Budgeting: the Hows and Whys
Once upon a time, I maintained a spreadsheet that listed my bills. As I paid each one, I'd highlight it. That was the extent of "budgeting" for me. Really it was more record keeping, but I thought it was working fine. I never missed a bill and avoided overdrafts in my bank account. However, I didn't have any savings and I had a decent amount of credit card debt. That's when a friend recommended that I use an app to budget - truly "budget," as in, plan out what I'm going to spend on different categories from each check. I was hesitant - I told myself I could manage my money fine without planning out each dollar. But I tried it, and y'all, it has changed my financial life!
I'm not exaggerating here. Not only has budgeting helped Dustin and me to pay off our credit card debt and pay cash for things like all-new scuba gear, but the discipline of assigning our dollars upfront to things we know we will want or need to buy showed us how much we could put money aside for big purchases each check. The downpayment on our house was way bigger than either of us thought it could be, and that's because we budgeted - hard. So how do you do it?
Before you dive into a budget, think about what you want to get out of the process. Are you trying to get out of debt? Do you want to be able to buy new fall clothes while still paying for essentials? Do you have a big purchase on the horizon? Knowing the end-goal for budgeting is key because it keeps you on track. When I first started budgeting, the goal was to pay off my credit cards and start putting more money into savings. Eventually the goal became saving for and paying for a wedding. When Dustin and I got married, our main goal was saving up for our house - for the downpayment and for furnishings. Now we budget to put more into retirement, save for eventual daycare, and pay for splurges, like new clothes or a new car.
Pick a program
There are a number of different budgeting apps out there. Personally, I like You Need a Budget (YNAB), but I know others who use sites like Mint and have had success. You could also check out the website of a friend of mine, who has really jumped into financial freedom and has a budget template you can download (www.katiebivens.com). Pick a program you are comfortable using - one that is intuitive for how you think about money. Several programs, like YNAB and Mint, will connect to your bank account so you can be sure not to miss a purchase in your transaction log. Play around with a few options and see what works best for you.
Trust the process
The idea of "giving every dollar a job" seemed a little far-fetched when I first got started. As long as you have the money for bills, then that's fine, right? Wrong. Giving every dollar a job means you are forced to think about your spending. Month to month, it also helps you anticipate expenses because you start to see patterns in your spending. Now when I think about stopping at Starbucks on the way home for a Seriously Strawberry Frapp, I know how it will affect my bank account and I can decide whether I want to splurge. If my "dining out" budget has an extra $5 in it (or I know I won't use all of the money budgeted in a different category), then I'll go for it! On the other hand, if our budget for clothes is maxxed out, maybe I'll skip that sale at Gap this time around. The key is truly thinking about the purchase (and logging it as a transaction).
Go all in
The last super important thing about budgeting is that you need to go all in. Pick your program, understand the process, personalize it, and really do it. The screenshots I've included are samples from YNAB's mobile app. We have different categories that are more personal to our life. Each bill has a line item. We have lines for "Groceries," "Pet," "Travel," and "Personal Care" (which includes the gym, manicures, shampoo, etc). We have lines for "IRA," "Daycare" (which we don't even need yet), and "HOA" (which we save for throughout the year to pay all at once in January). Then we have a category called "Everything else." Each payday, once we've gone through every category, setting aside our anticipated spending, we include an amount in this catchall category to cover any unanticipated purchase. Once we've finished, we see how much we have left over and immediately move it out of our checking account into savings (or maybe onto a credit card to cover a big purchase we've made). That way, the money isn't there to spend, forcing us to stick to the budget.
The final step is actually using your budget during the pay period, recording each purchase within its category. If the money gets spent, it comes out of the budget - this includes purchases put on credit cards! By doing this, you gain control over your spending and your saving. Every dollar seems to go further, you can finally start to chip away at debt or save for that new car!