Budgeting : Getting Off the Beaten Path
How you spend money is based on habits and to change those habit you need to have a budget. But have you tried to track your spending only to be discouraged by what you find? Or so lost that you don’t even know what you are looking for? If you do not follow a budget chances are you will never get off that beaten path. Where it leads is wherever someone else (i.e. advertisers, marketers, and influencers) has decided you should go. Get off the beaten path and start moving toward your goals. In this instance, homeownership.
First, let’s not confuse budgeting with tracking. Many of use get caught up in tracking every expense expecting some great truth to be revealed about our spending and Eureka! It is true that what gets measured gets managed, but learn to measure first.
There are dozens of different strategies and apps to help you track spending and set a budget. You can create your own custom spreadsheets on Google Docs or Microsoft Excel. They range from one size fits all to the infinitely customizable. None of these tools are any use to you unless you understand what you want to build with the tools you choose.
Measure twice cut once.
Three Simple Categories
The first place to measure is what are we bringing in. It is common in our society to believe that poor people are poor because they don’t have a budget. But when you live paycheck to paycheck you know EXACTLY how much money is coming in. Ironically, more well-off Americans often have no idea how much they are bringing home each month and end up over-spending. Regardless of your situation, you need to total up all your income from work, social security, side hustles, etc. and determine the size of the pie and how to slice it.
If you think lack of savings is a matter of income rather than spending read this article on ideas to Increase your income. However, if you are willing to take a look at your spending and how it might prevent you from reaching your goals keep reading.
- Income spent on needs
Learning to identify needs from wants is surprisingly difficult for many off us. Start with the obvious stuff like housing and food and start adding to it. Use the reverse for wants; Cut expenses and stop cutting when it hurts because you have found a need. Unless I will go hungry or without shelter or clothing, it’s a want. And even some wants disguise themselves as needs i.e. name brand clothes, going out to eat, a storage unit for things I think I might need someday!!
The nice thing about Needs is they tend to be fixed expenses, meaning we can reliable predict how much we will spend in this category each month. Rent, internet, and cell phones tend to cost the same amount each month. Utilities like gas and electricity can be spread out over the year using their Average Payment Plans. Or you can do it yourself and never over pay the utility company. A similar strategy can be used for groceries. Save the receipts for a little while and average how much you spend each month.
Paying off credit card debt is a need also. The more credit card debt you have, the more the interest and service charges will eat away at your income. Set a realistic goal to pay it down and stick to it. While It may sound counter-intuitive, contribute to a savings account too! In fact, tie these two items together in your budget and weight it toward paying off credit card debt or building savings. For example you allocate $200 per month to savings and credit, putting $120 toward paying off the credit card and $80 to build the savings. Increase the amount that goes to savings each month as you get closer to reaching your goal of paying off the credit card or vice versa. You need to do both, but only you can decide which goals are most important.
Do think of a savings as a need. We typically think of this a place to put our budget surplus, but savings is not a bonus for those lucky enough to make enough money. People with a savings think of it as a need and put that money aside just like any other fixed expense. It keeps you from putting emergency expenses on your credit card!! Even if it is just $10 a week it is better than nothing. Eventually you will allocate some of your income to cover the expenses of buying a house and possibly a down payment, but start with an emergency fund. You may be familiar with the idea that an emergency savings account should have three to six months of living expenses, but economists Emily Gallagher and Jorge Sabat suggest that may be too much. They suggested that there is not much benefit to having more than about $2,500 in savings. Anything more than $2,500 use it to pay off credit card debt. If you don’t have credit card debt put it toward other goals like retirement or buying a house.
There are ways to save money on needs. For example you may have an expensive internet service but don’t need the bandwidth you are paying for. Most basic internet plans are good enough for streaming services. Cut back on your phone plan for the same reasons. You may not need an expensive data plan if you are connected to wi-fi most of the time. Drop your thermostat while sleeping to save big money on utilities. There are countless ideas to save money and a lot of great blogs about the subject. If you start cutting back even if you don’t need to, you can grow your wealth even faster.
- Income spent on wants.
Only you can determine what is a want and what is a need. I typically think off anything I can live without as a want. I like to read, but books are just a Want. There’s a really good book on that spells out the psychology of wants and needs by Ramit Sethi. He argues that if you don’t love something don’t spend money on it. It’s like Tiding Up with Marie Kondo, but rather than getting rid of stuff you have you don’t buy it to begin with!! I don’t love clothes, not much ‘joy’ comes from clothes shopping. So even though clothing is a need, I just don’t spend much money there which frees up money to spend on different categories I love like books. Ramit’s book is called I Will Teach You to be Rich. Check it out at your local library. When I buy something now I rarely regret spending the money. I only spend money on the Wants that I absolutely want.
There is a good chance you will start cutting spending if you prioritize needs, including savings, over wants. While we typically think of our money problems as not having enough income (most of those readers that think so didn’t make it this far) we can make the most impact by focusing on what is in our control – spending. Learning to play the hand you are dealt can keep you in the game long enough to get a better hand. It has helped me to be grateful for the things I have and helps me to not try to buy my way to happiness. I only have buyers remorse when I buy something I didn’t plan on buying and may not even want.
Here are some links on how you can set up a budget that works for YOU. We all have different goals and different attitudes toward budgets. Make the effort to find the one that works for you and you will never regret it.
Here are some links to help you find and set up a budget that works for YOU. We all have different goals and different attitudes toward budgets. Make the effort to find the one that works for you and you will never regret it. I recommend anything that works for you and costs nothing. Remember, you cannot BUY your way out of a spending problem.
The 50-30-20 Budget The simplest and easiest budget to use. The budget changes the way you think about the money you have. For example if you make $2000 but only $300 of that is for Wants you will psychologically feel like you have less money. If your needs are more than $1000 you will know that you are living beyond your means even though you can ‘afford’ it. And it would prioritize putting $200 a month into savings, something I never would have thought I could afford until I made it part of my budget a couple years ago.
Using free Google spreadsheets to create a budget There are many sites that will help you set up a spreadsheet to help you track how you divide your pie. Learn how to do it as well as you want, but keep it as simple as possible. You want it to be so effortless that you stick with it.
Using Mint to create a budget and track spending I mostly use this as a dashboard to quickly check where I am at with day to day spending. It is also useful because it will alert me when I get close to over-spending or to any unauthorized spending.
Pennies (Free iPhone App) This is a much simplified version of mint. It’s a great way to keep track of cash. Give yourself a monthly or weekly allowance and when you hit the limit stop spending. If you don’t hit your limit, roll over the amount to the next time frame. The app is really great if you are saving for a big goal because it helps you visualize your progress toward a big ticket item that took weeks to save up for!!
Zero-Based Budgeting (YNAB and GoodBudget) The programs cost money but you can learn more about strategies that work for you. Maybe you need to know where every red cent goes. Maybe you like spending a few hours every weekend tracking every transaction. If that’s you YNAB and GoodBudget will sell you a way to automate the process to save time. The point is, if that’s what works for you, do it!
Envelope Budget. Back in the day when everyone dealt in cash you could keep that cash in separate envelops allocated toward different categories. You could use the Pennies app to do the same thing and your ‘envelopes’ could be your 50-30-20 categories. The psychology is still the same.
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Eric Schlueter is a licensed real estate agent in Kansas under Parker Realty LLC . Contact us to see how he can help you to buy or sell a home.
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