This is the seventh of ten posts describing the key pillars of building a strong financial foundation. Read the introduction here. Check back each Monday for the next post in the series
Many people cringe at the word budget. They don’t like the idea of having their spending planned out for them or not being able to spend as they please. In my mind though, budgets are extremely important and aren’t set in stone. As your life changes, so does your budget or spending plan. Even if you don’t stick to a budget all the time it is helpful for you to at least build the framework of one as the basis for how you handle your finances.
I consider the excel file that I use to track my finances my “budget” file. In this file there is everything from my spending tracker to my net worth calculator. I have tabs that show me my progress on meeting my saving and investing goals, as well as tabs that have goals for the year. By having all of my financial information in one place, I can easily chart my progress and plan my future.
Try Out a System
While I use a spreadsheet to track my finances, there are a lot of other ways to do it. Some people use a program such as Quicken or a website like Mint.com. Other people do everything by hand on paper. Whatever you choose to do, stick with it for a while and see if it works for you. You may realize after a while that spending more time focused on thinking about your money is all you really need to stop your bad spending habits.
I’ve even heard of people that use cash in envelopes labeled for different types of expenses. In that case, when the “fun” envelope is empty you have to wait till you refill it or cut back in another area like “groceries” or “housing”. This kind of system would be extremely helpful for anyone trying to stop using credit cards.
Determine Your Cash Flow
Before setting up a monthly budget it is helpful to determine you monthly cash flow. Figure out how much money you get paid after taxes each month. Then subtract any retirement or future savings. This is your useable positive cash flow.
Next, determine all of your recurring monthly expenses (housing, utilities, etc.). Then estimate your other expenses such as food, medical and transportation. Add everything up and this would be your total expenses. If you have been tracking your expenses line by line you can summarize the past months to get a better look at the amount of money going out the door.
Take your monthly income minus your monthly expenses. Hopefully this number is positive and you are spending less than you earn. You now have the basic framework for a budget.
Plan a Month of Spending
Pick the 1st of the month or another day of the month and figure out what all of your expenses are going to be for the next 30 days. Lay out every category you spend money on and put an exact value in each one. If you want a template you can use this one or a more advanced one from mint.com.
As the month goes on, track what you spend in each category. Don’t adjust how much you budgeted though. Try to stay below budget in every category. The months where I have created a budget and strictly stuck to it are the months where I ended up spending the least amount of money. When I don’t use a budget I just spend money on whatever I feel like and don’t have any clue how much I’ve spent until the end of the month when I track the expenses.
Do What Works for You
In the end, some people will love budgeting and charting their progress. Other people will complain that it is a pain to keep track of and that it doesn’t help them. I recommend that you try multiple ways of budgeting and do what works best for you. Without taking the first step and setting up a budget, you may go through life spending money wastefully on possessions and experiences that don’t truly matter to you. Build a budget and your future self will thank you.
Financial Foundations Series