8 Tips for Better Budgeting
Most of us know that we should be budgeting, but most of aren’t doing it. We want to take control of our finances & be able to live the life we want, but we struggle to budget. A big factor is our mindset, which I wrote about here a couple of weeks ago. Beyond our self-limiting mindsets, though, we really don’t know HOW to budget.
Budgeting is not just writing down the numbers that we think we spend during the month. Nor is it just recording the amount we actually spent at the end of the month. It’s a combination of planning & tracking and creating a system to keep our budget in balance during the month. So, we have to take our best estimate of what we think we spend, keep track during the month, and have strategies for staying on budget during the month. So, here are some tips to do just that.
1.) Budgets should be “zero-based”. That simply means that our income, minus wherever our money is spent (spending, saving, giving) should equal zero. In other words, we need to account for where all of our income is going. If we leave money unallocated, that money tends to disappear into a black hole. It just disappears without a trace & we have no idea where it went. And that’s one big reason people don’t make good progress on their priorities. The money that could be going towards paying down debt, saving up for a house or invested for retirement, etc. has disappeared without a trace!
2.) Whatever budgeting tools we use, paper, Excel, Google Docs, or a budget app, we must enter our budgeted income and where our money is going to be spent, by category. As the month progresses, we need to update the budget with what we actually spend, making sure not to go over budget. If we use a budget app, such as YNAB or Mint, we can link to our bank account and have the transactions updated automatically to our budget. Otherwise, we have to manually track our spending. If we’re manually updating our budget, I recommend updating the transactions once a week, or at least twice a month. If we do go over budget, we need to adjust the budget by lowering another category so we can increase the category where we’ve gone over budget. These adjustments throughout the month are critical.
3.) If we’re married, we should budget & track our spending together with our spouse. Personal finance is a team sport! With spouses working together, and on the same page, we’re a powerful force. Without a team approach, spouses tend to pull in opposite directions. This is a very common & very critical problem, and I’ll write more about that in the future.
4.) Use cash. Really. Almost nobody uses cash these days, but it’s a very effective way to stay on budget. Let’s say our Grocery budget is $1000/month. Instead of using the debit or credit card for groceries, we start using cash. And let’s say that we take out $250/week or $500/twice a month to cover groceries. If we spend only the cash that we’ve taken out of the bank for groceries, we’re automatically going to stay on budget. If our budget was $1000, and over the month we took out only $1000 in cash, and we only spend the cash that we took out, we don’t even need to keep track of our grocery spending to make sure that we stayed on budget. Using cash works well for eating out, shopping in stores, and other things we do around town. But I usually recommend first trying it out with Groceries and Eating Out. These are two categories where we often struggle to keep track of spending & go over budget. Using cash keeps us on track. In addition, using cash tends to cause us to spend less, especially on impulse purchases. There’s something about having to shell out $20 bills that makes us scrutinize our purchases much more than if we swipe our cards.
5.) Move our electric and natural gas bills to “Budget-Billing” or “Level Pay” plans. It’s nearly impossible to predict our heating and air conditioning bills. That would involve being able to predict the weather. So, to help us with that, many electric and natural gas providers offer a plan where we can pay the same amount every month based on our expected annual bill. At the end of the year, there’s an adjustment to account for any variances, but that’s typically very small. I do recommend making sure that you understand all of the rules before signing up, though. Rules can vary & nobody wants unwanted surprises. With this plan, if we write in $100 for electric, we know it’s going to be $100, not $300 for a hot August month.
6.) Shop mobile phone and insurance plans. These are two categories for which many people overpay. With mobile phones, we pay ridiculously high prices with the three brand name companies, when the same service is available for much cheaper. There are only three companies that have cell phone towers, Verizon, AT&T and T-Mobile. All of the rest of the companies (referred to as MVNOs) use the same towers, leased from the Big-3, but charge much less. For example, an unlimited plan with T-Mobile costs between $60-80/month, while Mint Mobile, a T-Mobile MVNO, costs only $30/month for an unlimited plan. If you’re on one of the Big-3 carriers, then just Google MVNO and the name of the carrier you’re currently using to see your options. You’re getting the same service, from the same towers you’re using now, for much less money.
With auto and homeowners insurance, many people don’t pay attention to what they’re being charged. And, unfortunately, many insurance carriers will regularly increase your prices. Why? Because they know many people will just pay it. So, shopping around can save many people 20%, or more. Always shop both policies together & include the entire family. This will pick up all of the multi-policy and family discounts offered. BTW: when you shop your policies, check your coverage, especially your liability limits. Too many people are operating with very low limits and are putting themselves at risk should they be responsible for a serious accident. Raising your limits doesn’t actually raise your bill as much as people think. People can often raise their limits and still lower their bill when they shop around. Talk to your insurance agent to better understand your coverages.
7.) Use a Misc or “Stuff I forgot” category. No month will work out exactly as we planned it. So, we need to give it some cushion to adjust for the unexpected expenses. This category isn’t to blow for fun. It’s there to create space in our budget so it actually works when we need to go to the doctor or fix our car. You’ll need to experiment with the amount to see what works best for you.
8.) Give it time. Budgeting is a skill that must be learned. The first two or three months, we’ll make a lot of mistakes. We’ll forget stuff. We’ll budget wrong amounts. We’ll forget about things that are coming up for which we need to plan. In short, we need to learn from our mistakes, make adjustments and get better every month. The biggest reason budgets fail is that people give up. But if we keep at it, we’ll get much, much better at it, and it will start to work.
Hopefully these tips are helpful. As part of my services to my clients, I help them develop budgeting strategies that work well for them. Different strategies work better for different people. If you’d like to find out more & seek help in getting your budgeting system working, click here to setup a Complementary Consultation. We’ll get to know each other better and see whether coaching is a fit.
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