Take my budget advice, gained from setting, maintaining, and tweaking budgets for two decades now. You'll be surprised at how much this budget advice can help!
For most people, budgets are a drag. They represent limits, and “adulting”.
The word itself conjures up images of spreadsheets and the Grinch.
But let me ask you this:
- have you ever gotten into a fight with your loved one over money (I have)?
- what about that feeling in the pit of your stomach or the one pounding in your head when you think about paying bills or dealing with creditors?
- have you ever felt frustrated with finances and like you will never get ahead?
I am here to give you my very best budget advice, from decades of keeping one (plus working with others on setting + keeping their own budgets).
Budgeting Tips for Beginners
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, as it can be tough when learning how to manage your money.
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, making the final product will not 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 for how to start a budget.
Tip #1: 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.
- Savings (emergency fund, college fund, etc.)
- Retirement (it will happen for most of us one day)
- Increasing your future cash flow (by allocating enough in paying down debt each month that one day more of your paycheck will be yours)
Tip #2: 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.
One of my biggest budgeting tips for low income earners: 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.
Tip #3: 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 (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!
Tip #4: Work Backwards
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.
Tip #5: Allow for an “Other” Category
This one helps with how to live on a budget (especially living on a small budget). 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.
Tip #6: Treat Your Savings Account as a Bill Collector to be Paid
This tip's great for how to save on a tight budget: 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.
Wondering how to budget and save money? 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.
Tip #7: 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.
Tip #8: 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.
Tip #9: Tweak as Your Cost of Living Increases
The agency I used to work for stopped giving cost of living increases for three years in a row. This was during the recession, when lots of places stopped giving increases (such as my husband's company, as well). But you know what? Our cost of living, well, continued to increase.
So, where did this leave us? With a small, but noticeable gap in our budget between what we had expected our expenses to be and the reality of the situation.
Because this happens from time to time, you will periodically need to tweak your budget and increase the flow of money to your checking account, decrease your spending, or fill the gap from savings (that should be a last resort).
Budgeting Tips and Tricks
I remember when I first sat down to budget right out of college and realized just how little money I had to spend in each category. In my case, this was self-imposed because I wanted to meet my savings goals. But it still felt limiting. Instead of dwelling in that feeling of limitation I overcame it by getting creative. Over the years I have found that you can grow the spending power of your budget from month to month without adding any money to it. Not only can this help with inflation, but it can also give you some breathing room.
Trick #1: Build Breathing Room into Your Budget
You can live the rest of your life with a monthly budget and you would be doing better financially than a lot of other people. But don’t you want more for yourself? What if you go without raises/promotions for several years, or introduce new little ones into your life without introducing extra money, or are faced with continued inflation on nondurable goods like gas and groceries? Your budget’s spending power would erode over time and suddenly having $300 to spend on groceries/toiletries each month would no longer cut it. At that point you would need to either make more money or allocate less money towards your future goals (savings, retirement, college funds, travel funds, etc.) to make up for the shortfall.
If you want to be ahead of the game and give yourself and family some breathing room, then you need to not only think about how your budget will help you survive in this month, but also how it will help you thrive in future months.
Trick #2: Make ‘Investments’ Now to Free Up Money Later
To achieve this, take a small amount of each month’s budget to “invest” in future cost savings. A future cost savings could be a new vehicle for work transportation or a degree in management to help you advance in your career. With a tight budget, this could be $5 or $10 per month to start with (adjust the amount accordingly). It may feel impossible at first, but it’s really you doing something nice for your future self. Here’s how to “invest” that money:
- Purchase More Durable Non-Durable Goods: Sometimes it pays off to spend a few extra dollars when purchasing an item now so that it will last longer down the road. For example, we purchased a metal paint pan that we washed and reused throughout our home on numerous projects rather than purchasing the cheaper, flimsy, plastic kind that gets the job done but is meant to be thrown away. We spent more money on glass bird feeders because we learned that the plastic kind, though cheaper upfront, had to be replaced within months due to squirrels tearing through the holes.
- Buy Items that Replace Future Spending Occasions: Perhaps you can use your ‘investment’ dollars this month to purchase items needed to change your own oil. This investment will pay you back for months and potentially years to come by keeping you out of service shops. When looking for a crib for a newborn, spend more upfront so that your crib can be turned into a bed, thus saving you from having to enter a bed store in a few, short years.
- Make it Yourself for Lower Cost and More Product: I recently purchased all of the ingredients necessary to make my own laundry detergent for about $8 (I say about because I actually have enough ingredients left to make another half batch). Not only should this last for at least twice as long as store-bought brands, but it also will reduce the amount of chemicals in our home. Think of areas in your own life where you can make something from scratch and save your family money.
- Buy Bulk: For items that you use consistently (like the copious amounts of mustard my husband consumes each month), spend that extra money you have allocated to invest on making a bulk purchase that will cost more up front but last longer. You could buy bulk diapers, pet food, cooking oil, batteries, toilet paper, etc. The trick is, don’t use more of the item now that you have more of it in your home (one way to avoid this is by pouring the bulk item into your last, normal-sized empty container of the product and storing the rest so that it is out of reach/out of sight). Try to stretch it out so that next month or even two months from now you do not need to purchase the item within your budget at all!
Trick #3: Give Purpose to the Extra Money
As the months go by the effect of making small investments in your future budget will begin to give you some breathing room. Perhaps one day towards the end of a future month you will notice that you have an extra $30 left burning a hole in your pocket because of the snowball effect you’ve created. Are you going to splurge with the extra money? Could you tack this money onto next month’s budget and begin an even bigger snowball of extra funds? Or do you want to set the money aside in savings? The choice is yours to make, but it is a choice that deserves some of your attention as you continue to make small ‘investments’ and see the gains in future budgets. We all know how extra money tends to disappear.
By setting aside a small amount of money in your budget each month to allocate towards freeing up money in the months to come, you are making life a bit easier on yourself, hedging your budget against future inflation, and ensuring that you will be able to continue making those necessary payments into your savings account.
What You Should Know about Budgeting
If you are just beginning to budget, then you will quickly face something that the rest of budgeters have long been acquainted with: the unexpected monthly expenses that do not fit into your categories.
Examples include an unexpected car repair you need to make in order to pass inspection, an opportunity that wasn’t available before that you would love to take advantage of, an appliance breakdown, unplanned doctor visit and antibiotic, etc.
When this happens, it is easy to throw your hands up in the air and give up in the name of a force greater than yourself which you are convinced will continue to sabotage all of your saving efforts (forget about the fascination our culture seems to have with the sock gremlin who lives in the dryer; I’d love to get my hands around the neck of the money gremlin).
But don’t give up just yet!
You may be tempted to tap the emergency fund to rid yourself of these money gremlins. But this is not necessarily the best answer as the money gremlins tend to just keep coming; if you tap the emergency fund every time you are in a pinch, your fund will disappear.
There are many strategies financial experts have developed in order to protect you against these expenses that seem to come out of nowhere. My favorite one is the idea of opening a spillover account (separate from your emergency fund) where you budget a certain amount each month to be deposited into as well as sock away any leftover budget from less expensive months.
The next time an unexpected monster from the depths of the black hole promises to wreak havoc on your budget, you simply take from your spillover account, and voilà: your monthly budget is unscathed.
I’d like to offer a few other ideas that are timeless and very effective in allowing you to meet your budget goals each month. In fact, you have probably used each of these at one time or another, so this might just serve as a good reminder that you do not always have to cave into needs and wants (I include needs because many times we perceive wants as needs).
- Substitute: This approach is great because it won’t lead to a feeling of deprivation, which is bad for both budgeting and dieting. Your need/want is still being addressed which means you are reaching satisfaction, just not the way that you had originally planned. In order to be successful with substituting, make sure whatever you substitute with fulfills not just the physical form of the need/want, but also the emotions of it as well. What do I mean by this? Let’s say you have an impulse to shop. If you choose to stop shopping cold turkey, you might binge shop one day. If instead you shop at dollar stores when you get the urge, then you might just spend $5 and fulfill that need. I am not suggesting purchasing things for the sake of accumulating items, as that is wasteful. But if you purchase a few items that you have a purpose for either now or in the future (physical form), this will fulfill your impulse (emotional aspect) while allowing you to remain on budget. Craving some comfort desserts? Bake your own at home instead of heading out to a cupcake boutique, ice-cream shop, or adding dessert onto a restaurant bill. If you are out of shape and motivated to begin exercising, take advantage of the great outdoors or an exercise video from the library instead of signing up for a new gym contract. With each of these examples you are getting the satisfaction you crave, just in a different (and cheaper) way.
- Borrow: If you have a one-time need, then borrowing from someone else could be much more cost effective than purchasing for yourself. For example, my husband takes care of mowing our lawn. He borrowed an edger from his brother to trim all of the edges along our walkways because he will only need to do so once a year (thank you Matt!). If you are taking a trip to another country, then borrow a travel book from the library or a friend instead of buying one. Remember that other people will most likely want to save money by borrowing as well, so be open to lending to them in reciprocation.
- Delay: If you can delay your gratification then you will give yourself more time to save and budget for the expense. Even if you cannot save up any additional money for it, delaying until the next month or several months from now means that your budget for that category is reset and you can stay within your limits. For example, instead of splurging on new sneakers right now, try a pair of foot inserts to breathe more life into your current pair (this has worked for me in the past).
- Do Without: If you have the luxury of choosing to do without (i.e. it’s not a medical need or a true need at all), then you should give this option some thought. I have heard that some people with impulse shopping addictions try to change their behavior by going home for two days instead of purchasing something right away. If in two days they still want it just as much, then they make the purchase. Most of the time they probably forget about it or have moved their desire onto something else.
Honestly, I could imagine ways to throw off my budget all day long and I am convinced life would still throw out something I had not even given a moment’s thought to. But Paul and I still budget because we have learned that giving your money a purpose will allow you to save more of it than if you had given it no purpose at all.
Secret to Budgeting
One of the biggest secrets to budgeting? Is matching up your budget-on-paper with how you use it in real life.
Excel sheets and plans-on-paper are great; but if you don't get this part right, then you likely won't stick to your budget.
Let’s take a look at the different methods you have to spend your budget (each of which I have used at one time or another in my life):
Spending Method #1: Without Guardrails
If you are very disciplined, you can take advantage of reward points by expressing your budgeted spending on a credit card. This means you will need to check your credit card statement every few days or so to make sure you are within your budgeted limits. Since credit card statements for the current month do not usually specify each transaction to designated categories, you may need to keep running totals of each category of spending (can also input this into excel automatically using programs such as mint.com).
Depending on your comfort level, you may give yourself even fewer guardrails by figuring out a number that you need to stay under for the month instead of breaking everything down into categories. Add up groceries, gas, and other expenses from your budget sheet and keep that figure in your head. As you check your credit card statement once a week or so, make a mental note of how much you have left for the month and adjust your spending accordingly.
Note that without any guardrails in place, and with a potential maximum credit limit of thousands of dollars, you need to be proactive about tracking how much you are spending. Nothing is in place to keep you on track with your excel sheet with this method except for yourself.
Spending Method #2: Financial Guardrails
Perhaps having a credit card with no specific maximums that will trigger (except when you max out the credit line…yikes!) is not for you. After all, if you do not check up on your account balance throughout the month, you may be in for an unhappy surprise when the bill is due.
Perhaps you also do not want to go to the other extreme either: cash only.
If you are not disciplined enough with plastic but still want some of its convenience (i.e. at the gas pump), you can do a hybrid method of debit and cash. A debit card is tied to your bank account, and so overspending is usually not an option. If you don’t have the money in your bank account to cover the charge, you will get an overdraft fee (this is a type of feedback, as typically your bank will notify you) and will need to make other arrangements. Some banks even allow you to sign a statement saying that you will not allow overdrafts on your account. This means that the transaction will be denied (could lead to some sticky situations), but at least you will not go over your budget. After repeated instances you will need to decide if you have learned to not over withdraw, or if you need to move onto a cash-only money system.
Spending Method #3: Mustang Budgeting
If you need to be extremely tight with your budget and extremely sure of what you and your partner are spending, then you might think about using a cash-only method with immediate feedback.
This is also the place to start if you need to learn some spending discipline.
Each week, every other week, or once a month (depending on your comfort level; weekly budgeting can ensure that you have money left for that last week of the month by slowing your spending in the beginning) you can withdraw cash from your bank account and fill envelopes, jars, or anything else with the amount of money you planned in your budget. This means you will have jars/envelopes labeled “groceries”, “gas”, “kids”, etc.
Budgeting is very tangible with this method, as when the money runs out so does your spending. The feedback is also immediate. If you have $100 left in the grocery budget for the month and it is mid-month, you need to adjust your meal plan accordingly and use the money that is left to supplement food in your freezer and pantry in order to make that category work. If you have extra gas money at the end of the month but are low on funds for a school field trip, then you can easily take the money from the gas jar/envelope and put it towards the trip. If you only spend what is in the jars, then your budget should balance each month.