Tips For Budgeting
Nothing is perhaps more significant of the struggle of the dual nature of humankind as the difficulty of budgeting. Intellectually, we know that keeping a disciplined budget is a sound practice that will pay off in the long run, but emotionally, we want to spend like there’s no tomorrow.
The first misconception to clear up is that budgeting is not for everyone. There is no financial bracket so small that it can’t be improved by budgeting, nor is there an economic bracket so lavish that it needs no budget. Given unrestrained spending, all amounts of money will vanish at an equal rate.
The 50/30/20 Rule
Author and US Senator Elizabeth Warren describes this rule in her book All Your Worth: The Ultimate Lifetime Money Plan. The rule is that after taxes come out, a budget should ideally be:
- 50% necessities
- 30% “wants”
- 20% savings
This is a commonly cited axiom, or rules similar to it. But it’s not always applicable. Someone in poverty is barely able to afford necessities at all, let alone luxuries and savings, while a typical middle-class young adult today is likely swamped with Student Loan debt so that they have to pay off their obligation first before they can think about savings.
Instead, it’s good to adjust your priorities to match your situation. You can cut your budget in all three departments.
You can downsize your necessities by finding real estate with cheaper rent, for instance, or cooking cheaper meals at home instead of eating out. Even shopping for lower-cost auto insurance can lower your necessities expenditure. You might be used to thinking of software as a necessary expense for your career, but Free and Open Source (FOSS) software offers many viable alternatives to common office tools. Whole businesses run a full stack of FOSS tools from the operating system up and never have to pay a dime for anything but support.
As for savings, cutting debt as much as possible counts here, since you’re likely saving yourself interest payments in the long run. Once you have debt erased, savings should be a category you think twice about. More likely, this is the “emergency” fund, but you could consider towards keeping only 10% as stand-by emergency funds and the other 10% invested in a 401(K), bonds, or other investment. Money just sitting in an account doing nothing almost isn’t savings at all.
Finally, the “wants” budget portion is usually the first to be cut. But give some consideration here, rather than doing with no luxuries at all, to making inexpensive choices. Inexpensive recreation options are always available. A small indulgence can be as satisfying as a big one while producing less “sticker shock.” Or that five-dollar latte you buy every day at the trendy coffee shop can be replaced by a home espresso machine and a bag of beans once a month.
General Budget Tips
Have a predictable income. This is so you can budget ahead month by month. If you have a variable income, decide what amount you can count on having at the worst-case scenario and go from there.
“Budget to zero” is also a commonly cited axiom. It means simply to budget completely, even if a dollar amount ends up in the “flex funds” category. By assigning every dollar to a job, you’re more likely to maintain control of your funds rather than experiencing a deficit.
Always look at what you really use. Inertia creeps into any budget over time. You might be so used to paying for a cable TV bill that you never think about it, but a new generation of “cord-cutters” have moved on to online video entertainment, which is typically free or much cheaper. You might be paying for a gym membership that you hardly use, or paying data charges on a device you hardly pick up.
Track every expense. You should make a habit of saving receipts and invoices for everything, even the most incidental purchase. It’s easier that way to add it up at the end of the day. Once you start doing this, you’ll likely be surprised at the spending you were doing in areas you never knew were taking up so much of your funds.
Forecast ahead as far as possible. There are semi-annual expenses, such as taxes or vehicle registration, which can put a dent in your budget when you only think about it the previous month. Looking six months ahead will help you buffer for expenses as they come up. Likewise, for luxury spending, you can save up a little at a time for a big purchase, and not have it blow a hole in your balance that one month.
As a rule, it takes about three months to form a new habit. This includes budgeting. You’re likely to make a few mistakes at the outset, but use these as learning opportunities and you’ll find yourself sticking to a budget more faithfully as time goes by.