Building a budget isn’t about punishment or paying for past money mistakes, though your budget may need to incorporate those debts. Instead, putting together a budget means creating a structure that will cover your basic needs, allow you to save for emergencies, and plan for your future.
Must Spend Vs. Could Spend
Instead of worrying about needs vs. wants, consider your must-spend vs. could-spend options. For example, you must have
- a place to live
- a form of transportation
- quality food to eat
- a way to feed your brain, or a form of engagement
- a way to connect with others, or socialization
Note that there is no entertainment line in this collection of must-haves. Try to get entertainment from your engagement and socialization category, then create an entertainment line item if you need it.
Keep Things Simple
The simplest way to connect with your money is to use a basic tracking tool, such as a notebook and a pencil. If you are comfortable with spreadsheets, you can create one on your computer, but many people remember their choices better and feel more in control with the tactile connection of pencil and paper. Once you understand how money is flowing in and out of your life, you can put the data into an app or a budget program.
Enjoy the Flexibility
The categories in the list above will give you a lot of flexibility. For example, if funds are very tight, you could get a roommate or bunk up at a friend’s house. You could turn your engagement time into earning time by finding freelance or consulting work. You could earn money by shopping for someone else while you pick up healthy food for yourself and be entertained by videos that teach you how to cook and eat cheaply.
Take care not to get too involved when setting up your budget categories. If you make it too complex, you won’t be able to stick with it. Remember, this is not a punishment exercise. It’s an awareness exercise.
That being said, it’s a good idea to take a look at the debts that you pay yearly or quarterly. Your yearly insurance premium will be easy to pay if you put money aside each month, but it will hurt if you have to pull it out of just one month’s income.
Categories such as your yearly car tags, quarterly life insurance, or twice-yearly auto insurance will be much easier to manage if you put away the necessary money. At the end of the day, no matter what budget method you choose needs to simplify your money management process.
Make Decisions on Your Debt
If you have debt you need to wipe out, open an excel sheet and enter
- the total amount owed
- the source of the debt
- the payment amount each month
- the interest rate
Be sure to put a header on each column so you can sort each column from lowest to highest. If funds are tight, sort your debt by monthly payment. See which loan costs you the most each month, just in terms of a payment amount.
Once you gain an awareness of your money, you may find that you have some leftover each month or that some of your budgeting categories are too large for what you must spend.
Now you can sort your debt by the total amount owed. Make the minimum payment and put everything extra on the smallest total debt. When the smallest total debt is paid off, move the payment amount to the next smallest debt. This is the snowball method.
If you have equity in your home, you may consider a refinance to consolidate your debt. In this case, sort your debt by interest rate from highest to lowest and wipe out the highest interest rates, again, rolling the payment amount forward. This is the avalanche method of debt payoff.
A Word About Increasing Income
If you get a job offer or have the chance to pick up a side hustle, spend some time reviewing your offer’s real value. If you need
- a longer commute
- a new wardrobe
- childcare or a housekeeping service
- convenience foods or takeout services
To make the new job work in your life, it may not be worth the extra effort or work to take a second gig. Carefully consider job changes from all angles before making big changes.
Learning to manage money is a multi-faceted process, and tracking your spending is a big part of it. Once you know what’s coming in and what’s going out, you can better manage how you will direct any surplus. Keep your mind on your goals when assigning dollar amounts to your budget categories.