Macro Mondays: Budgets (4 of 8)
Welcome back to Macro Mondays!
For the next eight weeks, we will be taking a look at the process of budgeting: a topic in high demand yet is a subject of soreness for a lot of people who have tried and failed at budgeting in the past. I'll be sharing some invaluable knowledge from the university section of Investopedia, to help you through the process of budgeting in the New Year (2018) and hopefully beyond.
Today we are continuing last week's discussion about using different techniques and apps for budgeting by now taking a look at the proper ways to use a budget, how to do the budgeting process, and how often you should be budgeting. In other words, we are going to learn HOW to use the budget.
To learn more and read the original piece on Investopedia, CLICK HERE.
Once you’ve chosen the system that’s best for you, how do you start using it?
Track Every Expense, Even The Small Ones
It’s easy to remember how much you spent on rent or your mortgage payment. But how much did your lunch cost last Tuesday? Small expenses add up, so to track them, you’ll want to save your receipts, put all your purchases on the same debit or credit card to make record-keeping easy, or use one of the programs mentioned above that automatically keeps track of your transactions.
Pro tip: The transaction descriptions on your credit card statement or in budgeting programs aren’t always crystal clear, which can be confusing when you try to review and categorize your spending later. Receipts are a useful backup. If you don’t want the paper clutter, jot down each purchase as you make it on paper or in a smartphone note. Include the date, vendor, item and amount.
If tracking every little expense is too tedious, another option is to use cash for the small expenses, but only withdraw a certain amount each week or month and enter this in your budget as “miscellaneous.” This method will not give you the clearest picture of where your money is going, but if it prevents you from overspending, it’s still useful.
Update Your Budget Daily
Tracking your money this way will take minimal time compared to doing it all at month-end, and you’ll be more likely to remember to track all your cash transactions. You’ll also always know how much you’ve spent so far and how much you have left to spend for the month. You’re much less likely to accidentally go over budget when you’re keeping tabs on it every day.
Use Accurate Descriptions
If you shop at a big box store like Walmart or Target, you might make a purchase that includes groceries, clothing and household cleaning supplies all on the same receipt. If you list the purchase under Walmart, you won’t really know where that $150 went. You’ll have to break it down within your budget. The same is often true for purchases at grocery stores and Amazon.
Budget By The Month, Not By The Paycheck
Budgeting monthly forces you to think slightly longer-term than your biweekly paycheck, which can help you get away from living paycheck to paycheck. But monthly budgeting is not so long-term that you’re likely to get overwhelmed or derailed, unlike trying to make an annual budget (that’s a more advanced step). Also, you’ll get a fresh start every month. If you have a bad month, it’s in the past after 30 days. If you have high expenses one month, you can look forward to the following month when, for example, your car insurance isn’t due.
That being said, if you find that a weekly or biweekly budget works for you, do that. The most important thing is that you’re tracking your income and expenses accurately, not that you’re using a particular method or program to do it. The options discussed here are just suggestions that many people find helpful.
Plan for Both Fixed And Variable Expenses
Fixed expenses are items like rent and health insurance, and variable expenses are things like utilities and gas. Some costs, like groceries, can fall into either category depending on how much self-control you have. By looking back over past months’ bills and budgets (once you’ve been budgeting for several months), you’ll know what range your variable expenses tend to fall into and how they vary seasonally. For example, you’ll know that your electric bill always falls somewhere between $50 and $100, but that it tends to be closer to $100 in the winter and summer and closer to $50 in the spring and fall. Then, you can plan accordingly even for expenses that aren’t set in stone each month.
Plan for Occasional Expenses
Don’t forget to budget for expenses that only happen a few times a year, such as gifts, insurance and doctor visits. If you have enough room in your budget, you can pay for these as they occur. If you’re on a tighter budget, set aside additional savings ahead of time. There is no excuse for going into debt at Christmas when you know it’s coming every year. And if your best friend tells you she thinks she’s getting engaged soon, start setting aside money for those bridesmaid expenses.
Separate Required Spending from Nice-to-Have Spending
Required spending is the stuff you really need to live: housing, utilities, food, insurance, transportation to work. Nice-to-have spending is stuff you could cut if your income dropped or if you were willing to sacrifice to meet other goals: travel, gifts, donations, entertainment, eating out, and cable television. And clothes, beyond the bare minimum – except, of course clothes for growing children. When you know how much you really need to live on and which spending categories should be your priority, it will be easier to understand how much of an emergency fund you need and what you can cut when money’s tight.
Choose Categories That Work for You
Your budget can be more or less detailed depending on your level of self-control. Can entertainment be grouped under miscellaneous, or do you tend to spend so much on movies, restaurants and concerts that each item needs its category to help you understand exactly where your money is going?
Meeting Long-term Financial Goals
Use your savings category (see example below) to save up for your goals such as building an emergency fund and a down payment for a home. Ideally, your retirement savings come out of your pre-tax salary at work through a 401(k), but you may also want to budget for payments for a post-tax Roth IRA.
A budget spreadsheet is easily adjustable to accommodate different budgeting needs and styles. This spreadsheet is so simple that you can also model a paper-and-pen budget after it.
Here’s an example:
You can make your own simple budget by changing the income and spending categories to reflect your personal situation.
Next week, we’ll talk about some of the finer points of budgeting.