A word that is resisted or feared by many, because it implies restraint. Budgeting appears to tell you “NO, you can’t do that” right out the gates.
I am here to challenge that.
Budgeting is simply telling your money what to do. It’s creating a plan for how you want to spend, and then executing that plan. When you have a budgeting system that works, it reduces stress around money and allows you to move forward confidently with spending decisions.
Budgeting keeps your spending in check so you are less likely to go into debt, and more likely to achieve your financial goals. Do you want to save $10,000 for a house remodel? A budget allows you to set aside money each month so that you can achieve your goal. You create a category specifically for your house remodel, which allows you to stay focused (and pay cash!)
In this post, I want to explain HOW to get organized for budgeting and also share some strategies we use in our budget to create financial success for our family. Before I dive in, I want to share some of our family’s financial principles and goals:
- Be completely debt-free by age 40 (our current debt is a 15-year mortgage).
- Strive for early “retirement” aka financial independence.
- Maintain financial security for our family by living frugally, staying well-insured, and maintaining a robust emergency fund.
- Be intentional with your money.
- Talk about money on a weekly basis during our budget review. Talk openly about money concerns. Work as a team!
- Be patient. Saving cash takes time. Big goals take time. Sometimes you have to wait for great things.
OK, so let’s talk about getting organized. If you’ve NEVER budgeted before, the first step you want to take is writing out all of your expenses. Think about your expenses by category:
Fixed Expenses: These are expenses that typically occur on a fixed date and for a fixed amount. Start with your bills. Monthly, quarterly, yearly. Write them all down. Use your bank statements as a guide (look back over 12 months to make sure you don’t miss anything).
Variable Expenses: These are expenses that typically occur on different dates and for different amounts. Things like groceries, gas, hair cuts, household supplies. Don’t get too caught up in the details here; it’s tough to line-item every last thing. Keep it simple. Again, use your bank statement as a guide to tell you where you’re spending money. Write down those categories.
Long Term Savings (i.e., retirement, college, house down payment): What are your long-term savings goals? The big one, for most, is retirement. Are you contributing to a retirement account? Do you have other non-retirement investment accounts? Make sure to include these line items in your budget. If you contribute through work, then you don’t need to write it down as that money is already being set aside for you. (But this brings up a good reminder to review your paycheck withholdings, and ensure everything is in check!)
Short Term Savings (i.e., vacation, new appliances, new cell phone): I love this category. This category forces us to be patient, and save cash for things we want to do. We do not believe in impulsivity in our household, because it usually translates to spending money we don’t have, or going into debt for something we don’t need. If you recognize that you want something, or will need something in the near future, create a line item for it, decide on how much you need, and come up with a monthly amount you need to set aside to hit your goal. It’s a game-changer.
Emergency Fund: We follow the “6 months of expenses” rule. Not 6 months of “everything’s fine, spend as normal” expenses, but 6 months of what do we ACTUALLY need to get by during a time of crisis. Again, something big just happened (health issue, job loss) so you are not operating at normal speed. If you don’t have an emergency fund, decide on an amount that makes sense for your family, and start setting aside money in a separate bank account.
Debt: If you have debt you are trying to pay off, I recommend writing out ALL of the details regarding your debts and keeping this information in a visible location. Keep in mind that your monthly debt payments will be categorized under fixed expenses.
- Vendor (who do you owe?)
- Outstanding balance (how much is justify to pay?)
- Monthly payment amount
- Monthly due date
- How the loan is paid (check, autopay, bill pay)
Having all of your debt information in one place is super helpful. You can reference in a pinch, and update as necessary.
OK, now that we’ve addressed the different categories of budgeting, let’s talk about one of my favorite concepts of all time: sinking funds.
A sinking fund is a money that you set aside for a known future expense. Let’s talk through some examples. You have a car insurance payment every 6 months, you celebrate your family’s birthdays every year, you have annual memberships to museums, Costco, Amazon, etc. These are all things that I recommend saving for on a MONTHLY basis.
Here are the different sinking funds we send money to on a monthly basis:
Yearly Household Fees
For each category above, we determine what we need to set aside monthly so that we are ready for bills when they arrive. Let’s take Christmas as an example. We sat down and calculated how much we want to spend on gifts, brunch, stocking stuffers, and extra groceries. Then, we took that amount and divided it by 12, to get a monthly amount. Starting in January of this year, we put aside a monthly amount into our “Christmas” budget line item. When December rolls around, we will have all of the money we need to pay for Christmas. Talk about the best gift ever!
I also think looking at yearly household fees is super important. We have 11 vendors that we pay once a year for different household needs (think: Amazon, winter grass, car registration, home security system, CPA fee for taxes). We don’t want these bills to show up as a surprise. So, we sat down and wrote out who we need to pay, on what date, and in what amount (a spreadsheet works great for this exercise!) We got a total, divided it by 12 (aka MONTHALIZED it, my favorite term I need to coin) and now we send away that monthly amount every single month to our Yearly Household Fees line item.
Long story short, budgeting is all about categorizing. Identify the categories you need to have in your budget, decide what amount of money has to go into them, and, when you get paid, make sure you allocate money to those categories. We use a software called You Need A Budget (YNAB, for short). The way YNAB works is the money you earn in the current month is assigned categories in the next month. For example, your March paychecks are used for April’s budget. It’s a pretty cool system. This is not a sponsored post, but we have been using YNAB for over three years now and it has been a game-changer for our budget. We had been using an Excel spreadsheet prior to using YNAB, and it just wasn’t the same. We were looking back at what we had spent, not forward at how we should spend.
I will end by saying this: budgeting is not restricting. Budgeting is not limiting. Budgeting is taking control of your money. It’s telling your money what to do because you are the boss. It’s creating financial success for you and your family. Want to buy that $1,000 phone or take that trip to Greece? Do it guilt-free by planning and saving and letting your budget say “Yes”!
I hope this post was helpful to you in your budgeting journey. Please share in the comments below your struggles and successes with budgeting!