Budgeting for Reality
The beginning of fall is welcome to many who delight in pumpkin spice lattes, the return of good TV and a change of season. For others, it is the unwelcome end of summer. Not only does it mean back to school or work, colder weather and darker days, but it also signifies that the most notorious overspending temptations will be upon us before we know it.
Holiday gifts for friends, family and colleagues; Christmas vacations; end-of-year charity appeals; shopping for coats, boots and cashmere everything -- fall and winter are often brutal on our bottom line. Without a plan, spending more than we should is usually inevitable. And even though the year is more than halfway over, now is a great time to get a grip on your finances and prepare yourself for rest of the year and beyond.
Creating a budget is relatively easy. What’s not easy is sticking to it.
The first step in sticking to a budget is changing your mindset. Instead of thinking of budgeting as denying or limiting yourself, think of it as a means to freedom and your ideal life. Understand that a budget doesn’t have to be all restrictions and no fun. In fact, a well-constructed budget will free you from living paycheck to paycheck, help you avoid going into (further) debt, support your particular goals and dreams and have flexibility built into it to accommodate for real life, which you need in order to be able to stick with it.
It might help to even remove the word “budget” from your vocabulary and replace it with “life plan” or something more creative like “Operation Freedom” or “Project Rich.” Whichever name you choose, think of it as your chance to finally control your money, instead of letting your money control you.
Exact Your Expenses
The next step in creating a budget you will stick to is to calculate all of your expenses as accurately as possible. Of course, your monthly bills will be the largest component of your expenses and the easiest to calculate, but you can’t forget about other, less frequent expenses that occur quarterly, semi-annually, annually or even every two years, such as subscriptions and charity donations.
You need to take the time to carefully examine your bank and credit card statements for the past two calendar years to make sure you catch all expenses you expect to recur (plus, you’ll probably find a charge or two that shouldn’t be there or you want to cancel). Help yourself by itemizing common spending areas such as housing, utilities, transportation, food, child care, health care, personal care, entertainment, debts and insurance. If you pay for something once or twice a year, divide the expense by 12 and include it in your monthly budget to keep it simple.
Sidestep Income Tricks and Traps
When creating a budget, it’s easy to double-count or neglect accounting for health insurance, taxes and other automatic paycheck deductions. To avoid this trap and get a clearer picture of your cash flow, use your gross income in your budget and then add your paycheck deductions to your list of expenses. If you are self-employed and your income is inconsistent, use an average based on the prior two calendar years (if possible) and divide it by 12 to include it in your monthly budget.
If you have big swings in your monthly income, you might want to just go by the least amount of monthly income you have earned to be safe (otherwise, you risk overestimating and ending up in the red sooner than later). If you are recently self-employed, you’ll need to project your income; just remember to be conservative in your estimate and don’t forget to account for quarterly taxes in your monthly expenses (use 50 percent of your gross income as a general guideline).
Eliminate Unnecessary Expenses
You’ve heard it before, but we have to say it again: The No. 1 rule of successful budgeting is living within your means. In other words, spend less than you earn. It may sound simple enough, but it is seemingly impossible for so many of us. Whether you are over budget by $20 or $2,000 each month, expensing more than you bring in is the biggest hindrance in achieving financial freedom.
To help yourself avoid this bad habit, examine your expenses, starting with your discretionary expenses such as clothing, travel, entertainment and personal care and identify areas of overspending. These are opportunities to scale back and save money. You can usually save yourself more by taking the time to shop around for cheaper auto insurance, cable and phone service and credit card interest rates, or at least calling your carriers to try negotiating discounts.
By eliminating unnecessary expenses from your budget, you will give yourself the ability to pay off debt sooner, save more for your goals and have more cushion for the occasional splurge, which will help you stay on track.
Save Room for Savings
It is common to neglect including a savings category in your list of expenses when creating a budget. While some of us may already have retirement savings automatically deducted from our paychecks, all of us need to be automating some kind of savings on a monthly basis and making it a fixed expense in our budgets. You might think you can’t afford to save, especially if you are paying off debt, but the reality is that you can’t afford NOT to save.
Even if it is a seemingly insignificant amount, you should be automatically transferring something from your personal checking account to a savings or investment account every month. At the very least, you should have a “curveball” account that you fund monthly for those annoying, unexpected-but-expected expenses like replacing a lost cell phone, paying an insurance deductible or fixing a broken appliance. Aim to have $1,000 in your curveball account at all times so you can avoid racking up unnecessary credit card debt when these common budget-busters arise.
Plan Early for Late-Year Spending
We all know that holiday gift-giving, the barrage of end-of-year charity appeals and winter activities can take a big bite out of our budget. However, you can make that bite sting less by simply planning ahead. Calculating the amount you can comfortably afford to spend on these later-year expenses in advance and including them in your monthly budget will help you stay within your means and avoid going into debt to pay for them when the time comes. Plus, having a limit in mind before you spend will help prevent you from giving in to the temptation to overdo it. Another idea is to open a separate holiday savings account and set up an automatic monthly transfer that will get you to your goal in time.
Believe it or not, the only way to stick to a budget is to spend money on things you don’t need every now and then. Too much deprivation only results in binge spending -- or eating, when it comes to dieting. To prevent binge-busting your budget, you should allow yourself the occasional indulgence and include a category and amount for it in your budget (as a guideline, take your largest discretionary expense from the previous year and cut it in half). Think of these treats as rewards for responsible behavior.
Ideally, indulge in something that you are particularly passionate about, such as a hobby, type of performance or philosophy that you want to further explore. This way, you can avoid the buyer’s remorse that often comes with frivolous spending on stuff that really doesn’t enhance our lives and feeling of failure that can lead to completely falling off the wagon.
Check In to Avoid Checking Out
It’s easy to set a budget and forget it. Without periodic checkups, you are likely to stray too far and ultimately give up. After you create your budget, mark your calendar with quarterly budget checkups. Use these dates as opportunities to review your progress, identify your weaknesses, make adjustments and stay motivated to succeed. A smart strategy is to plan checkups with a trusted family member, friend or financial advisor to help keep you accountable and gain the perspective of a more objective set of eyes.
Even if you are guilty of the occasional budget-buster, checking in on your spending plan on a regular basis will help you refocus and get back on track. Remember, creating a budget is the easy part. Sticking to it requires time, dedication, support from loved ones, a little indulgence and a lot of forgiveness. But the payoff is huge.