In this article, we will discuss some common reasons why individuals choose to use budgets, and a simple how-to if you’re ready to start.
Umm, I have no idea how much I’m spending each month.
Regularly when I meet with clients, I ask them questions about their income and spending. Income is usually relatively simple to get a firm number, but the questions of how much are your monthly living expenses? or how much do you spend per month? are often met with, “Ummm, I have no idea”.
I don’t like budgets. Here’s why.
Obviously, if a person has a budget, they should know exactly how much they are spending and in what categories. But the problem is, who likes keeping a budget? Keeping a monthly budget requires substantial time to set up the initial budget, and especially to track actual expenses against what was budgeted, identifying any discrepancies. And who has time for that in their daily lives?
But the basic problem remains: to develop a good financial plan, you typically need to know where your income is being spent right now. And frankly, there are other reasons to have a budget as well – like figuring out if any expenses can be cut or redistributed so that your money better aligns with what’s important to you in your life.
So I have found a few simple ways to budget, which I actually use with my clients. Some of my clients prefer an online tool that can import data from their bank accounts and credit cards, like ynab.com. Other clients prefer an actual spreadsheet that they manage in Google Sheets or Excel. And in some cases, clients prefer to use an old-school envelope system, where the monthly cash gets put into envelopes for each of the expenses. When the money is gone from that envelope, no more spending in that category is allowed until next month.
Ready to start your own budget? Here are a few simple tips.
Here’s one way to get started which can work for some individuals.
First, make three sections on a piece of paper (or in your spreadsheet): Yesterday; Today; and Tomorrow. (I based these categories on an episode of Hilary Hendershott’s Profit Boss Radio podcast.) This assumes you already have some emergency fund stashed away.
Yesterday: In the “Yesterday” section, include any spend that you have already committed to. This will include rent/mortgage/real estate taxes, utilities/cell phone/cable, debt repayment like student loans or credit card, streaming services or gym memberships, car loan or lease payment, private school tuition.
Tomorrow: In the “Tomorrow” section, list out anything you are saving money for. This could include a vacation you plan for next summer, the purchase of a new car or home, college for your kids (or you), home repairs, or a wedding.
Today: In the “Today” section, you’ll include all the day to day things you spend money on, like groceries and restaurants, gas, clothing, and anything else you typically spend money on regularly. Typically, this is the section which is most difficult to complete because it varies so much from month to month and many items are discretionary.
To get a big picture view of your budget, complete the Yesterday and Tomorrow sections first. Compare that to the amount of take-home pay that goes into your bank accounts each month. The difference is your Today spend. Simple, right?
Now, it’s time to fine-tune.
Are you pleased with what you found from this exercise? In other words, is your spending aligned with your life priorities? If not, it’s time to fine-tune.
Carefully examine your last three months of credit card and bank statements. Make sure the expenses are included accurately in your budget. Highlight any expenses that are discretionary, meaning, you can modify them if you like. Can you eliminate some of your monthly subscriptions for a streaming service you no longer use or a gym membership you no longer attend? Can you scale back your eating out by making a weekly grocery run and spending some time meal-prepping to avoid all the casual food purchases? Can you eliminate the impulse walk through the accessories section at Target on your way to buy toilet paper?
I believe knowledge is power. If you have the information, you’re on your way to making informed decisions. A budget can be a step along the way.
If you’d like a copy of the budget spreadsheet I sometimes use with my clients, request one using this form: https://treefortfinancial.com/contact-us/