Comprehensive Budgeting

What is Budgeting?

Budgeting is the practice of recording your income and expenses so that you can better understand and use your money. Your money has many places that it needs to go, but without any boundaries it’s easy to spend too much in one place and not have enough for another thing that was needed. A budget helps create guidelines in your finances so that you can spend your money wisely. Limiting yourself to spending just what you need lets you allocate the excess to other goals and expenses.

What Happens Without a Budget

Without a budget, our wallets and bank accounts are a constant game of estimated costs and future expenses. Not really knowing how much money is needed at any point, we are stuck in a pattern of over or under-estimating our expenses, sometimes with drastic results. If your expenses are overestimated, that margin of extra money at the end of the month or week might be an extra buffer for something fun, or maybe it was supposed to pay a missed bill. If you underestimate your expenses, you’ll know quickly in either the form of a declined card or a single digit checking account balance. Recovering from this may mean pulling money from your hard-earned savings, or worse, incurring interest in the form of credit card debt – a slippery slope that can lead to financial hardship.

Your Money Can Go Further

Spending money is fundamental to our lives, and we spend it nearly every day on all variety of different things. It’s difficult to remember those numbers, and nearly impossible to calculate those costs and percentages mentally. That’s why the practice of keeping a budget is useful for making sure that you have enough money at any time to pay for what you need. It helps to keep track of what you spend your money on so that you know which expenses are coming up again soon. Simply put, keeping a budget helps your money go further.

How To Build a Budget

There are many ways that you can go about creating and using a budget. There aren’t any rules around how you need to build your budget, there are some fundamental components to include in it. Here are the three main points for any kind of budget.

Logging Your Income

Logging your income lets you know how much money you have coming in at any time. Once your paycheck comes in, it’s your job to send it to the accounts and expenses where it is needed most. Keeping track of your income empowers you to set money aside for savings, expenses, and more. This can help you hit your savings goals and keeps you honest about your working capital.

Tracking Your Spending

Tracking what you spend is your foundation for forming an effective budget. Once you know how much you are spending, you can start figuring out where your money should really be going. Different ways you can track your spending include saving your receipts from purchases or logging your spending from your most recent statements and account history. If you have the dedication, try noting down all your purchases for a week and log them to your budget at the end of the week. Tracking your spending helps you to recognize patterns so that you get a better understanding of your usual expenses.

Planning for Future Expenses

We all have expenses that keep coming back. A budget helps you to categorize and track your expenses so that you know how much you spend and where. Recording your history of purchases helps keep you prepared for current and future bills. Keeping a log of reoccurring expenses is the best way to stay prepared so that you know how much to budget for them.

Budgeting Tools

Your budget can be stored on your computer, in a notebook, or on an app on your phone. Different people prefer different places and levels of accessibility. Depending on your preferences, you can use premade budgeting tools, or go solo and design your own budgeting spreadsheet. We suggest that if you are starting a budget for the first time that you use a premade app or spreadsheet, and only advance further once you feel comfortable and are looking for more features.

Budgeting Spreadsheets

Many people use spreadsheet programs such as Microsoft Excel or Google Sheets to build their own budget layout. Sheets offer incredible flexibility, but they can take time to build up to your ideal vision. Advanced spreadsheet functions allow you to automate calculations and suggest inputs. While spreadsheet budgets can be complicated to set up yourself, the payoff is tremendous. If you aren’t interested in custom-building your own budget, many premade spreadsheets are available online. They can offer you a starting point to build from or inspiration for your own creation. Get started with some great budgeting tips with this interactive article.

Budgeting Apps

Budgeting apps can act as a great way to easily access your information. They are usually filled with useful tools and easy access for cataloguing information. However, they are not nearly as customizable as spreadsheets or notebook use and can be frustrating at times. There are many options for budgeting applications with a large variety of features. Some require a paid subscription or have free versions with advertisements. Many budgeting apps are accessible online, while others are regulated to mobile devices. Some even pair with your bank accounts and credit cards to keep track of everything all at once.

Physically Tracking

Notebooks or binders are an “old school” approach to budgeting. These are great if you prefer something tangible, but still want access at any point. Due to the nature of physical goods, you will likely need to use your notebook along with a calculator to fully benefit from your budget. If you want something physically present to encourage you to keep track of purchases, a notebook is a good way to go. There is great satisfaction to physically writing down your budget, and it can be a very relaxing and meditative practice. Recording in a notebook is also a good way to rest your eyes if you work with screens all day. Various budget templates can be printed off the internet for you to use.

Keep in mind that physical budgets have downsides. They can be lost or destroyed much easier than a digital version. Security can also be an issue with a physical budget. If you are carrying your budget around with you it could be stolen, or your financial information could be compromised. Additionally, you miss out on the ability to create instant copies, erase content, or utilize premade templates or formulas. It’s a very different way to budget from the digital-age tools. However, you are primarily budgeting for yourself. If you prefer a physical copy for your budgeting, this is still an effective approach.

Entries & Expenses

The hardest part about budgeting is keeping up with entries. When you first start budgeting it’s best to update it every day. As you establish a good relationship with your budget, you can relax a little and move to a rhythm that you prefer, such as a weekly, biweekly, or monthly check in. Your budget is easier to do the more frequently you update it. Entries becomes more difficult when you let them sit – much like neglected dishes piling up in the sink. Practicing frequent budgeting ensures that you don’t miss entries and keeps your thoughts on money up to date, as well as strengthening your budgeting habit.

The most basic set up of your budget should include a section for your income as well as a section for your expenses. To “balance” your budget is to equalize your income with your expenses.

As you get started with your budget, you should overestimate your expenses slightly. This gives you some wiggle room as you get used to understanding how much you usually spend. Once you have a good understanding of how much you spend on each category, you can tighten your budget up and start putting that extra money towards your larger goals.

Static Vs Dynamic Expenses

As you budget and get to know your spending habits, you’ll start to learn that some expenses change frequently, while others stay consistent week to week, or month to month. There are two different kinds of expenses: static and dynamic.

-Static Expenses

Static expenses are things that you pay for on a regular basis that stay the same consistent cost. Some examples include your phone payment, rent, or your car insurance. These expenses are straightforward when it comes to budgeting because they stay one amount. All you need to do is make sure that you have that exact money set aside when your payment comes due.

-Dynamic Expenses

Dynamic expenses are a bit trickier to budget for. How much goes into your groceries every month or how much you usually spend on gas are both dynamic expenses, meaning that the exact amount spent varies. These are more difficult to budget for because you don’t know how much they require at first glance. The best way to budget for dynamic expenses is to track your spending in that category and learn what the pattern is. Once you have established your pattern of spending you can allocate money to what is needed. For example, if you usually spend $150-200 dollars each week on groceries, you can have $200 ready and earmarked for that expense.

Understanding your income and expenses paints an accurate picture of your financial situation. You can figure out what percentage of your money is going to food, to rent, or to renting movies online. This helps you to see how you can move your money around to best accomplish your goals. For many people, saving money is an important goal. (Learn about different retirement accounts here). Budgeting helps you reallocate your money to the things that you want. And once you know your expenses, you can save more money by reducing them.

Reducing Your Expenses

Dynamic expenses can be reduced by reducing your budget in that category. For example, if you usually spend between $150-$200 per week on groceries, you can try to reduce that budget by making $150 the upper limit to your spending. This artificial cap essentially frees up that flexible $50 and allows you to apply it somewhere else. In this way, your budget can be trimmed down. Establish a test period for your new budget before promising that money elsewhere. Give yourself a month without moving any extra money around. This helps prevent overleveraging your money and keeps your finances consistent. That way if you were only able to cap your grocery spending at $170 each week you still have that money available to you.

Static expenses are reduced differently from dynamic expenses. The situation varies for static expenses, but they remain static from the moment you start them. You can reduce these expenses by canceling, downgrading, or bargaining for the services that you pay for. This may mean finding a different insurance provider or reducing your internet speed. If you notice that you are spending most of your money on rent, it might be an indicator to find a cheaper living solution. Money can be saved on static expenses if you are willing to compromise. Learn some easy ways to “trim” your budget here.

Managing Infrequent Purchases

One of the difficult pieces to budget for are the infrequent – but recurring – expenses. Examples include getting new tires for your car or buying a new phone. These are things that need to happen on an infrequent basis, but they are still inevitable expenses. Rather than being hit unexpectedly with expenses like these, you can anticipate them beforehand by accounting for the costs in your budget. For example, if you anticipate buying a new smartphone every year, you just need to divide the average cost of the phone by the months until you expect to buy it. (For example, $800/12 months = $66.6/month.) This equation can be added into your budget as a monthly expense. But instead of that money going away at the end of the month, it sits in your savings in preparation for when it’s needed.

Once you start saving for expenses down the line, make sure that you keep track of what that money is promised for. When it’s all in one account it is easy for it to get mixed together. Keeping a “savings account” sheet that explains what the balance of your savings is comprised of is a good way to keep track of your money. This helps you to know what your money is intended for.

Budget to Afford the Life You Want

Reducing your expenses doesn’t have to be a painful process. After all, the point of budgeting is to get the most out of your money. It’s important to pay for things that you enjoy. If you like having an unlimited data plan or living in an expensive apartment, that is something that you can make a financial priority. The practice of budgeting isn’t here to take that away from you: it’s here to make that possible. Your money can be moved around other places so that you can afford the standards of living that you desire. It’s not about reducing and reducing until you have nothing – you deserve nice things too. Don’t forget it.

And those are the basics of how to start your budgeting journey. Keeping a budget is a discipline that helps you to save money and understand what your financial situation looks like. And despite all the numbers and calculations, budgeting doesn’t need to be boring. You have the creative power to make your budget entirely your own.

Additional Tips & Tricks

Here are some additional tips to help you keep your budget on track.

-Divide your paycheck as soon as you get it.

Whether you have direct deposit or receive a physical check from your employer, you should make a habit of dividing your pay amongst your accounts as soon as it’s deposited. This keeps your money organized from the start, and holds you accountable for contributing to your long term savings and other goals.

-Create an emergency fund

An emergency fund is an important piece of your financial portfolio. Having money set aside specifically for the unexpected is a great way to avoid dipping into your other savings accounts, or taking on debt. Learn the importance of building an emergency fund here.

-Budget to zero

Budgeting to zero is the practice of allocating all of your income to your expenses. This is an aggressive style of budgeting that encourages you to adhere to your spending goals with the utmost importance. When every one of your dollars is earmarked for specific purpose it puts your under pressure to stick to your budget. But remember, budgeting to zero only works when you have some money left over to pursue the things that you enjoy, and contribute to your savings. Don’t try to invent expenses just to fulfill your income – you won’t see good results if you do so.

-Budgeting with a partner

If you have a partner it’s very helpful to budget together for a complete view of your finances. Rather than dealing with the unpredictable nature of spending individually, try combining your  household expenses together and budgeting them equally. This can be assisted with a joint checking account and debit card. Learn here how to track your joint expenses.

-Set reminders

Setting reminders for your financial upkeep helps you take time for the maintenance you need. This can include paying down credit cards before the due date, depositing paychecks, and updating your budget. You can also blocking off time in your calendar for longer projects.

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