Numbers!I like to think about budgeting as goal-setting, not limit-setting. A budget helps us align our day-to-day actions with our long-term hopes and dreams. It's about living purposefully, not carelessly. A budget is a plan, which can be adjusted as we go along, that helps move us toward the life we really want.
Before we start budgeting it's essential to figure out where our money is going, and what our priorities are. I suggest about three months of tracking spending (step one) to get a good idea of what a year of spending might look like. In the meantime, it's important to think about, talk about, and write down what we really want in life: defining our dreams (step two).
For some reason, what we do and what we really want usually don't line up. Maybe we're spending hundreds of dollars on eating out, yet we're feeling stressed because we have no savings to pay for emergency house and car repairs. Maybe we want to pay off our student loans, but nothing is left at the end of the month after cable, fitness club, and cell phone bills.
Budgeting is making a plan to bring your actions and your desires into harmony. You are the conductor of your money and your life; it's time to get in there and start waving your arms and telling the instruments how to cooperate.
Ultimately a budget will make your life easier and more pleasing by imposing structure on chaos -- a budget is the sheet music that tells each individual player (your income, your expenses, your family members, your goals) how to work together. Once we eliminate underlying guilt and dread, bring finances out into the open, and start making changes, we begin to hear the beautiful music that is created when we live according to our values.
There are all sorts of ways to create that structure. Here are some budgeting methods for you to try:Reverse Budgeting
Reverse budgeting means that you put as much as you can into savings at the beginning of the month, and then you let things work themselves as the month goes on. Reverse budgeting is great for people who don't want to fiddle with allocating certain amounts to spending categories. Just sock away as much as you can, then let the chips fall as they may, which is the way Rachel Jonat, The Minimalist Mom, paid off $82,000 of debt.
Perhaps the easiest way to budget this way is to set up an automatic monthly transfer to savings. Deducting the money from your paycheck is ideal because you never see the money, thereby eliminating monthly decision-making.
What should you save for first? An emergency fund is essential, and debt elimination and retirement should come as close seconds. Other savings goals like college, new cars, and vacations can fall into line after this strong foundation is built. Reverse budgeting helps you think of the future, then live in the present.Zero-Balance Budgeting
Another way to budget is to plan out how you will spend your money before it arrives. This structure might seem too constricting, but personal finance expert Dave Ramsey says it actually gives people an increased sense of freedom.
In zero-balance budgeting, you figure out your monthly cash flow, then you "spend" it all on paper before it comes in. For example, you "pay" the essential expenses first (emergency savings, rent, transport, utilities, food) by subtracting them from your income. Then you start allocating your money to less-important expenses such as entertainment, non-essential clothing, and beauty.
So that you don't feel like you're wearing a straight jacket, Ramsey suggests allowing some fun money every month, so that a couple of dollars here and there can be spent on a magazine, a pair of sunglasses, or a toy, without feeling guilty. Fun money is the equivalent of the dieter's weekly allowed ice cream sundae.Traditional Budgeting for the 21st Century
Most people think of budgeting as deciding how much we should spend in a certain category -- like groceries, eating out, fuel -- and then trying to stay within those limits. Online budgeting tools like Mint.com do this work for us by setting up budget categories based on our spending history (which it knows because it tracks spending by secure linking to bank accounts). Then you decide to either increase or decrease these categories based on your long-term goals.
The colorful graphs and charts at Mint and other personal accounting software programs can really help you see the big picture, as well as visualize how much has been spent and saved. If you choose, you can even ask Mint to send alerts when you're about to reach your spending limits. (Mint is a free website so one of the trade-offs are the savings tips, which are really advertisements by financial institutions.)Budgets are Plans to be Shaped and Re-Drawn
Perhaps the most important thing to remember about budgets is they can be adjusted. Just like too-strict diets don't work, neither do overly rigid budgets. The psychological factor of saving money should not be underestimated. I find that, just like a child, I get frustrated when I am unable, over and over, to achieve the results I want. So I try to outsmart myself by setting up systems, thinking up rewards and consequences, and figuring out what I'm most motivated (or derailed) by.
Most of all, I try to find the fun in saving money. If I can find ways to spend less while at the same time making friends, learning new skills, and spending more time with my family, I find a sense of fulfillment which makes a budget less like a diet and more like a lifestyle that I love.
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