This is a guest post from Penny Pinching Professional
As a reader of Frugal Living Mom, you know how to get your everyday essentials for free or cheap and it saves you a lot of money. It’s important to remember, though, that you need to consider the big picture, and that means looking at your budget. Don’t have one? Don’t worry! I’ll walk you through the basic steps of setting up a budget and explain some of the common guidelines people use for budgeting.
Step 1: Track your spending.
The first step in budgeting is to see where all of your money is currently going. If you use credit and/or debit cards for all or most of your transactions, this will be easy. I almost never use cash, so I just download my transaction history from all of my banks and credit card companies and put them in an excel spreadsheet. If you do use cash, you’ll need to start keeping your receipts so you can enter your purchases in manually. Don’t forget to include any rent/mortgage payments, utilities, and any money that you put into retirement or savings accounts. You should also be cognizant of bills that may not come due every month, like car insurance and tuition. Once I have everything in excel, I then assign each transaction to a different category and add them all up. You can also use software like Quicken or websites like mint.com to do some of the legwork for you. You can split your spending into as many categories as you’d like, but they should all fit into three larger categories: Needs, Wants, and Saving.
Step 2: Pick a budget to follow.
There are a lot of budgets out there that you can use as a guideline. What you’re doing here is deciding how your money should be allocated. These are just starting points; once you get going you can adjust them to meet your goals.
One of the simplest ones is the 50/30/20 budget. 50% of your after-tax income should be spent on needs, which include housing, utilities, groceries, insurance, transportation, and bills that must be paid every month like minimum payments on credit card balances and student loans. 30% of your budget should be spent on wants, like dining out, shopping, gifts, cable (yes, you can live without television) and anything else that you can survive without. The remaining 20% of your budget is reserved for savings and debt repayment. That’s where your retirement plan comes in, as well as your emergency fund, your rainy day fund, and any savings you have for big purchases like a house or a car. It’s also where you place any debt that you’re trying to pay down. The minimum balance will go in the necessities category, because you’re obligated to pay that amount, but if you are looking to pay down your debt faster with higher-than-minimum payments, the extra payment is assigned to this category.
The 60% solution is similar, but your expenses are broken down a little differently. For this budget, you start with your gross income, and allocate 60% to your committed expenses. This is similar to the Needs category in the 50/30/20 budget, but it includes a couple of other items. Your committed expenses are: basic food and clothing, essential household expenses, insurance premiums, charitable contributions, all bills (even cable), and taxes. You then allocate 10% of your income to each of the following categories: Retirement savings, long-term savings, short-term savings, and fun money.
You can search the web and find other breakdowns, but my suggestion would be to start with the 50/30/20 plan and adjust it to meet your goals and situation. For instance, I’m graduating in May and will be starting a full time job. My income at my new job will be about twice what I currently spend. I’m happy with my current standard of living and I don’t see any reason to double my spending, so my goal won’t be 50/30/20. I’m probably going to be looking at something more like 40/20/40.
3. Figure out where your current spending doesn’t match your budget
If you’re going completely over-budget – spending more than your earn – or you’re going over in a particular category, take a closer look and see where your money is actually going. If you’re over on Wants then you need to stop spending money on things you don’t need. Eat out less, go shopping less frequently, or downsize your cable package. If you’re over on Needs, it can be a little more tricky. Mortgage and rent payments can’t be changed easily. You may be able to save some on utilities by adjusting your thermostat by a degree or two, making efforts to only use the washing machine and dishwasher when they are full, and installing low flow shower heads. You also may be able to cut your grocery bill by utilizing coupons and sales, buying store brands, and wasting less food. If you find yourself throwing away food every week, consider ways to be more efficient. Buy smaller quantities of produce if you aren’t going to eat it all, introduce a leftovers night, or freeze what doesn’t get eaten and thaw it out on a night when you don’t have time to cook and might otherwise have ordered a pizza.
Adjusting your spending to match your budget is by far the hardest part, and you really have to stick with it. If your goal is 50/30/20 and you’re starting off at 58/37/5, you’re not likely to make all of those adjustments in one month.
4. Consider changing your buying methods
If you find that you’re struggling to meet your budget or change your spending habits, consider how you make your purchases. I use my credit card for everything and pay it off in full every month because if I have cash in my wallet I will spend it without thinking. For some reason I actually think through my purchases a lot more carefully if I’m going to swipe a card. That makes me a little unusual.
Most people find it hard to stop and think before buying, and if that describes you then you should consider a cash budget. The basic idea for this is that you pay for your rent, utilities, and other monthly bills as usual, and then take out the rest of your money as cash. When you run out of cash for the month, you can’t spend any more. This can be dangerous if you aren’t tracking your expenses, so if you do a cash budget I recommend using an envelope system. You have a different envelope for each category, and every time you buy something you take cash out of the appropriate envelope and put the receipt back in its place. Keep a running total of your purchases and keep an eye on how much money is in the envelope.
I would also recommend making your savings automatic. Have your savings pulled directly from your paycheck or set up an automatic transfer into a separate account where you can’t easily access it. That way you won’t be tempted to spend that money on needs or wants, and it will be easier to enforce your budget. If your current savings rate is a lot less than what you’d like it to be, make this adjustment gradually. Suddenly having 10% less spending money than you’re used to could lead to problems paying your bills at the end of your month if you can’t change your spending that quickly. Instead, consider increasing your savings automatically by 1% of your salary each month until you reach your goal amount. That will give you time to change your habits accordingly.
Budgeting isn’t a one-time thing. You need to be constantly aware of what you’re spending and stop yourself before you exceed your limits. It’s something I’m still working on. When my friends want to go out to eat I have to pause and think about it. Have I spent too much on restaurants already this month? Can I get something that will work? Should I decline and eat the leftovers I was planning on? As a graduate student, I’m basically living paycheck to paycheck though I have some safety nets in place. I’m working diligently to figure out how to handle having a larger paycheck when I graduate so that I can get into good habits from the beginning, but I’ll have to continue making adjustments as I get married, buy a house, need a new car, have kids, go through job changes, and any other time my lifestyle or finances undergo a change.
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