Someone asked for my help this past week in creating a budget for their household. I was happy that this person took the initiative to ask their questions and seek some guidance. Did I mention that my little excel-happy heart fluttered at the thought of getting to help another person with their budget?
Budgeting is like baking. Too much of one ingredient throws off the natural balance and chemistry of each of the other ingredients and the final product will not be so tasty. Forget an ingredient, and the end result may be unrecognizable from what you had wanted. I remember the first time I tried to bake something in my teens. I had never read a recipe before, nor used any sort of measurements in the kitchen. When the recipe I was using called for a cup of sugar I was pretty stumped. Did they mean grab a cup out of the cupboard, even though drinking cups are all different sizes? I hesitated, but grabbed a small drinking glass. Then I asked a more experienced person. They giggled before explaining to me the concept of measurements and the chemistry involved.
Once you know the basics in both baking and budgeting, the end result is better and the activity itself becomes more enjoyable. From someone who has been budgeting longer than she has been baking, here is some of the advice that I gave to this person.
Keep These Goals in Mind to Build a Better Financial Future
Your goal should not just be to pay the bills each month (though this is a worthy goal). To ensure you are in a better financial situation in the future, there are several other areas you should keep in mind when filling out a budget sheet. These include Savings (emergency fund, college fund, etc.), Retirement (it will happen for most of us one day), and increasing your future cash flow (by allocating enough in paying down debt each month that one day more of your paycheck will be yours).
For Most People, You Don’t Need that Second Job
Paul has told me a few times over the past few years that he needed to get a second job to bring in more income. Every time he says this I look at him like he has two heads. If you find yourself near the poverty line, under the poverty line, or generally not covering your basic necessities, then yes, finding a second or more lucrative job is important. But most of us can just use a tune-up on our budgets. Wouldn’t you rather curb your spending a bit each month then spend 20+ hours more away from your family and home working at a job you might not like? Maybe you have a specific financial goal you are trying to reach (paying for a wedding, paying for college, extra bills, medical bills, etc.) and so picking up a second job for a certain amount of time might be a great idea. But I caution against working your life away to meet your spending appetite. Instead, curb your spending appetite and live a fuller life.
Choose an Intensity Level
Each of us is at a different stage in life, both financially and personally. Some of us are debt-free, while others are in dire situations where we are anxiously awaiting our next paycheck and life feels like it’s on hold. When sitting down to budget, you have to decide how tight to pull in the reins. If you are in a desperate situation, then your budget will need to be extremely tight with little added cushion or hardly any excesses (entertainment, luxury items, gifts, etc.). If you are debt-free and meeting your other savings goals, then your budget is going to look very different. While Paul and I were paying down our non-mortgage debt in 2009-2010, our budget was a bit intense. We did not allocate anything for entertainment though we definitely kept ourselves entertained. We went on spending hiatuses, we grocery shopped every other week (still do) and cooked nearly every meal at home on a $250 monthly food budget (at one point we had it down to $160 with the grocery game).
Now that we have reached non-mortgage debt freedom, our budget has eased. We both have fun money to spend on whatever we wish each month, we allocate money towards a travel savings account, and we have upped our grocery budget to $300 (which has delighted both of us because we enjoy experimenting in the kitchen).
I would also caution against a high intensity level for too long of a period; when there is no room in your budget to cut loose, you tend to snap back to the other extreme and binge spend after a period of time. Moderation works in finances as well!
There are two ways to work a budget: by figuring out what you want in your savings and working your way backwards, or by filling in each of the categories until you finish the list. I know this sounds like it is the same thing, but the difference is there. When you do the latter, you may have no money left for the savings category and will be quick to give up. When you do the former, then you must get creative with the money that is leftover after allocating to your financial goals. At the end of the day you cannot spend more than you make. But you might stretch your imagination a bit by figuring out what you would like to save for the year, dividing it by 12, and then filling in the other categories.
Allow for an “Other” Category
Having an “other” category may save you each month from repeatedly taking out of your entertainment, saving, or other category when extra costs creep up (as they typically do). At the end of the month if there is still money left in the “other” category money, you can choose to pad your account/jar/envelopes with the extra for the next month, or you can spend it as you wish.
Treat Your Savings Account as a Bill Collector to be Paid
Treat your savings category as a bill to be paid. Otherwise, you might constantly take from this category when in a pinch (perceived or not) and may end up in the same financial place next year. You have to make the changes now to ensure a brighter future. If your head is barely above water, you still need to figure something out so that next year the water level only comes up to your neck. Who knows, two years down the road you might be wading in the kiddie pool! Also by not allocating this category as the go-to when in a pinch, you will give yourself the opportunity to be creative with your limited resources.
Equate Money to Something Other Than Legal Tender
My money is much more than legal tender used to purchase the things and experiences I want. My money actually symbolizes independence. And once I gave money such value in my teenage years it really became much harder to part with it. I would caution against going overboard with this, but if you treat your money without respect, then equating money to something important to you will help you to hold onto more of it.
Tweak as Needed
Budgets need to be changed as your needs, wants, goals, and income changes. What may work for you right now will likely need to be adjusted next year and don’t be afraid to pick one month out of each year to tweak your budget. The better a budget reflects your actual lifestyle, the more likely you are to stick to it.
If anyone would like a copy of the excel sheet that I gave to this person, please send me an email to firstname.lastname@example.org. It is very simple to use (did I mention it is fun as well?), and has built-in calculations. I would also be more than happy to attempt to answer your budgeting/financial questions.