“I should get on a budget.”
Ever say that? It’s really an admission that budgeting isn’t easy or fun. (If it were, everyone would be doing it, right?)
So, if you’re one of those who doesn’t have a budget, why bother trying to create and live by one?
Because having a firm spending plan—which is all a budget is—is wise. It can be simple enough to write on the back of an envelope. Or so complicated that it fills up a spreadsheet.
But whatever level of complexity, you want your budget to be marked by at least four characteristics:
- Premeditation. A budget is a proactive plan for allocating your income. It lets you anticipate both problems and opportunities in advance, so you can maximize your financial resources and thereby accomplish your goals.
- Communication. Budgets gives couples, families, and executive teams a chance to discuss and decide what is most important to them. By talking in detail, agreed-upon priorities can be reflected in all future spending (and big frustrations can be avoided).
- Moderation. Budgets help promote wisdom in spending. Consider:
- If you spend more than you make, that’s a problem. You’ll end up in debt.
- If you spend every dollar you make, you’ll never get ahead. But…
- If you spend less than you make—i.e., you live moderately—you’ll have money to save and invest, which is how you make financial progress!
- Preparation. Once you’ve got your spending plan crafted so that you’re avoiding short-term consumer debt, and saving sufficiently, you can prepare for the future—both short and long-term. Saving money allows you to prepare for “big-ticket” expenditures in the near term, and also for the granddaddy of all expenses—retirement.
Okay, we’ve defined what a budget is…and the ingredients of a good one. What’s the best tool to use to track how you’re doing?
In short, you need something that matches your personality style and technology preference.
Here are four “tool” options:
Pencil and paper
No points for style here, but it’s simple, basic, and gets the job done. Write down your income, expenses, and savings. Make sure the math works so that you’re (a) spending less than you bring in and (b) putting some money back (start with 10%) for savings.
Once you’ve got a plan where the math works, check yourself daily during the month to make sure you are staying on plan.
If you have a hard time with impulse spending, the old, tried-and-true “envelope system” might be for you. You can’t use it for big items like mortgages or car notes, but you can use it with ongoing expenses like groceries, dining, gasoline, entertainment, etc.
Each spending category in your budget gets a physical envelope. You simply put the agreed-upon amount of cash (bi-weekly or monthly) in each envelope. When that envelope is empty, you stop spending. It’s hard core, but it’s simple. And it works.
If you use spreadsheets at work, you know how handy they can be. They do all the math for you. This may be a great option for you.
Are you the person who’s always asking, “I wonder if they have an app for that?” Good news! When it comes to budgeting and personal finance, the answer is a resounding “YES!”
You can find dozens of apps with cute names like Mint, YNAB (You Need a Budget), Good Budget, Mvelopes…you get the idea. Just type “financial apps” into your browser search bar. But before you pick one, ask around. Make sure it’s one you will use.
A budget is a lot like a financial diet. Some people count every calorie. Others just get a general idea of what they can eat and still lose weight. With budgets, it’s how much can you spend and still save money.
Budgeting isn’t, as one person said, “rocket surgery.” You simply need to spend less than you make, avoid bad debt, save adequately, and communicate adequately about all these priorities with your spouse. Those are the goals of a budget.
How you get there is not so important.
That you get there is hugely important.
To help you think through such issues, I’ve created a comprehensive checklist of pre-retirement questions for people who are 60-something. It’s free if you’d like a copy. Email me at email@example.com, and I’ll send it to you right away.
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