Budgeting. AHHHH! Goodness, sorry to start off with such a scary word. I think “budgeting” gets a bad rap these days. Truthfully, I’ve always struggled with budgeting. I think most people think of a budget as restrictive and penny-pinching. Having an accounting background, I can keep records of my finances all day long (I may or may not keep a personal QuickBooks of my entire personal finances). However, when it comes to forcing myself to stick to a budget, I used to always struggle. I think my reasoning behind my struggles was because I fell victim to the perception of budgeting that so many others have these days.
As time has gone on, I have learned that budgeting can be a freeing exercise for your finances and also an eye-opener. For those that don’t budget and just hope to make it to the end of the month without bouncing any checks or transactions, there’s the feeling of not being able to control your own spending and finances. I’ve been there in my life. The end of the month comes around and you ask yourself, “Where’d all my money go?” Almost as if your finances have a grip on you, not the other way around, as it should be.
Creating a budget doesn’t have a secret recipe and isn’t for a certain range of income earners. No matter how much money you make and how much money you have, creating a budget has a list of benefits. The most obvious is how it helps define your goal with your money and what you need to do to get there (i.e. have money left over at the end of the month). Second, it creates transparency in your own personal spending that you may not have had in the past. You may realize that your Starbucks coffee addiction isn’t just a $5 coffee here or there, but rather a $5 coffee nearly every day which can add up to some serious change over the course of a month, let alone a year.
So where do you start? My favorite place to start with budgeting is zero-based budgeting. What is that? It’s when you list out your income, minus all your expenses, and you end up with zero. It’s not that you’re necessarily spending all of your income, but you’re putting every dollar you make somewhere. Groceries? Yep. Utilities? Yes. Rent? You got it. Savings? Absolutely. Make $5,000. Spend $4,000. Save $1,000. Money left over = $0. In this example, your cash at the end of this period increases by $1,000.
When creating a zero-based budget, I love starting with your savings. If you haven’t saved much in the past, start small (let’s say 5%). Make $5,000. Save 5% ($250). Spend $4,750. This is what’s called pay yourself first. Your first “expense” is the $250 that needs to be put back/saved. Now, all you have left is that $4,750. That $250 you saved doesn’t even factor into the money you can budget out next. It’s “spent” in essence.
Next, after you pay yourself first and you start to list out your actual expenses, YOU are telling your money where to go, not the other way around. Plus, in order to track where your money is going, you’ll be constantly adding up how much you’ve spent and where. All of a sudden, you’re learning your money habits and finding out where your money is going. It’s the greatest feeling in the world!!! (even though you might find some unsettling surprises like how much all 7 different TV subscriptions cost altogether… can we just get cable back?)
My last bit of advice is to always, I mean ALWAYS, plan for the unplanned. Expect the unexpected. I’ve never had a single month in my entire adult life that hasn’t had an unplanned expense. So, plan for that. Make a line item in your budget that states “miscellaneous” or “unplanned” or whatever else. But plan to spend money on things that you don’t plan to spend money on. That way, you won’t be feeling guilty about having to break your budget.
Remember, budgeting is the act of telling your money where to go and stay on track for a common goal. Will it be perfect? Absolutely not. No budget that’s ever been written has ever been perfect. But, it gives you something to aim for and is a necessary step in financial independence and understanding your personal finances fully.
As always, we’re here to help walk through building your first budget if we can!