a time for brutal honesty and painstaking attention to detail.
Income
You need a clear picture of how much money is coming in. For people who make a straight salary that information is on recent pay stubs. For people who earn commissions, run their own businesses, work as independent contractors or receive tips, income can fluctuate wildly. The safest thing to do is to calculate an average income over a specific period of time.
Expenses
The next step is to gather up your expenses. You probably have a fixed monthly expense that covers housing. But your monthly utility costs may vary by the season. Your gas bill might be higher during cold winter months than during warmer times in the summer. There are also going to be some annual and semi-annual expenses like auto or homeowner’s insurance. As you budget you will clearly see the trends in fluctuating expenses.
Next up is to document as many reasonable expense categories as you can. These are things that are just the cost of living. Things like:
Transportation
Food
Clothing
Healthcare
Personal items
Charitable contributions
Gifts for others
Credit card and other debt
Technology
Entertainment
Retirement Savings
It is also a good idea to budget for unplanned expenses like the unexpected nail in the tire or the out-of-pocket cost for the broken ankle.
Budgeting for Dummies Tip: This is a great time to carefully study the individual expenses in these categories. Could the food category be reduced by replacing delivery pizza with frozen pizza? Are you actually watching all the streaming services you subscribe to? Are your credit card balances getting out hand? Are you funding your retirement to take full advantage of your employer’s match?
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Set Priorities
Compare your total income versus your total expenses. Hopefully even after all the bills are paid you have money left over. If you are just breaking even you are living paycheck-to-paycheck. If you don’t have enough coming in to cover your expenses, budgeting for dummies to take steps to get those two numbers closer together. One way is to cut expenses.
Cut Expenses
Your expense list is going to contain a lot of non-negotiables. Obviously, you need a place to live. You need to keep the lights on. You need a way to get to work. You have to pay your credit card debt and other debt like student loans to keep your credit score intact.
When you get down into clothing and entertainment you have the room to make more choices. Should you shop for clothing seasonally? Maybe slow down the pace of new shoe shopping? Can you sell those things hanging in the closet with tags still on them through an online resale site and use that money for new things?
Increase Income
Another way to bring the incoming and outgoing totals together is to find a way to bring in extra income. A side hustle or a freelance gig might help solve the immediate problem but it always worthwhile to study expenses carefully to see if there is any room for reducing them.
Budgeting for Dummies Tip: Compare income and expenses with a critical eye looking for categories that can be increased or reduced to bring the budget into alignment.
Set Goals
When you are working through this process you should be setting budget goals. There are three different types of budgets for meeting and exceeding goals.
- The Planning Budget
This is the budget that is planning for a specific financial goal. It could be something like a big wedding, a dream vacation or a new home. To work a plan like this into the budget, you have to figure out how much money you need and divide that into the length of time you plan to work toward this goal. Then you will know how much extra money you need to earn or how much you need to reduce spending in other categories to make this goal.
Budgeting for Dummies Example: You’d like to visit Turks and Caicos two years from now. Airfare, hotel, and meals will cost about $5000. If you divide that $5000 into the 24 months until the trip, you’ll know you need to move about $208 a month into the vacation planning part of the budget. - The Problem Solving Budget
This is the part of the budget that is designed to manage a certain financial area. Maybe your entertainment category is very much out of alignment with your other expenses. At this step, you look carefully after things you can eliminate or reduce to bring the problematic part of budget into line.
Budgeting for Dummies Example: You might decide to reduce the entertainment spending portion of your budget by $100 each month. That can be achieved by replacing three out of four first-run movie tickets on Friday nights with Amazon rentals. Maybe give up one of your specialized sporting cable channels because you can always catch the game on somewhere else. And maybe moving from three monthly subscription goodie boxes to one. Don’t eliminate completely too many of the things you enjoy because it will be harder to stick to the budget. - The Comprehensive Budget
This budget might be used to reduce expenses in every possible category. The cuts may be smaller but more plentiful.
Budgeting for Dummies Example: If you want to reduce expenses in many categories begin with smaller things like bringing lunch to work two days a week, splitting Uber rides with friends, putting the thermostat down a degree in winter and up a degree in summer and carefully choosing which live concerts to attend.
Follow Through
A budget is only as good as your effort to make it a part of your life. Your spreadsheet may be spot on. Your graphics may be as colorful as the rainbow. But if you create a budget and then ignore it, it just won’t do you any good. So how do you stick to a budget?
Be Honest With Yourself
Don’t vow to stop your morning latte habit because $20 is the difference between reaching your financial goals and not. If you genuinely enjoy that latte and it’s a treat you look forward to every single day then keep getting the latte and shave away from something else that isn’t quite as delicious to you.
Set up a Payment Calendar
Whether you use a paper planner or a budgeting app you must keep track of when your bills are due and make sure to get them where they are going in advance. Late payments take chips out of your credit score and late fees are a waste of money.
Set up Auto-drafts
Put your bill-paying on auto-pilot by setting up automatic drafts from your bank account. Your payments will be on-time and for the correct amount.
Watch Your Social Calendar
Is your June bursting at the seams with friends getting married? Are your grandparents celebrating their 60th anniversary with a big party? You’ll have to increase what you’ve budgeted for gifts and maybe even travel expenses. If you are watching the upcoming calendar you will be more prepared for the months that are more expensive.
Don’t Carry Around a Credit Card
If you face the world armed every day with just a debit card you are less likely to overspend. You know those funds disappear nearly instantly when you use a debit card. But credit cards seem just a little farther into the future and a little less like real money at the moment. The safest place for your credit card is at home tucked inside your checkbook. That might help you think of both of them as your real, cash money.
Wait to Buy
That “buy now” bottom at the bottom of every online shopping cart is calling your name. After all, it’s so easy to stay in your pajamas, pour a steaming mug of tea and shop your little heart out. If it’s non-essential spending that doesn’t exactly fit the budget, a good rule of thumb is to move that shopping tab to the back and give yourself a set amount of time to think about it. 12 hours or even 24 hours from now that belly burner may not seem like the answer to all your fitness needs.
Budgeting for Dummies Tip: Food is usually an easy category to cut some expenses without giving up on decent meals. If you grab a bagel and coffee on the way into work, step out to buy a salad for lunch and pick up Chinese takeout for dinner, begin by trying to plan one of those meals for yourself at home each day.
Can you toast a bagel and carry your own coffee in a disposable cup on Monday? Maybe on Tuesday you can bring your own salad from home for lunch. (Bonus points if you make two at a time and have one with the dinner you’re going to make on Wednesday.) Maybe on Wednesday you can quickly saute some shrimp at home with a green vegetable and boil some pasta on the side. Just like your budget, plan in advance. Save some money by shopping for groceries and preparing meals.
A Budget is a Living Thing
Don’t think of your budget as something that is absolutely set in stone. Think of it more as a living thing that evolves with your personal situation. A big income tax return might speed along the road to that dream vacation. A generous bonus at work might wipe one credit card balance completely off the budget. Part of budgeting for dummies is a willingness to constantly assess your income and expenses.
Your income may also decrease. Perhaps the company is having a bad year. Maybe bonuses have been completely eliminated. But if you are faithful about keeping an eye on your budget, you are instantly able to zero in on categories that can be adjusted.
Conclusion
Creating a budget is the best way to truly understand what you make and what you spend. With a budget you know what bills are coming and you will have the money ready to pay them when they are due. Select the tracking method that works best for you whether it’s pen and paper, spreadsheets or budgeting apps. Gather and organize the categories and totals for all of your income and expenses. Set priorities among non-essential expenses and look for ways to reduce what you spend. Also, you want to make sure that you are saving up enough money each month. One of the best ways to do so is to set up a savings account.
With a budget in place, you can set goals for the future that may include big trips, big purchases or eliminating debt like student loans quickly. It’s important to keep track of when bills are due and make the payments on-time so that you can continue to build your credit score. Practice controlled spending and make good choices within the structure of your budget. And be prepared to adjust the budget for any of life’s circumstances.
With a budget in place you control your money, it doesn’t control you. And you’ll never spend money that you don’t have. Now you know all about budgeting for dummies which actually makes you financially smart.