8 Tips For Effective Budgeting
Budgeting isn’t always easy. It takes some effort to get it set up and a lot of commitment to stick to it and make it work. However, budgeting doesn’t have to be painful and it can really add value to your life.
Gwynn and I have tried a number of different budgeting techniques, each with their pros and cons. It took us several years (10 in fact) to come up with a method that works really well for us (another post). Along the way it became apparent that there are a few critical things that make budgeting effective and I’d like to share them with you.
1. Account for all of your income. It’s important to know what your total monthly or bi-weekly income is in order to know what you have to start with. It’s a good idea to mark out on a calendar or spreadsheet the dates you get paid and the total amount. This is a critical first step in setting up an effective budget.
2. Have an accurate list of all expenses. Start with all the necessary expenses such as phone, water, hydro, home insurance, mortgage, car payments, groceries etc. Make this list exhaustive, it won’t help if you cheat and leave out items you need to pay monthly or quarterly. Once you have all the necessary items listed move on to other items such as cell phones, internet, cable, eating out, clothes etc. I can’t stress enough the importance of listing everything here.
3. Set up automatic transfers. Take away the urge to spend the money in your account by never letting it get there in the first place. One way to do this is to set up automated transfers for the day you get paid. Set up as many transfers as you need by having the money go directly to your emergency fund, holiday fund or retirement fund etc. We have 4 automated transfers set up so that the day after pay day the money is automatically shuffled off to 4 different accounts, and we don’t even see it. It’s really easy and for the most part it’s set and forget.
4. Be realistic. It is important to be realistic with the amounts you set in the budget. Like having an incomplete list of all expenses, being unrealistic with the amounts you allocate to each item will make the budget unreliable and highly ineffective. Some items vary from month to month, like the phone bill for example, so track the amounts for a few months, take an average, and round up to the nearest $10. It may also help to add an additional $10 or $20 to the budgeted amount, if you have enough breathing room, to make sure you are covered each time.
5. Use cash. A lot of people swear by using cash and I am certainly one of them. It was VERY difficult initially but it really helps to curb spending. I find it’s a lot harder to part with $80 of physical cash for a pair of jeans when I only have $100 cash a month to spend on clothing. I am a lot more aware of the money I have and what I spend it on. Conversely, I wouldn’t have thought twice of spending $80 on a pair of jeans if I put it on a credit card and I would have been more likely to go over my $100 budget since it’s not as visible.
6. Have fun money. This is where budgets get a bad rep. If you budget too tightly and have no money on hand for fun stuff you’re more likely to get frustrated, annoyed and give up on it. Be sure to include things that may seem extravagant or frivolous if you enjoy them. Things like going to the movies or out for dinner, be sure to budget what you can towards them and take the money out in cash. This helps you to spend guilt free (and trust me you will spend it anyway so best to capture it).
7. Align budgeting with your goals. It helps to have an idea of what your long term goals or directions are so you can make your budget work for you, not control you. If your goal is to go overseas for a month but there’s no money left over to allocate to a travel fund your budget is rather ineffective. You could start by taking a look at where your money is going and if there is somewhere you can cut back to make greater headway with your travel goal.
8. Find a system that works for you. There’s a lot of software available to help with setting up a budget. My advice is to evaluate several and use one that works for you. There is nothing worse than trying to use something when you’re fighting it every step of the way. There are complete software packages available like Quicken and MS Money. There are also online resources such as mint.com and quicken online. We’ve looked at a few different options but none have met our needs 100%. We set up a very detailed budget using a very simple spreadsheet. It works for us because it’s flexible, simple and reports information in a very customizable format.
Using these tips you can set up an effective budget for yourself and your household. A budget should be used as a tool to help you align your spending with achieving your goals. Budgeting doesn’t have to be hard or restrictive. If done effectively it can add a great deal of value to your life.
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Photo courtesy of: b.franchina
It’s Frugal Friday here at Serene Journey! Every Friday we will address the topics of frugality and finances. If you have any suggestions or particular things you would like discussed on this subject please drop us an email or leave them in the comments.