Macro Mondays: Budgets (5 of 8)
Welcome to another edition of Macro Mondays here on GradMoney! By now, you may be thinking that budgets are simply a way to completely cramp you style and cause you angst, but that's quite far from reality. Budgeting can be a helpful tool to get your life back on track and, as with things like cleaning or exercise, can be a way to reward yourself as well. You shouldn't think of it as rigid either -- budgets should be flexible, but not so flexible that they are pointless.
Below are some suggestions directly from Investopedia, which offer some general tips when it comes to budget creation.
When you’re getting used to budgeting for the first time, knowing these budgeting tips will help you manage and stay within your budget.
If you want to spend more on groceries one month because you’re having a party or craving something gourmet, there’s nothing wrong with that. Just spend less in another area to compensate. Don’t expect to always stick within the exact guidelines you set when you first created your budget.
Maybe your budget is so tight that the most fun you can afford are the ingredients to make some chocolate chip cookies or a one-night DVD rental, but at least allow yourself that. Or maybe you’re in a better situation financially and the choice is between saving 15% for retirement one month or buying a concert ticket and still saving 14%. You should reward yourself occasionally for your hard work. If you don’t reward yourself, it will be emotionally difficult to stick to your budget in the long run.
Check Lifestyle Inflation
For most people, lifestyle tends to inflate when income goes up. As you earn more, you might move to a nicer, more expensive place; start driving a nicer, more expensive car; and start taking more frequent or more expensive vacations. Some amount of rewarding yourself is okay; after all, if you reward yourself the same way on a $7.50 an hour wage or a $75,000 a year salary, yes, you might be able to save more and retire sooner, but where’s the short-term incentive to work harder, and what if you never reach retirement?
Some lifestyle inflation is okay, but you should be aware of this tendency and make sure the choices you’re making to spend more are intentional and not just a result of doing what people around you are doing. When you get a raise, it’s okay to spend a little more, but save a little more, too. Having more money means having more options in life, so the less you allow lifestyle inflation to creep in, the more choices you’ll have, whether the choice you want to make is to retire early, walk out on a terrible job, take a sabbatical or buy a new couch. (Learn more in How to Manage Lifestyle Inflation.)
Always Keep Your Spending Below Your Income
You may not be able to do this every month, or even every year, but it should be what you do most months and most years. For example, your expenses might exceed your income in December when you buy Christmas gifts, but that’s not a problem if you’ve saved extra from January through November to account for your higher December spending. And you might have high medical bills one year that force you to dip into savings, but that’s okay if you’re adding to your savings in years when you’re healthy.
Remember how we said that budgeting isn’t about deprivation, it’s about putting your money to its highest and best purpose according to your personal values and goals? One of your new budgeting goals might be to reduce your spending in a particular category so you can put that money toward something that is a higher priority for you. In the next three chapters, we’ll give you some specific budgeting tips for each spending category.
To learn more, visit Investopedia by CLICKING HERE.