Budgeting

Budgeting for Begginers

First Gameboy I saved up an entire $100 to buy.
First Gameboy I saved up an entire $100 to buy.

Call me a nerd, call me what you will but I’ve had a budget for longer than I can remember. It wasn’t always a thorough or complex budget, most of the time it was a scribble on the back on an envelop to let me know how many more lawns I needed to mow until I could afford a new Gameboy. Eventually that evolved to rudimentary excel sheets and then it became me using YNAB which is the budgeting software that I use right now. My budgets are important to me, despite how simple or complex they are because it helps me understand and control where my money is going. Without them I get anxious about whether or not I’m spending my utility bill on a night out with friends. If you’re looking to start a budget of your own I recommend you start here and remember:

  • I didn’t start out with a complex system to track my finances and neither should you
  • I’m a nerd and get some sort of sick pleasure[1] out of tracking my finances down to the penny

The tools you need for this project can be as simple or as complex as you want. If you want to use a budgeting app or software that will work just as well as a pen and paper. It’s all about what works for you. Some people like to make a graph on a large piece of butcher paper and post it on their fridge so they see it every day. I’m not here to judge, do what works for you! If what you try at first doesn’t work for you then try something else until you find something that does work.[2] No mater what you do these steps will universally apply to all budgeting systems.

Step 1: How Much Do You Make?

For most people this will be how much do you make in a month, however if you have sporadic income it might be how much do you make in 3, 6, or 12 months. It doesn’t matter what time scale you put it on it just has to be on a scale. From here on we will assume it is a monthly budget, so find out how much you make per month. This is how much you actually make i.e. after taxes, 401k etc. Once you know how much you get into your account every month put that somewhere prominent on your tracking sheet.

Step 2: Where Do You Want Your Money Go?

This is my favorite part of the budget because it makes me feel like I’m in control. Budgets enable you to control where your money goes. Your money is yours until you give it to someone else. My general philosophy is: wait until the absolute last second before you give anyone else your money. Which typically is applied as the hole in the bottom of my shoe isn’t that big, I’ll wait to buy a new pair until my shoe is unusable. Your philosophy may differ, if you’re the kind of person who values being an early adopter budget so you can buy the new iPhone. Your budget shouldn’t restrict you, it should enable you to buy things you want and can afford.

Make a list of categories that you want to spend money on. Some of mine are: Rent, Utilities, Internet, Groceries, Clothing, Restaurants, Spending Money, Fuel, Emergency Funds. Look back at previous spending that you’ve done to help categorize things. This is where you make your budget yours, I have a category for blogging expenses that a lot of you won’t have. You might have a category for daycare that wouldn’t make sense for me right now. Make it work for you, because if it doesn’t work for you then it doesn’t work at all.

After you have a list of spending categories add how much you want to spend each month in each of those. For categories that you pay less often than once a month divide those into monthly amounts. For example if you have a $300 insurance bill every 6 months then you should budget $50 of your income to go to this insurance every month. If you follow this savings then you will have the money after 6 months to pay the bill without having to cut into other funds.

Once you have assigned the amount you plan to spend in each category then you shouldn’t spend more than that. This is the part that people don’t like, typically budgets restrict what people do and people don’t like to be restricted. I don’t look at it this way, you shouldn’t either, look at it as acknowledging where your money is going. If I look over my account and realize that I’ve spent more than I’ve allotted for a category then I’ll know I shouldn’t go out and buy that crossbow that my friend is buying. However if I have money in my spending category I am free to buy that crossbow knowing that I’m not going to be overdrawn when my electricity bill gets auto drafted[3].

I was so busy figuring out if I could I forgot to ask if I should
“Your scientists were so preoccupied with whether or not they could that they didn’t stop to think if they should” – Dr. Ian Malcolm, Jurassic Park

If, read “when”, overspending happens there are a few ways to handle it. My favorite is to cut back spending in another area. If I spent too much on food this month but didn’t buy any new clothes then I move the extra moolah from one category to another. The other option is to carry this debt over to the next month, for example if I have $50 a month for restaurants and I spent $55 then that means next month I will only have $45 to spend. I don’t like this method as much because it’s spending money you don’t necessarily have but it’s less risky than not having a budget at all. You can also take the total amount that you over spent that month and subtract it from your next month’s income. This never made sense to me, why should my clothing budget suffer because I ate too much last month[4]? My mind likes to segment things and I prefer to keep the spending with its category. No mater how you handle your over spending the important part is to acknowledge that you over spent instead of ignoring it and end up spending money you don’t have.

Step 3: Update Your Budget Accordingly

After your categories have been listed and you’ve determined an amount for each category then start using the budget. Mark down how much you’ve spent in each category and update your spreadsheet, app, or butcher paper. This can be done once a week, once a month or once a day if you’re an over achiever. I usually update my budget whenever I sit down to write my net worth articles which is once a month. The more frequently you update your budget though the more useful it is! Updating it once a month works for me since I don’t impulse buy things and I over budget in all categories, but it may not work for you, and if it doesn’t work for you then it doesn’t work at all.

All budgeting systems will have these three steps because they are critical to a successful budget. As with all things in life this can be as complicated or as simple as you want. I encourage you to do a budget of some sort, try something out and see what works for you, if something doesn’t work don’t give up on budgeting[5] instead try something different. Other bloggers have other systems that might resonate with your life style better than mine, go look for them and try them out! Let me know below what works for you and what doesn’t. Does any of my logic match yours? What do I look at differently than you? Every budget should be as unique as the bugeteer.

Afterwards:

[1] It’s more of a peace of mind, which is a pleasure in some ways.

[2] If doing nothing works then explore some alternatives that might automate it or make

[3] You should still evaluate whether or not you should buy a crossbow. I skipped that step and ended up with a crossbow that I used twice.

[4] This is rhetorical, the obvious answer is because you spent too much dope. But it doesn’t work for me so I don’t look at it that way, I go and find logic that does work for me

[4] Read: controlling your finances

[5] Bugeteer: Like a buccaneer but less cutlasses and more spreadsheets

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