This is part of a series of posts on 10 Important Financial Lessons To Learn While You’re Young. A new lesson will go up every Friday. And if finances bore you, don’t worry…I’ll keep posting non-finance things on Mondays!
Ok, I changed my mind. You still get bonus points if you decided to make a budget after reading last week’s lesson, but now I’m going to say you really should do it anyway. :-p
Budgeting is not hard, but it is something that takes some effort to learn and maintain. The basic principle is simple: to create a budget you should track your income, track your expenses, and don’t spend more than you make. But we’ve been trying to stick to a budget for a little over a year (about as long as we’ve been tracking our spending) and I’m only just now feeling fairly confident about my budgeting plan. The problem was I jumped right in and tried to “stick to” my budget without even being sure that I had a workable/reasonable budget.
We use Mint (which is free!) to create our budget. I love it because it automatically connects to our bank accounts and credit cards, pulls in all of our transactions, and even attempts to categorize them for us (though sometimes it makes some fairly hilarious mistakes! It always wants to categorize Bar Method, my exercise class, as “Alcohol & Bars”). Then it keeps track of each category, how much we’ve spent, how much is left, etc.
|We went $1 over in “Mobile Phone” so it gave us this big red angry bar!|
But if you’re just starting out my suggestion is to start with baby steps. For your first budget use only four categories:
- Income: This is your income, duh. But make sure this category includes all your income, not just your regular paycheck. You should count tax refunds, gifts, side job income, etc. The only income we purposely leave out is interest income from our banks because it’s such a small and varying amount.
- Needs: You can be fairly flexible on what is included in this category (and in the Wants category) but try to be reasonable. Obviously you should include money spent on rent or mortgage and groceries. Utilities. Insurance. What counts as a need varies from household to household, but these should be the most important things, the things you really couldn’t do without (without a major lifestyle change). For us, our cell phones count here, but our gym membership doesn’t. :-p
- Wants: This should be pretty much everything else you want to spend money on that didn’t fit into the needs category. And this is where you should cut expenses if you need to cut them down one month.
- “Allowance”: This is actually a fairly important category for us. The idea is that sticking to a budget can be super hard, and you’re not going to be successful if you don’t give yourself a bit of leeway. So we make sure to set aside a little bit of money for each of us each month that we can spend on whatever we want. It doesn’t have to fit into any category and we don’t have to be accountable for it. If I wanna spend my allowance on Starbucks and shoes I can, dammit!
By the way, Lesson 5 is going to touch on savings, which will be it’s own category somewhere between Needs and Wants. More on that later!
One very important thing to remember about your budget is that it will change month to month. I didn’t realize this at first and spent many months beating myself up for it. Our spending was never the same month to month and it freaked me out because I had to keep changing the budget when we went out to eat an extra time or spent more at Michael’s than the previous month (damn craft habit!)
What I finally realized is that if I took our twenty or thirty specific spending categories and grouped them into the larger categories of Wants versus Needs, our spending on Needs was mostly the same each month. It was the spending on Wants that varied so much. It was a nice realization because, besides eliminating some of the stress I felt about the budget changing so often, it also eliminated some of my worries about what we were going to do if we ever needed to cut back on the budget. There’s a big ol’ chunk of Wants that can be reduced before we even have to worry about starving!
So that’s it, just split everything you earn or spend into one of those four categories. If you want to get more detailed later, you can divide those four categories further like we did. (Maybe I’ll write a more detailed post later about how we use Mint for budgeting.) But always make sure you still know the difference between your needs and your wants. At some point you will probably need to cut your budget back for some reason or another, and you need to make sure to do it from the right places.
Do you already have a budget? How’s that going? Have you tried to make one before, but had a hard time like we did? Do you use a different budgeting strategy? (I keep hearing about the envelope method.)