Budget like a Rock Star

So you are convinced that it is a good idea to make a budget, right? Right!

But how do you start?

Let’s start with the easy part- income. Most people have a fairly steady income and should know how much money is coming in. If you have a variable income, you need to treat it like you treat your spending- use your best guess based on history/upcoming income that you know about, and be conservative. Update it as you learn more.

After you know how much money hits your bank each month, start by getting an idea of where your money is going now. A baseline, if you will. It will probably take a few months for you to get a full picture of your expenses, but don’t let perfection get in the way of planning. Estimate now and then you can adjust as you go. When I got my first job out of grad school, for the first four months my clothes spending was triple what it is now because I needed a full professional wardrobe. Now that I have the staples, I’ve adjusted my budget to reflect my lowered spending and my lowered need for clothes (did I really just say that?! There is no such thing as a lowered need for clothes!)

There are a few ways to go about tracking your spending. While working on this part of your finances, I would recommend relying on debit or credit cards (but don’t use this as an excuse to overspend!) just so that you don’t make yourself crazy trying to figure out where your cash went (or, if you are a diehard cash user….save those receipts!) When it comes to actually following a budget once the amounts have been set there are ways to use cash only and still stay on track- I’ll cover that later.

Method 1: The Worksheet Method

Make your own spreadsheet and fill in your expenses. Pros: You can adjust it to fit your lifestyle. This is good if you have complicated finances or if you mainly use cash, because you will have to manually enter your expenses anyway. Also, you can keep it supersecure by saving it only to your computer. Cons: Pain in the butt. High maintenance, and you really have to be committed. If you suspect this will be too much work for you, don’t do it. Make it easy on yourself to stick to a budget!

Method 2: The Automated Method

Use a personal finance tracking software. I use Mint.com, which is very secure (and pretty awesome), but there are other options out there. Mint works by linking all of your accounts into one website so you can look at your spending, your budgets, your savings goals and your investments all in one place. NICE. Mint automatically uploads your spending and files each purchase into your budget tracker, so you can see how you are doing for each category. Mint also tracks long term trends in spending. It’s pretty great. And there’s an app.

Worried about security? Mint is just as secure as online banking. But more awesome because everything you need is in one place.

Ok, now you know where your money is going. Next, set your budget!

First you need to make a list of the main expenses that come up regularly in your life. Here are examples from my own budget:

  • Rent
  • Utilities
  • Cable/Internet
  • Phone
  • Public Transportation
  • Taxis
  • Emergency fund
  • Restaurants
  • Savings
  • Gym/Fitness
  • Alcohol/Bars
  • Retirement investments
  • Groceries
  • Clothes
  • Charities
  • Haircuts
  • Travel

Next, set target amounts of what you want to spend in each category based on how much you normally spend. Be realistic-  don’t worry about “trimming the fat” just yet. If you usually spend $250 on groceries, don’t suddenly expect your spending to drop to $100 just because you wrote it in the budget. Some items won’t come up every month- I don’t travel every month, but I plan to fly every three to four months, and that is in my budget.

Now, add it up. Is your budget less than your income? Awesome! Book your flight to Vegas, baby! (Or, keep reading this blog so you can learn about some good long term plans for that spare ca$h).

Is your budget more than your income? Still awesome, because now you know where your money is going, and you can make a plan to tweak your spending so that you are living within your means. You are becoming empowered to take charge of your financial life, and that is something to be proud of.


Budgets or the line at the DMV: Which is Worse?

Budgets sound like they are NO FUN. They sound like they are as much fun as going to the DMV, except that you don’t need a budget to drive a car…so maybe you can skip that particular adult task? No. No, you cannot.
I am betting that even the word budget makes you feel guilty. And maybe a little scared. I used to feel exactly the same way. I thought that if I had a budget, then I was certainly going to go over that budget every month, and then instead of feeling vaguely guilty about something that I didn’t really know about I would have a real reason to feel guilty for mismanaging my finances. If I didn’t have a plan, I couldn’t feel bad about not following the plan, right?

Except that…without a plan, how would I be able to save for things I really want? You’ll notice that I have wanted Lasik for seven years now. If I had made a budget seven years ago, I would be staring at this screen with contact-free eyes! I wouldn’t have to keep buying contacts and glasses (goodbye, money….) But let me tell you, my left eye is a little itchy because I am wearing my contacts right now….and I will keep on wearing them for a  while longer, and it is my own fault for not having a budget. Or maybe a currently unknown rich relative’s fault for not dying and leaving me massive amounts of money.

Without a plan, you are much more likely to overspend and get yourself into debt that you could have avoided in the first place.Without a plan, how do you know if you can afford to do the things you want to do? I wanted to join a pretty swanky gym when I moved to my neighborhood. I had never joined a gym before because I thought it would be too expensive, but because I had a budget, I figured out that I could afford the membership (hellooooo sauna!)Do you have any habits that you only do occasionally, like take taxis instead of buses? How much is it costing you? How do you know, unless you track where your money is going? I don’t have a car, and before I had a budget I felt guilty every single time I took a cab instead of waiting for the bus. EVERY TIME. But you know what? Now I have budgeted cab money into my monthly plan. I can take as many cabs as fit in my budget, and I never have to feel bad about it! Once I have used up my monthly cab budget, then it is bus stopville for me….but until then, I have given myself permission to stop feeling guilty about spending on luxuries because I know exactly how much I am spending and I also know that I can afford it. It is an amazingly liberating feeling.

Also, I know that if I do badly on following my budget one month…well, it is a guide for myself and only for myself. I’m not getting graded. So there is always next month, and I can always reassess and adjust my budget as need be.

Budgets sound terrible, but they are really freeing. They free you from feelings of guilt. When you budget for everything you HAVE to pay for (stupid electricity bill) and everything you SHOULD pay for (emergency fund, investments) then everything you have left over is yours to do WHATEVER YOU WANT WITH.
ANYTHING AT ALL (within the budget, of course).
Want to spend the remainder of your budget playing penny slots after flying first class to Vegas on a whim? You are being totally responsible! That is a legitimate way to spend your money because you already took care of all of your responsibilities! WOOHOO!
Don’t you feel better? Don’t you want to make a budget? Aren’t budgets fun? Isn’t Vegas fun?
Don’t worry, I’ll discuss exactly how to make a budget soon. Stay tuned!

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