FINANCIAL ADVICE | managing your money

How to Build a Budget That Works

Published February 12, 2019

Key Takeaways

  • Begin by figuring out where we do want to spend money.
  • If you start with something you want, it's a lot more fun.
  • Knowing the truth is the beginning of getting the thing under control.

Budgets are a great tool but two-thirds of Americans don't make them, and of the third who do, many don't keep them. Why? Because a budget sounds like a diet. People think of both of these things as a punishment for being undisciplined, a way to deprive themselves of what they really want, while they trudge forward, paying the bills and eating boring food. Who would want to do that? What we need is to know how to create a budget that actually makes our financial lives better.

Brad Klontz, a psychologist and certified financial planner, explained that the problem is our perspective. By themselves, budgets are just math: There are 20 people at the birthday party; how many pieces of the cake should you cut? However, it's all the negative associations we add to the idea of budgeting. Realizing we don't make enough to cover our expenses while thinking of things we want and can't have; that's what makes budgeting into a depressing chore. He recommends, instead, that we think of it as a spending plan. We begin by figuring out where we do want to spend money.

For example, let's say you want to go to Thailand. You start the budget process by researching the costs of your trip—flights, accommodations, food, excursions. You create a spending plan for your trip. Divide the total costs by the number of months you have to save for the trip. Then you create a spending plan around your income and expenses that support making the trip possible by the time your vacation rolls around next year.

If you start with something you want, it's a lot more fun.

So now you're building your budget around your goal. If you must change things about your life—cutting out your daily coffee stop or getting a roommate—you're doing it in the service of your goal—not as some Charles Dickens character, “No more gruel for you!”

Okay, now the practical part. Some of this can be done pretty easily in free online services, like Mint or NerdWallet so begin by looking for a tool that will help you make and track your budget, preferably one with an app that goes with you everywhere.

Get and install the app and populate it with your income and expenses.

Add up your fixed expenses

Fixed expenses are rent, car payment, student loan, other things require a fixed payment each month. These are fairly easy to calculate.

Calculate your variable expenses

These include your groceries, your utility bills, your credit card bills, your entertainment or shopping expenses. Variable expenses are where most budgets tend to go awry. Fortunately, current software can show you your trends in terms of how much you spend on each category. If you really want to get a handle on your spending, you'll break large categories down into smaller ones. Auto, for example, shouldn't just be left as one category but broken down into payment, insurance, fuel, parking, repairs, etc.

It can take a couple of hours to set up the software correctly, but it will save you a lot of time, money, and stress down the road.

  • Download your account history from your bank into the software
  • Go over each of the downloaded transactions to ensure they're recorded properly. The software often knows to put any payments to Kroger in groceries, but it might mistake your local tavern as a travel agency, depending on its name.
  • Get as granular as you like. Do you buy both clothes and housewares from some retailers? You can break down a particular expense between types of purchases.

Take a deep breath

Another moment when a budget feels like a diet is when you look at how you spend money. If you've been estimating up to now, there's a good chance you'll be surprised. Most people who begin counting their calories are shocked to discover how many calories they consume in an average day. It's the same with budgeting and realizing how much money you're spending every month. For many of us, it's not a fun moment. However, knowing the truth is the beginning of getting the thing under control. So take a deep breath, and begin evaluating where you could make some changes.

Your money story

Any changes have to begin with your relationship with money. We all have a money story, for example:

  • There was never enough money when I was growing up.
  • Money was more important to my parents than spending time with me
  • Responsible people don't have money troubles.

Whatever your story was about money, it probably guides your money choices now, and often not in a good way. It's important to begin by understanding whether you have a healthy relationship with money or an unhealthy one and start to deal with that.

Klontz defines a healthy relationship with money as “having a conscious and purposeful relationship with money that is satisfying and isn't overly stressful.”

So, what is stressful about your relationship with money? How is it satisfying or unsatisfying? What are the underlying assumptions you work with? Do they create a sense of peace and empowerment? Do they create a sense of anxiety and guilt? These are important things to consider when thinking about your budget.

Your financial infrastructure

The Emergency Fund

Most experts say you should absolutely have an emergency fund, but some say that's a waste of a resource. This side argues that with a median household income of $61,372, people would have to save roughly $15,000 to cover three months' worth of expenses—the amount often recommended. However, most Americans carry more than $135,000 in debt including nearly $7,000 a month in revolving debt. Instead of spending $15,000 on an emergency fund, consumers might consider paying down debt and reducing spending to what they can afford, so they're not forever paying interest on revolving debt while having a pile of money that may not be needed and isn't earning anything.

Automate, automate, automate

The more you put on autopilot—paycheck deposit, 401K withdrawal, bill payment, the less money you have to make missteps. Frequently, for example, utilities will create plans to even out your monthly payments, so you're not paying a lot in some months and very little in others. A fixed payment allows you to add utilities to your fixed expenses. The less money and fewer payments you're juggling, the easier it will be to stay on budget. You might consider using an app like Empower or Acorns that automatically rounds up your spending to the nearest dollar and stashes the extra in a savings account

Look for places to shave off expenses

Is there a nearby gym that costs $35 a month less? Could you reduce your grocery bill by $100 a month? Most consumers spend more than $5,000 a year on impulse buys at the grocery store, meaning that if you reduced the number of trips, you could reduce the number of impulse buys. Then when you do go to the store, have a list and stick to it.

Something as simple as removing your credit card from your wallet can make a big difference. If you do not have the ease of a credit card when there is something that you wish to impulse purchase, it will give you the opportunity to think through the purchase while you go home to retrieve your card.

Consider whether you might be wise to refinance your auto or switch to a lower-interest credit card. When you get conscious about spending, it can become kind of fun to look for ways to save money.

Extra Incentives

If you have debt and paying off that debt is part of your budget plan, consider incorporating a snowball or avalanche approach to debt reduction. One of the reasons people buy things is to trigger the reward center in their brains. Meeting financial goals can have the same effect in the short range with much better outcomes in the long term. Setting yourself specific rewards for paying off debt or sticking to the budget can help you avoid spending money on the expensive night out or the extraneous pair of shoes. You can create rewards for sticking to your budget, like throwing an extra $100 toward your Thailand account.

Money is a resource that flows through our lives, not a solution to unhappiness or a sign of our worthiness. Once we start treating it like a resource, by creating budgets and strategies to manage it, we'll probably enjoy it more. If you want more help with creating and sticking to a budget that reduces stress and increases satisfaction, contact us!

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