At its core, budgeting is setting aside money from each paycheck to go towards a specific goal or category of expenses. That’s it. You get paid, you give those dollars a job, and then you only spend whatever you have saved for a particular category. To give you an idea of what this looks like, here are some of the categories that my wife and I have set up for our budget:
- Eating out
- Car fuel
- Car repairs
- Fun (movies, clothing, apps)
- Cell phones
- Summer vacation 2015
Notice the mixture of month-to-month (eating out, groceries, fun) and long-term (summer vacation, car repairs) expenses. Also think about how bills (cell phones, internet) will be relatively consistent from month-to-month, while things like car repairs can vary in cost.
The first step for any good budget is to figure out what you’re currently spending money on. To do this, it helps to group your transactions into categories.
All of your categories should fall under one of the three following “master categories.” Although grouping transactions into categories is useful, it helps to group those categories together, based on whether they’re things you have to pay or not. Here’s what we currently use:
- Fixed costs — These are things that you have to pay for every month, like a cell phone bill or groceries, and the cost is relatively consistent month-to-month. This is also the master category for things that you have to pay for in a lump sum. Think about a six-month car insurance premium. If you know that in six months you’ll need to pay $600 to Geico, you can set aside $100 every month for this purpose. When it’s time to pay, you just pay it; no scrambling for cash.
- Discretionary costs — These are the general things that you pay for each month, but that you’re not obliged to buy. This master category accounts for things like going to the movies, your new hoodie, or going out to eat. The categories here are flexible, because you can reduce how much you spend each month, without missing important payments.
- Rainy day — These are long-term expenses and things that you want to save for. An example: Christmas gifts are expensive, and you may not think about saving for them during the spring and summer. However, by tossing $10 into the Gifts category every month, you’ll have $120 to spend, come December!
So what are some categories that go into these master ones? Here’s what my wife and I have been using for the past several months:
- Car fuel
- Car lease
- Car insurance
- Rent insurance
- Student loan
- Eating out
- School + Work
- Car repair
- Nest Egg™**
No two budgets will be the same, but I think that the above categories are a good start for anyone who is relatively fresh out of college. Two special notes for our Buffer and Nest Egg™ categories:
Buffer — The Buffer is just that: a special slush-fund to put any “extra” money in. Think of it as a liquid-able savings account. The Buffer is nice, because it allows us to have a little wiggle room, if we ever go over in a particular category. For us, we’re trying to get our Buffer to the point where we have a month’s worth of funds inside.
The Nest Egg™ — The Nest Egg is really just a placeholder for our long-term savings account. There is only one rule with the Nest Egg: you never, ever, touch the money inside. It’s the first category that we put money into, and it will be the last one we take money out of, which is why the Buffer is useful. The Nest Egg just sits there and grows. We’re trying to put a solid 15-20% of our income into the Nest Egg, and it’s already surprised me at how large it has grown after just six months.
When talking about a budget, it’s important to talk about credit cards. These little pieces of plastic make it easy to swipe and click our money away, but budgeting can help keep you out of credit card debt. Forever.
It’s simple: no matter where your money is located (credit card, savings account, checking account), you stick to your budget. Your budget is based on your income, so it doesn’t matter if you spend $20 on clothing with your credit card or a check. You’re only spending money that you intentionally set aside, which safeguards you from ever overspending.
When cash was more prevalent, a great way to budget was to have physical envelopes with the names of each category on them. Whenever you got paid, you would then take that paycheck and divvy it up between the envelopes. When an envelope was empty, so was that category. I don’t see myself ever using this sort of system, but I know a few people who do (notably, Shawn Blanc).
For me — and a decent percentage of my generation, I’d wager — managing cash sucks; especially since most employers offer some form of direct deposit. For my wife and me, we find it much more convenient to access our money through our debit cards. However, this convenience needs to be kept in check, because it is easy to overspend in a category when you’re not dealing with a limited amount of cash.
The tech and apps
Over the past 18 months, I’ve used a lot of different apps and websites to manage my money. I had used most of The Sweet Setup’s Apps for Managing Personal Finance before that list existed, and I had even tried tracking everything by hand, in a big notebook. However, the tools I found the most success with were the ones that kept it simple and put the responsibility on me.
If you’re new to budgeting, I’d warn against any sort of app or website that promises to do much of the “budgeting” for you. More than a bunch of tools and apps, budgeting is a state of mind. Your goal is to become a good steward of your finances. That being said, there are some apps that I’ve found fit into this ideology nicely:
You Need A Budget, affectionately known as YNAB, is a fantastic piece of software, with an even better online community. There are other “finance” apps out there, but most of them just help you see your spending trends, not curb them.
Note: YNAB’s mobile apps are free, but they require the desktop app to sync with, which costs $60. College students can get it for free(!), but if you’re not in college, don’t let the price deter you. Using YNAB will help you save that $60 several times over, and it remains the best software investment I’ve ever made.
YNAB doesn’t tie into your bank account, which means that it can’t automatically download your transactions. However, I find that this is a blessing in disguise. Being forced to manually enter all my purchases has the same psychological effect as using cash; you play an active role in the transferring of money, rather than a passive one.
YNAB also has some other neat features, like being able to see spending trends over time, which has proved useful in finding areas that we were spending money that we didn’t need to.
YNAB is great on its own, but my wife and I share the same bank account, which means that there needs to be some way to sync our transactions. Thankfully, YNAB stores all its data in Dropbox. All I had to do (even though my wife and I have different Dropbox accounts) was share the YNAB folder between our two accounts, and everything stays up-to-date.
If you budget for long enough, you’ll realize that entering in transactions on the day they occur is much easier than trying to reconcile a long list of line items from a bank statement. To ease this effort, it helps to start asking for receipts.
However, if you’re anything like me, you have over a decade of experience in abusing and losing receipts. My receipts will end up in coat pockets, car drink holders, and the bottom of my bag before they ever end up on my desk. Thankfully, there’s a wonderful little app called Scanbot (affiliate tag), which lets you quickly snap a picture of your receipt, and then it will automagically upload that image to Dropbox. All that’s left is to recycle the paper slip and smile.
Numbers, Excel, or some sort of spreadsheet
Categories are great for making sure you don’t go over budget, but how do you figure out what the max amount for each category should be? Here’s where a good old fashioned spreadsheet comes into play. Using the categories above as a guide, you can map out your total expenses for a month, and then subtract that from your total income. From there, you can tweak the numbers, until you find a plan that fits your saving goals.
Plus, it’s always a little fun to change the
income field to $1 million every once in a while.
It’s about you and your money
If you’ve never created a budget or thought about your finances before, this whole process could seem overwhelming. However, with just a month or two of effort, you’ll begin to feel a freedom and confidence that you may have never felt before.
That’s how it was for me. Over the course of my senior year, I went from dangerously inept with money to, what I feel is, very competent. My wife and I are saving our money, living within our means, and have established a lifestyle that has helped prepare us for any financial storms that may blow our way. I’m not an expert by any means, I still have a lot to learn about investments and retirement planning, but I feel well versed in the fundamentals and ready to learn more.
For me, budgeting is a lot like exercise. It’s something that, if done a couple times a week, will only help improve your life. I can’t promise that budgeting (and learning how to budget) involves less sweat than a 2-mile jog, but at the end, the results are the same: you feel good, your heart rate relaxes, and a sense of accomplishment permeates your day.
—Friday, 12 December 2014