How To Have Fun Managing Your Budget
Our previous post discussed healthier ways to manage your relationship with money and the benefits of using a budget to reach your financial goals. If you haven’t had a chance yet to read that post, I encourage you do before we get started. Now for the fun part: putting your budget together.
Rule No. 1: Be kind to yourself. There is no perfect budget. Yours will change over time as you adjust to new financial circumstances. Part of the reason you’re making a budget is to see what your spending habits are and how you might want to tweak them. This isn’t about making you feel guilty because you ordered carry-out instead of cooking dinner.
In fact, in many ways a budget is sort of like a diet. If you make radical changes to what you eat all at once, chances are you won’t stick with them. But if you make small changes regularly you’ll have much better odds of maintaining them. Just as you’d use a diet to build a healthier lifestyle, a budget helps you enjoy a healthier financial lifestyle.
Where to Begin
The first step is to track where your money goes now. For a month or two, write down what you spend. You don’t have to track everything down to the penny; that $4 latte isn’t standing between you and your financial goals. Try not to change your normal spending behavior too much, unless your financial situation dictates that you really need to cut back on spending ASAP.
Once you have a sense of what you’re spending, it’s time to decide what you want to be spending, saving and investing.
There are many rules of thumb for how to allocate your income. The 30-30-30-10 rule is one I like to use:
- 30% towards housing (rent, mortgage, insurance)
- 30% to pay bills (utilities, credit cards, loans)
- 30% for the household budget (groceries, gas, dining out, entertainment)
- 10% for the future (savings, retirement beyond your company-sponsored plan)
Another rule of thumb we often recommend at Facet Wealth is the 50-30-20 plan, which is even simpler:
- 50% towards needs (housing, food, utilities, insurance, transportation)
- 30% towards wants (vacations, shopping, dining out)
- 20% allocated to savings and investments
These rules of thumb are starting points or guidelines, not rigid rules. For example, if you have no emergency savings, building an emergency fund might be a more immediate need than paying off more debt. Once you have three months of emergency savings, then it might make more sense to save a little less and allocate more of your income towards paying off debt. Your budget is dynamic, which means you’ll probably be tweaking it as your circumstances and priorities change.
You could be committed to certain expenses that mean adjusting your budget in other ways, and that’s fine, too. Your budget won’t look like mine.
Keeping Track of Spending
It’s up to you how detailed you make your budget. You can start with a handful of general categories, or get deep in the weeds with dozens. Here’s one example.
Start by putting your current spending in the template, and then think about how you want to change things. The goal is to move from what you’re spending, saving and investing to what you’d like to be spending, saving and investing. If you want to pay down debt faster, what do you need to adjust to do that? Can you refinance your mortgage or your auto loan at today’s historically low rates to free up cash for other purposes? Can you call your credit card company and negotiate a lower rate to pay off your debt faster? Can you cut back somewhere and allocate those funds towards debt payments?
Once your initial budget is set up, the fun part begins: updating it every week. As I mentioned in Part 1, keep it simple.
A Date with Your Money
Set a money date once a week to review what your income and outflow look like. This isn’t meant to be a marathon, solve all the problems, three-hour session. Just 15-20 minutes each and every week. Try to find a way to make it special: put on your favorite music, pour a glass of wine if that’s your thing, reward yourself at the end. (I do it every Monday, because our favorite sushi place is half price on Mondays. Guess how I reward myself?)
Use that time to identify any gaps, issues, or AH-HA moments between your budget and your actual spending. Make little tweaks and edits to your budget as needed. If you budget $100 for dining out each month, but you find that you are consistently spending $150, you need to adjust your budget to reflect that. Again — we have to be real with our money.
Pretty soon you’ll get into the rhythm of it, and you’ll start to develop insights into your spending. Eventually you’ll learn what I learned: The short-term feeling of happiness you get from buying something fun doesn’t compare with the long-term feeling of happiness you’ll have when your finances are in order and you can use them to achieve your goals.
And don’t feel that you have to go it alone. A financial planner, partner or friend can help keep you on track and hold you accountable. Pretty soon you’ll find that a budget that works for you also works to help you achieve financial peace of mind.
Interested in learning more about the art of budgeting? Check out our lunch & learn.