How Can I Create a Budget I Will Follow?
When it comes to budgets, my philosophy has always been, the simpler, the better. Nowadays there are many personal finance software companies which offers apps and websites which will help keep you on track if you don’t mind spending some time ensuring each expense is credited to the right category for a while (until the software catches on). Companies such as Mint, Quicken, or Personal Capital have become extremely popular for good reason, they help to simplify the tracking of your expenses in a day and age where there are many small transactions that will appear on your monthly bank statement or in your online banking transaction history.
Having an automated system in place to track these expenses and categorize them is extremely useful and helpful to you. Personally, I am using the Personal Capital Financial Software to have my accounts consolidated for purposes of keeping track of income and expenses. Additionally, they have tools which will analyze your investments to assure you are not paying too much in fees. When you pay more than you need to in fees, it is robbing you of future value as the money going toward fees could have been invested, then earned interest for the next 10-20 years or whatever your time frame. For each successive year the same would hold true. This may not seem like a lot on an annual basis, which is what these companies count on (that, and the fact that many investors simply blindly put there money in a fund without ever comparing or considering the effect of annual fees on their long term wealth or long term investment performance).
What Some Helpful Rules for Budgeting?
A simple and recommended method for budgeting this author prefers is the 50/30/20 rule where you allocate 50 percent toward necessities, 30 percent toward additional purchases, and set aside 20 percent for savings or debt repayment if you are working on chipping away at that credit card debt (this should be a priority if you are paying a high rate of interest on a credit card; in addition to contacting your credit card company to attempt to negotiate a better rate). I like this method again, for the simple fact that it is simple….although I will be honest, I am not the best with budgeting and could improve in this area. I find however, that it is sometimes harder to do as a couple. Budgeting for couples is completely different than budgeting for an individual as when you have two people you need to account for the differences between you and come to a joint resolution as to what you are both comfortable with. When I was younger I was of the mindset that i would take over half of my money to invest it, but I did not have a huge income. However, I married young, had two children, and my expenses grew faster than my income. Now, over time my income has grown, along with my expenses, but luckily I am able to afford to provide for my family, enjoy some amenities, pay down my debts at an advanced rate, and put a good chunk into my 401k (along with my wife’s). Therefore, in addition to the budgeting rule above, another rule for couples is to talk about your finances and get on the same page (agree upon your overarching goals, and the plan to get there).
What Steps Do I Take to Create My Budget?
- Determine your cash flow or after tax income (your paycheck after health insurance, tax, and 401k deductions).
- Calculate the amounts for the 50/30/20 rule (to determine 50% you would multiply your after tax income by .5; for example if your monthly after tax income was $5,000 * .5 = $2,500, the $5,000 * .3, etc).
- Monitor your progress in sticking with the planned budget, make any needed changes to keep the budget accurate, but try to stick to it. A helpful hint is to automate it as much as possible for fixed expenses and your 401k savings amount, debt payoff, etc.
It can also be helpful to maintain an excel spreadsheet with these numbers as well which will allow you to play with the numbers to see how much free cash flow you can create by varying certain expenses (to create additional income for investing/debt payoff). Personally, I use Personal Capital financial software to track income and expenses and get a picture as to whats going on overall, but still like to plot out the fixed and variable expense categories on an excel spreadsheet so that I can play around with the numbers and see what effect it would have when I pay off a certain debt, and can reallocate the amount i was paying toward that debt to something else, etc.
To me, personal finance is fun. I like to dream big, plan for success, and see my finances improve over time. As stated above, I have not always been the best with a budget, and am not a coupon clipper (my grocery bill is typically something like $1,200-$1,400 per month, but I do believe budgeting and couponing provide value and a framework for you to accomplish your financial goals faster. It also teaches you a lot about your situation, spending habits, where you can improve, etc. This is an important part of learning what is holding you back from accomplishing your financial goals, and learning where you can cut down some expenses and increase your free cash flow for investing (so that you can grow that long term wealth). Although I have been able to make great strides toward my financial goals in my present situation, perhaps this year I will take time to learn more about using coupons and other ways to make the most of my monthly income, so that I can reallocate and invest the difference.