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| Not my favorite kind of pie. |
I’d like tell you I never use a budget. But I guess that wouldn’t be completely true since the point of a budget is to help you keep track of the money flowing in and out of your pocket/bank account/Kate Spade wallet, and I do have a way of doing that.
And since I didn’t always have a good sense of my spending I had to experiment with different methods before I found one that worked for me. So, technically, I suppose I do have a budget. But I still hate budgets so I don’t call it that. Instead, I call it a spending strategy because spending is more fun than budgeting and strategies are empowering.
Here's how you can set up your own budget spending strategy in eight easy steps.
1) Be honest with yourself about how much money you actually have. This is easy if you get a regular paycheck every two weeks because you can add them up and, voila! If you work on commission, do freelance, or have other variations in your income you can base your spending plan on last year’s numbers, or the past 6 months' numbers. Add up everything you earned and divide it by 12 (or 6, as the case may be) to get an average amount of money you have each month. Write down that number.
2) Get a handle on your expectations. Start by estimating what you think you’re spending each month, and on what. Write down a number that you think is in the ballpark of what you’re spending each month on things like rent, utilities, cell phone, student loan payments, gasoline, groceries, restaurants, clothes, entertainment, bar tabs, gifts, travel, etc. Then, for each of those individual categories, write down what you think is an objectively reasonable amount to be spending on that item for someone with your income (the real monthly income you discovered in Step 1, not what you wish your monthly income was).
1) Be honest with yourself about how much money you actually have. This is easy if you get a regular paycheck every two weeks because you can add them up and, voila! If you work on commission, do freelance, or have other variations in your income you can base your spending plan on last year’s numbers, or the past 6 months' numbers. Add up everything you earned and divide it by 12 (or 6, as the case may be) to get an average amount of money you have each month. Write down that number.
2) Get a handle on your expectations. Start by estimating what you think you’re spending each month, and on what. Write down a number that you think is in the ballpark of what you’re spending each month on things like rent, utilities, cell phone, student loan payments, gasoline, groceries, restaurants, clothes, entertainment, bar tabs, gifts, travel, etc. Then, for each of those individual categories, write down what you think is an objectively reasonable amount to be spending on that item for someone with your income (the real monthly income you discovered in Step 1, not what you wish your monthly income was).
3) Give yourself a bit of a reality check by identifying how you’ve actually been spending your money over the past three months. This could take a bit of time and will require you to round up your bills, receipts if you’ve got ‘em, and bank and credit card statements. It’s super easy to get access to bank statements online so take a minute to sign up for online access to those accounts if you don’t already have it. Once you have all the records you need, use them to figure out what you’re actually spending your money on, and how much. If you can’t account for every penny that’s ok, just get as close as you can for now.
4) Keep track of your spending for the next month or two. Have a way to follow every dime of your money. Save all your receipts, even for (especially for) the little stuff. Make a note in your phone or a notebook when you spend cash. If you buy a bagel, write it down. A 3pm trip to the vending machine for M&Ms (this can’t just be me)? Write it down. Write it all down: the $8 for nail polish, the round of drinks you picked up for friends at the bar, and the $12 cab ride that got you home. The trick here is to record your expenses without judgment. This is the information gathering stage so spend like you normally do. You can make whatever changes are necessary in the next couple of steps.
5) Compile your data. Now that you have a few months of records, set aside an evening of watching reruns and parsing through the information. Pile up your pay stubs, receipts, bills, bank statements and the list of little expenditures you made. You’ll also need pen and paper, and a calculator.
Make a list of all the money you spent each month, and what you spent it on. Once that’s finished, group the items on your list into categories similar to the categories you listed in Step 1. You can decide how specific to be, and nothing here is set in stone so if you don’t like it, you can change it later. For example, you can include your car payment, gasoline, car washes and insurance (annual or 6-month premium divided by the number of months to get an average monthly cost) under “car”. Or, you can put your car and other insurance in a special “insurance” category. On the food front, it’s worthwhile to separate “groceries” from “restaurants and eating out”. Most of us are in for quite a shock when we discover how much we spend on eating out.
6) Do some quick math - you’re in the home stretch now. You’ve figured out how much money you have each month, and can also see how much you’re spending. Now, subtract how much you’re spending from how much you’re bringing in. If you brought in more money than you spent – hooray! – that’s the cushion you’re looking for when you start thinking about your long-term spending strategy (AKA, saving). If your expenses exceed your income for any given month, you’ve identified where your spending plan needs some adjustments and can move along to Step 7.
7) Figure out what changes to make. This is where the rubber meets the road in your spending plan. Take a look at each of your categories of expenses and figure out where you can cut back. Some of your expenses such as rent, loan payments, and some transportation costs are relatively fixed. Others are more flexible.
A good place to start implementing changes is by spending less money on things you care less about. Let's say you’re spending $10 to eat a boring cafe-bought salad/sandwich combo at your desk, you can save some serious cash by buying the fixin’s and bringing lunch from home. If you hardly ever watch TV, consider canceling your cable and replacing it with a subscription to an Internet streaming service. Can’t remember the last time you actually went to the gym? Cancel the membership. You get the idea – the point is to use your money to fund the life you actually want to live. Spend less on the stuff you don’t use and you just might have more money to devote to the things you love.
8) Keep it up. Now that you’ve done the hard work of taking a look at your resources and developing a solid spending plan, you can relax a bit. You’ve just given yourself more control over your financial health than many people have. So stick with it and you very well may feel some of your stress start melting away.
Congratulations on taking a huge step toward funding a life you love!
8) Keep it up. Now that you’ve done the hard work of taking a look at your resources and developing a solid spending plan, you can relax a bit. You’ve just given yourself more control over your financial health than many people have. So stick with it and you very well may feel some of your stress start melting away.
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