Master Your Budgets
Yesterday we discussed the importance of tracking your spending and some tools for figuring out just how much you spend on food, shopping, coffee, or gifts. Today we’re going to learn how to make a budget and stick to it.
Setting a Budget
Once you have an idea of how much you’re spending in different categories, you can set monthly budgets and rein in excess spending. This is the second step to mastering your money: create and maintain your budgets and look for areas to reduce spending.
Sometimes just being aware of how much you’re spending can help reduce your expenses. For example, when I began tracking my spending with Mint, I was shocked to see how much I spent on restaurants each month. Just being aware of how much money was going to restaurants allowed me to cut back on those expenses.
In general, however, it’s best to set hard budgets for the month for how much you’ll spend in each category. Use the average monthly totals in each category that you obtained from tracking your spending in yesterday’s lesson to set your monthly budgets. If you want to spend less in a certain category, set your budget for less than your average expenses in the category.
Let’s look at how this might work:
In this example, I want to maintain my current spending on groceries and gifts as well as transportation, because that’s how I get to work. I enjoy my coffee/tea purchases, as they are a time to spend with friends, so I don’t want to cut back on that spending just yet (in a future lesson we’ll discuss how to keep certain habits and luxuries without spending so much money). However, I can spend less on restaurants and clothes each month, so I’m going to set lower budgets for those categories and try to cut back my spending there.
Sticking to a Budget
Now that we’ve set our budget, how do we stick with it during the month? Here’s where Mint or another personal finance tool can come in handy. When we tracked our spending in the first lesson, we focused on historical information and how much we spend on average. Now that we have set a budget, we need to track spending in real time.
There are several ways to check in with your budgets during the month. The most important thing is that you actually do check in regularly, not just at the end of the month. Develop a habit of checking your budgets at the end of each week regardless of whether you’re using Mint, checking your bank accounts online, or using some other tool.
Another method for sticking with your budget is to use cash for all purchases. You can break your monthly budgets down into weekly budgets and take out enough cash for each category each week. Or if you’d prefer, you can take out cash for the whole month. Then you can put the cash into envelopes designated for each category. When you’ve spent all the cash in the envelope, you’ve used up your budget for the week or month.
One last important thing on your budget—make sure that your total monthly budget (including any bills, rent, or mortgage payments, which we have not included here) is less than your monthly income. We will dive into debt in tomorrow’s lesson and talk about saving the day after that, but it’s very important to make sure that your monthly expenses are less than your monthly income, so check the math before you set your budgets! See you tomorrow to talk about debt!
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