How to Take the Stress Out of Budgeting
Raise your hand if the mere sound of the word “budget” fills you with stress and anxiety since it makes you think of penny-pinching and restrictions. Well, we can’t see if you raised your hand or not, but if you did know that you’re not alone. A lot of people don’t like the idea of monitoring their spending and budgeting since they feel like it’s a surefire way to suck all the fun out of life.
And while you have to be a rather special individual to see budgeting as fun, you know what really isn’t fun? Not being able to pay your bills and drowning in debt. When done right, a budget can help you get back control over your finances. You’ll know how much money you have to work with and where it all goes. This gives you clarity and the freedom to spend without guilt. When you’re improvising, you’ll often find yourself obsessing over small expenditures because you’re not sure where your money went and why you barely have enough to make it to your next paycheck.
The steps we will go through in this article work best when you have a fairly stable income that exceeds your basic expenses. If you don’t make enough to cover your basic expenses, you have three options. The first one is to find ways to increase your income. For example, you can get a side job. The second option is to reduce your expenses, such as your rent. Third option is to get outside help.
Give It a Different Name
If the word “budget” has such a strong emotional impact on you, changing the name could help you stay motivated. Maybe you’ll have an easier time getting behind a “wealth-building plan.”
You can also use a specific goal such as “new car plan” or “dream home plan.” Anything works as long as you see it as a tool you use to reach a positive goal.
Get Started: The Basics
Now that you found a less dread-inducing name, you can get started by calculating your income after tax. This can include your monthly salary but also additional income sources like freelancing, side jobs, child support, alimony or benefits.
If you’re self-employed, you can use your tax returns from the past two or three years and try to estimate how much you’ll make this year.
Now we can move on to expenses, and we’ll begin with your fixed expenses since they’re the easiest to calculate. This will include your debt and your fixed bills.
Your variable expenses will include some of your bills, groceries, gas and entertainment. Variable expenses are trickier because, as the name suggests, they vary. You can take a look at your credit card statements so you know how much you’ve spent, but a better strategy would be to keep track of your variable expenses over a couple of months.
You can use your smartphone to write down everything you buy, even if it’s something small like a cup of coffee. This will help you identify some of the small expenses that add up over time. You’ll discover some things that you can easily live without because you never saw them as essential or important sources of joy, but you simply had no idea how expensive they are in the long term until you started tracking them.
The next category is debt payments such as credit cards, auto loans and student loans. If you have multiple credit cards, you’re making minimum payments, and it’s starting to spiral out of control, you might want to consider refinancing through a personal loan. Personal loans usually have lower interest rates than credit cards. You’ll save money and have an easier time keeping track of just one monthly payment.
And a budget wouldn’t be complete without discussing savings. After all, building up your savings is the main purpose of the entire process. If you have no savings, you’ll want to start with an emergency fund, which you can use to cover unexpected expenses like medical bills and car repairs instead of getting into more debt. Ideally, your emergency fund should amount to your salary for six months to a year. Why so much? So that you have a buffer if you lose your job and it takes a few months until you find another one. Once you’ve finished building up your emergency fund, you can start allocating money to other goals like buying a house or retirement.
You Need a Budget You Can Stick To
As much as you might hate to admit it, deep down, you know that without a budget, you can’t reach your financial goals. Most people tell themselves that they’ll just set aside the money they have left at the end of the month. The problem with this plan is that if you don’t track your spending, you most likely don’t have that much left to work with.
Budgeting lets you see your spending habits so you can make adjustments and prioritize before it’s all gone.
A common reason why people don’t stick to their budgets is that they go from not budgeting at all to over-budgeting. Over-budgeting is a lot like extreme dieting. It can seem effective short-term, but you can only starve yourself for so long before you start feeling absolutely miserable. You have to find your balance and make room for some fun. Life is short, and we’re trying to make the most of it. It’s ok to spend some money on things you simply enjoy. Maybe you’d like to go to a nice restaurant or have a vacation. As long as this doesn’t take away from your basic expenses and financial goals, go for it! Note that your financial goals should be realistic.
Instead of sacrificing the simple pleasures in life, you can work on becoming a more mindful shopper. Next time you want to buy something, take a moment, breathe, get centred. Then ask yourself if you really need whatever it is that you’re about to buy or is it just an impulse. You really need it? Ok, no problem. Just one more step. Ask yourself how much value it would bring to your life. Then look at the price tag. Does the value match? Is it worth it? You don’t want to restrict yourself, but you also don’t want to waste your money on the wrong things.