Do you keep a budget or spending plan?
Even if you have a budget, it’s hard to keep track of how much you are spending and on what. And what if you want something that’s not on the budget? Do you just buy it anyway?
If you’re confused about budgeting and spending plans, continue reading to learn how to set spending limits (aka a budget) and keep them.
The Wrong Way to Budget
Do you know anybody who goes over all their expenses at the end of the month and then acts surprised when they find out how much they spent on gases, groceries, clothing, or something else?
You wince and grimace, but then you pay the bill. The next month plays out the same. This isn’t budgeting, this is spending money on whatever you think you need and then checking the receipts and/or banking statements at the end of the month. While it’s important to check your monthly expenses, especially credit card statements, this won’t do anything to change your spending habits.
This is known as tracking your spending, also known as spreadsheet budgeting. It’s a great first step toward more responsible spending, but it’s still not a budget or spending plan. Knowing how much you spent on coffee last month may change your spending habits for the following month, but probably not.
Remember, tracking your spending is different from keeping a budget.
That’s why you need an actual budget with spending limits on each category.
The Right Way to Budget
1. Automate as many expenses as you can
We’ve written about automating your finances before, but it’s important to reiterate. By automating where the majority of your monthly income goes each month, you’ll have a much more realistic sense of how much discretionary money you have to spend.
We recommend automating your income to cover the three main categories of spending:
- Fixed costs (rent, utilities, etc.)
- Investments (Roth IRA, 401k, etc.)
- Savings (vacations, down payments, etc.)
While you want to be careful not to fall into credit card debt, it’s a good idea to use your credit card for your online bill payments for added consumer protection.
Learn more about automating your monthly payments.
2. Write down your fixed expenses
The first step toward setting a budget is writing down your fixed costs first. These are the essentials you need to live, such as rent, utilities, cell phone, internet, car payments, and food.
These are called fixed expenses because you need them. You may be able to spend less in these categories or find a better deal, but they are unlikely to change.
Use this Google Sheets budgeting spreadsheet as a starting point. You can delete or add any expenses as needed.
If you don’t know your monthly expenses for a category such as groceries, review your last three months of bank statements and then write down the average. Add 10% onto each category for a cushion. These fixed expenses should come to about 50-60% of your monthly income.
3. Investments and Retirement
The next budgeting bucket should be your investment portfolio. If you aren’t automatically putting money into your Roth IRA and/or 401(k) plans, read our article on why you should be maxing out your Roth and 401(k) match.
If you have debt and are wondering if you should pay it off or invest, read our article on saving money while paying off debt. In general, you want to pay off your credit card debt before investing since credit card interest rates are almost always higher than what you could make on your investments.
Wondering how much you should be saving for retirement? Use this retirement calculator from T. Rowe Price.
4. Sub-Savings Accounts
Sub-savings accounts are great for automatically putting away money for things you want to save up for, such as weddings, vacations, down payments, Christmas gifts, and more. This is how you can reach your financial goals without the willpower of manually setting aside money. Simply set up a sub-savings account with your bank and then set a comfortable amount to transfer over to those accounts each month.
Learn more about sub-savings accounts. If you have any questions about setting up sub-savings accounts, just ask your bank.
5. After You Automate Your Finances
Ok, so you’ve automated everything you could possibly automate—bills, investments, and sub-savings accounts. Now, you can spend the rest of your money without feeling guilty about it since all of the essentials are already paid for. If you can’t afford something, wait until you can.
Best Way to Increase Your Budget
The best way to increase your budget for things like clothes, eating out, or anything else is to reduce your expenses (streaming services, subscriptions, etc.) and make more money.
- Negotiate a raise.
- Start a side hustle.
- Negotiate a lower credit card interest rate.
- Cut back on phone, internet, TV, and subscription payments.
- Cook at home.
- Use your public library.
- Consolidate or settle your debt.
Learn more about assessing your income and costs for building your financial fortress.
Consider the Envelope System
A common and effective way to budget for expenses is to use the envelope system. This involves setting aside a set amount of money for things like groceries, entertainment, clothes, and coffee. Put the cash in an envelope marked for that category and then you know exactly how much you have available for the next blockbuster release or shopping trip. Since it’s easier to keep track of cash than card payments, it’s an effective way to be more conscious of what you spend. Handing over cash is a lot more visceral than swiping a card.
You can still use the envelope system using cards, but you will have to make sure to write down the exact amount you spend in each category. You can also use a separate debit card. Just make sure you set of overdraft protection so you aren’t paying extra fees for going over the allotted budget.
If you have any money left over in any of the categories, you can roll it over to the next month or use it to supplement another category.
Speak with a Debt Specialist (for FREE)
It’s hard to budget and save money while you’re drowning in debt. That’s where DebtBlue comes in to help. We can help you come up with a custom plan to get out of debt.