Brussels sprouts… Monday mornings… Joan Jett… all of these things have bad reputations (some of them more deservedly than others). But know what definitely doesn’t warrant its bad rep? Budgeting.
Budgets have one of the worst reputations out there. People hear the term and automatically think “deprivation.” Images of eating rice and beans in a tiny, dark apartment spring to mind.
Now, there are plenty of reasons why budgeting might not be a good solution for your personal situation. In fact, our founder isn’t a particular fan of budgeting and has other ideas about how to grow your money.
But budgeting can be helpful for saving money and managing your cash flow. It helps you live according to your values, helps you save money and helps you achieve financial goals. When you budget, you get the chance to see up close where you spend your money, which gives you the power to continue that way or to change it. Budgeting is like having a supportive friend just for your money. And you should at least know how to do it, right?
There are a lot of budgeting styles out there to choose from. No one way is better than another. So let’s figure out the best way to set up a budget for you.
How to Set Up a Budget
Setting up a budget can be a simple process. (Another vicious rumor: Budgeting is hard!)
First, you’ll get to decide how you’ll budget. You can choose to track your spending manually with either an Excel spreadsheet or a notebook. But there’s also a bevy of personal finance apps out there.
Today, so much of our lives are managed online. And it’s no different when it comes to budgeting. Apps like YNAB or Personal Capital might be the way for you to go.
Personal Capital is free, which makes it attractive to a lot of people. It also tracks your net worth, has a fee analyzer to see if you’re being overcharged by your broker, and shows your various accounts in a graph. This app incorporates your investments and retirement accounts too.
YNAB (stands for “You Need a Budget”) is strictly about budgeting. No investing accounts here. So for those who just need a way to track their spending and earning and don’t care about their investments or retirement accounts just yet, this is a better fit. YNAB is also great at accountability — it hooks you up with a budgeting partner so you can use each other to reach your financial goals. It costs only $50 per year.
(We’ve reviewed a lot of budgeting apps here at Investor Junkie — here are some more favorites.)
The most important part of picking the way you budget is to feel comfortable with the system. Budgeting does require some time and effort every month. So do yourself a favor and pick a method that you’ll actually want to use. It’s a small step, but don’t make the whole endeavor harder by choosing a system you hate or one that has a steep learning curve.
Budgeting is supposed to get you closer to your money, not further away from it.
Second, you need to categorize the parts of your budget the best way for you. Not everyone has the same expenses, so not everyone needs an identical budget.
Start with broad categories like housing, transportation, food and entertainment. From there, add item costs that apply to your life.
For example, here’s how my housing category breaks down into in my budget:
- Utilities (electric, trash, water)
- Renters insurance
If you’re a homeowner, things like property taxes should be included in this budget. For each item, I assign a cost. This way, I know how much it costs me to keep a roof over my head each month. Knowing that cost allows me to put aside that money month to month.
Here’s another example. I recommend that people keep a list of their debts in their budget so they can see how much they owe and where it is. If you have a monthly debt payment (like student loans), it should definitely be included in your budget, since you have to pay it each month.
You can list them out something like this:
- Credit card 1
- Credit card 2
- Student loan 1
- Student loan 2
- Student loan 3
- Car loan
By listing your debts separately, you see each debt’s individual balance and interest rate, as well as how many debts you have in total. It’s a fantastic way to organize your debts and keep everything straight.
Other big categories to start with can be personal expenses, business expenses and medical expenses. Again, start broad and work expenses down into their individual costs.
The third step may take a little time. It’s important to set up your budget as accurately as possible. If you’re guesstimating the costs in your budget you’re really not helping yourself out.
Accurate numbers are essential to getting your money organized. If you think that your monthly expenses are $2,000, when in fact they’re really $2,400, you’ll end up in the red each month.
Take a month to play around with your budget. Track each purchase you make and every recurring expense you have. By having accurate records of both your income and your expenses you’ll have accurate numbers for your budget.
After you’ve done steps one through three, your budget should be in great shape! From here on out, it’s maintain and adjust.
If you get a puppy, you should add line items that correspond to the cost of having a dog. Food, vet bills and dog toys should now have a line in your budget. Similarly, if you want to cut costs, eliminate things from your budget that you’ve stopped spending money on.
The first time you sit down to get things organized, give yourself a solid hour. You’ll probably need to sort through your credit and debit card history, pull up bills online or sort through some mail to get a realistic view of your finances.
However, once you’ve broken your budget down into broad categories and individual expenses, you probably won’t need much time month to month to manage your money. As long as you follow your budget faithfully, it can be a pretty low key part of your life.
Having a clear, easy-to-understand and up-to-date budget can be a financial game changer. It just gives you such a clear, big picture view of your money. Even if that picture is one that you want to change, you have to know what it looks like before you can make any adjustments.