Hey everyone! I was thinking- there are some things in life that are important and can have an amazing impact on your life. Things like budgeting and finances– but I would totally be lying to you if I wrote up a post and tried to pass it off confidently. So I asked my handsome hubby who is amazing at finances and budgeting to write up some posts for you.
Hello! For those of you that have been reading this blog for a while, you know me as “handsome hubby”. My beautiful wife has talked about me here frequently, but this is a my debut post. It’s a bit different than a lot of the content here… but not to worry! We’ll be keeping the math to a minimum.
I’m going to be doing a series of posts about finances and budgeting. These topics can be pretty scary and intimidating, but I’m going to take things slow and keep them as simple as possible. Kynley isn’t much of a math brain, but together we’ve figured out budgeting and it’s working great for us.
In this first post, I’m going to talk about the basic principles of budgeting. Let’s get started!
Spend Less Than You Earn
Seems obvious, right? But, it’s incredible how many people don’t do this right. It’s easy to live right at the edge of your means, or even beyond. It’s so easy in fact, that it takes a concerted effort to live below your means. There are tons of examples of this, and you likely have some personal experiences to share.
Without a budget, it’s easy to spend too much, especially with credit cards and other debt. Over a long period of time this can get worse and worse. Sooner or later this will catch up with you with dire consequences. It doesn’t really even matter how much you make. Hundreds of thousands of dollars per year won’t help you if you don’t do some budgeting.
Take A Look At What You’re Spending Now
This can be uncomfortable. Much like counting calories, you might be in for a bit of a shock. When Kynley and I first started doing this, we turned up all sorts of unnecessary expenses. Gym memberships we never used, online subscriptions we’d forgotten to cancel, Netflix DVDs that we’d never sent back. This kind of thing can build up over time if you don’t keep an eye on it.
But, I digress. At this point you simply want to take an inventory of what you are spending now. You aren’t yet concerned with changing anything. You can do this with a spreadsheet, or with an online service. Kynley and I use Mint. It’s super easy and free. Honestly, I can’t recommend this highly enough.
However you do it, look back several months and be sure not to leave anything out. Tempting as it might be to leave out things that seem irrelevant, try to include everything. Credit card purchases, things bought with credit card reward points, cash purchases… you name it.
Create categories (shopping, groceries, rent, utilities, piano lessons, etc.). Try not to have too many items left in a “Miscellaneous” category. Shopping is a good flexible category to put miscellaneous stuff in.
Now that you have an idea of what you are spending, it’s time to start setting some budgets. Set your categories (rent, spending, dining out, personal care, gas, etc.). Set each category to what you are currently spending. Also, consider any categories that you’d like to add in, such as charitable giving or savings.
Next, compare the total of your ideal budget with the amount that you currently make. Are you making more than your ideal budget? Awesome! Walk away from this post and go enjoy yourself.
If you’re like the rest of us, that ideal budget amount is higher, or closer than you’d like to your current income. That means that you’re going to have to decrease some budget categories. Start whittling away the areas that you have room until you get down to where you need to be.
Jack and Jill make $5,000 per month after taxes. Rent is $1,500 per month. As it is they are spending $800 on restaurants, $400 on shopping, $200 on groceries, $150 on utilities, $200 on cell phones, $100 on gas and car maintenance, $350 on car payments, $100 on gifts, $80 on medecine, $60 on massages, $150 on entertainment, $50 on pets, $500 on student loans, and $50 on gym memberships. This adds up to $5,090.
That’s not too bad. It’s only $90 over. But, we have a few problems. First, you will occasionally go over budget in some categories and this leaves no room for that. Second, this budget leaves no room for savings or unexpected expenses like flat tires or doctor visits.
Since it’s not that far over, no drastic measures are needed. Jack and Jill simply need to decrease a few things, most likely restaurants and shopping. Ideally, they’ll also add in some savings. But, we’ll get to that.
Once you’ve set your budgets, you’ll want to review them regularly. It’s easy to set budgets at unrealistic levels. Reality will quickly assert itself. Don’t be discouraged by this. If you are reviewing it regularly you can adjust as necessary.
In particular, you’ll probably underestimate the amount that you spend on shopping and dining out. For Kynley and I these two categories easily get out of control. On the one hand, you’ll want to decrease these as much as you can. But, on the other, you don’t want to decrease these more than necessary because they’ll make your budget feel especially oppressive. And, if you can afford it, there’s no reason to restrict these more than necessary.
The point of budgeting isn’t to live a Spartan lifestyle or to become a monk with no worldly possessions. The point is to take control of your finances and to bring more value to the things that you spend your money on. The whole things should be ultimately a very positive experience for you.
Set A Flexible Catch All Category
Once you’ve set a budget, you’ll undoubtedly have some expenses that don’t neatly fit into one of the categories you’ve set. The temptation is to handle this outside of the budget. Kynley and I are frequently faced with this temptation. We have something that doesn’t clearly fit into one of our categories. What can we do? Well… it shouldn’t really count against our spending budget right? Let’s just get it and not worry about it.
You need to stop this sort of thinking from the get go. The sad truth is that money doesn’t come from nowhere. You can’t just create new money to buy things that you haven’t budgeted for. How do you handle this? Decide what category will handle new expenses that don’t fit into other categories of course!
For Kynley and I this is our spending budget. Anytime a new type of expense comes up we have to decide if it’s worth taking money from the spending budget for.
Want an example? Sometimes, if I’m feeling romantic (or more likely if I’ve done something stupid), I like to get flowers for Kynley. We have no budget category for flower. They are only $15 or so, so I could just let it go and not worry about it. But, what I should do is count the flower purchase as part of our spending budget.
Don’t Apply Surplus To Other Categories
Sometimes you’ll have money left over in a category. You may want to apply your extra money to some other category. For example, let’s say that your utilities are less than usual one month. You might be thinking that you could apply that savings to a new pair of shoes (as Kynley often does) or to a new video game (that would be me).
Resist this impulse. It’s a bad idea. In my experience it’s a general bad practice, and will often end up running you over budget. It may also tempt you to skimp on one budget area to indulge another. Instead you should make sure all of your budget levels are set appropriately.
Decide What To Do With Surplus Money
Instead of applying surplus to other categories, decide ahead of time what to do with surplus. In some cases it makes sense to roll the money from that category into the same category next month. Or maybe that left over should go to charity or savings.
But, in other cases the money won’t be left over. Instead, it will be from a bonus or raise at work, or a tax refund. In that case, you need to decide ahead of time what to do with it. If you just start spending it, it will disappear into what I call… the cash pit! But, more on that in a later post.
Also, remember not to spend the surplus until you actually have it. If it’s a tax refund you’re waiting for, wait until it actually hits the bank. Otherwise, you’re likely to spend it ahead of time and then spend it a second time when you actually get it.
If you are setting this budget with a significant other, it’s important to set responsibilities. Likely, one of you is more money oriented than the other. That person may love spreadsheets and be good with numbers. Put that person in charge of this process. They won’t make all of the decisions, but they will handle the nitty gritty of analyzing and setting up the budget.
Once the budget is set up, decide who will keep an eye on the budget, who will pay the bills (which must be paid on time!), etc.
Support Each Other
Remember that being in charge of the budget can be stressful. Be careful not to set things up so that the person handling the budget has to be the bad guy all of the time. It’s not fun to be the person that has to say no or decide what’s okay for everyone.
Remember that this is a team effort. All parties need to be on board and buy into this process.
These are the basics of budgeting. You should get started right away. Taking control of your finances is extremely freeing and empowering. It may be uncomfortable at first, but it’s rewarding. Once you get started you won’t regret it!