As I alluded to in my last post, creating a budget – and sticking to it – is one of the most important first steps you can take. Many people seem to shy away from this, either because it seems too time-consuming, boring, or they’re overwhelmed by where to start. Before we create the budget, let’s take a look at developing a budgeting framework.
First, be willing to make a lasting change. There are a few possible reasons someone may create a budget and never stick to it.
- It highlights a reality they may not want to accept, leading to repeated overspending.
- It is too constraining and is never adjusted to reflect how their money actually gets spent.
A budget is not meant to be a stuffy document that makes you feel trapped. If this is the case, analyze it and see what changes can be made to give you more freedom. Once you know where your money is going you can stop spending in areas that aren’t adding value to your life – and reallocate to those that are.
If money is still tight after doing this then start thinking about what you can do to bring in more income. You either spend less or earn more. Going into debt should be the last resort.
Once you’re willing to make the change, it’s important to give every dollar a job. I recommend a zero-based budgeting approach because it forces you to allocate every dollar you have already earned into specific categories to be used (or saved). How much you put, and where, is up to you so long as you’re only budgeting money you already have (not hoping to have at a later point).
The intention is to have your income minus expenses equal zero. With this done you will have given every earned dollar a job. This is important because it makes you think about what you want to do with your money instead of having remainder that just gets spent haphazardly.
Once you do this you can always adjust the plan later. Life happens and we need to be prepared to roll with it. No budget is perfect, which makes this a living document you can add, edit, and delete from at will. Simply re-allocate from another category and use it as a learning opportunity for the future.
Allocating Your Dollars
Since I brought up categories, let’s give every dollar a job by using a digital envelope system. You’ve probably heard the old stories about someone writing down different category names on envelopes and putting cash in each one. This is similar to that but in digital form. It’s easy, versatile, and we can move money between categories as life happens and adjustments need to be made.
We will explore this more when we start creating the actual budget.
With a mindset and a framework, you now have to decide how you want to track your budget. This is all personal preference. Experiment with different apps or spreadsheets to find what works best for you. I believed spreadsheets were the only way to go for a long time, but am now obsessed with YNAB. It doesn’t matter so long as it gets you to keep using it.
Some YNAB alternatives include:
I have not used any of these alternatives but would love to hear about your experience if you try one.
Getting started with YNAB
Because I use and enjoy YNAB, here are some resources to help you learn about what makes it great, how to get started, and the best trial deals I know of.
I receive no kickback of any kind for recommending them.
Resources to get you started:
A note on “budgeting” trackers like Mint.com
The Mint.com call-out is based on the last time I looked into budgeting with them (2018). The software may have changed by the time you are reading this.
Any budget that wants you to allocate money you have not earned yet is merely a forecasting tool. Forecasting future spend is important, but it’s more of a sidekick character; a “what-if” scenario. You are guessing what you’ll make, how you’ll spend it, and most likely not tracking it all efficiently.
It’s nice to think about and plan for but not the most effective way of doing this. When you budget with money you already have it’s far more impactful because any category you allocate to is funded right then and there. Budgeting should only be done with money you already have – not hope to have in the future. You can’t spend what you don’t have.
Join me next time as I discuss how to use this to actually put the budget together.
Continue to Part 3 – Creating the Budget.