Key Takeaways
- Most of us don’t track our spending – that makes it hard to save for important goals like retirement or pay off debt efficiently.
- Download a free budget spreadsheet and get visibility into your income minus expenses right away. Try this one from My Frugal Home.
- Put savings on autopilot – put a portion of your paycheck automatically into a separate savings or investment account and then forget about it. Treat it like a bill you have to pay.
For some people, a budget means following strict rules that will immediately extinguish all fun from their life. Say goodbye to any spontaneity or the ability to enjoy your favorite restaurants or hang-outs as much as you want.
Maybe that’s one reason that most of us don’t do it. A Gallup poll from 2013 showed that only one-third of Americans track their financial inflows and outflows.
But too many people don’t see the biggest upside to putting a budget in place: namely, the ability to offer more financial flexibility than you have now, including what should be one of your biggest financial priorities – saving money. If you’re not putting some money away, you lose the capacity to efficiently invest for future financial goals or pay down debt effectively.
Hard line or guideline?
A quick Googling of “how to start a budget” will generate scores of ideas as to how you should plan your spending. Some of these can be very defined, like the “50/30/20 plan” originally devised by now-Senator Elizabeth Warren (a bankruptcy law professor in a previous life). Under this plan, 50 percent of your monthly net income (after taxes) should go toward fixed expenses like rent, mortgage, insurance payments, utilities, etc. 30 percent can go for variable expenses like travel, entertainment, or eating out, and 20 percent should go toward goals of additional debt payments, or saving for retirement or a home down payment.
This plan can be great for people completely new to budgeting and who need a general framework. On the other hand, some budgets assume a level of financial consistency that just doesn’t exist for a lot of us. In fact, a recent JPMorgan survey found that 80 percent of its customers experience more than a 5 percent variation in money coming in and overall spending on a month-to-month basis.
Meanwhile, one in four saw their financial inflows change more than 30 percent from one year to the next. For these people, especially those who freelance or work in the gig economy, it may help to use ranges that will even out over the course of months and years. One expert, for example, recommends saving 10 percent to 20 percent of your gross income (before taxes) each month. The amount can vary depending on your income fluctuations as well as unforeseen expenses.
A simple budgeting spreadsheet that even you can use
Whatever budget system you choose, don’t get caught up by what’s the “best” way to create a budget. Just pick one and get started. You can always adjust your budget later. The last thing you want to do is do nothing or be paralyzed.
To begin tracking your spending accurately, try recording all of your day-to-day and regular expenses. Many financial websites offer automatic record-keeping of all debit and credit card transactions, and you can input any cash expenses manually. At MoneyLion, our mobile app includes a personal financial management tool called the Financial Heartbeat monitor where you can see all of your spending transactions for accounts you’ve linked.
Then take those transactions and create a spreadsheet that lists all of your income items and expense items. To help you get started, try a simple budgeting template that you can customize to work for you.
When you have a better idea about where your money goes, you can help yourself avoid many spending traps and get a better handle on what spending is necessary, what’s a luxury you can’t live without and what is true excess.
You might find that tracking your spending will reap benefits very quickly. Several studies have shown that consumers that merely stay more aware of their spending tend to spend less. One financial website showed its users cut their grocery bills by 20 percent and their overall spending by 15 percent just four months after keeping track of where their money went.
Put your savings on automatic
The financial power you get from budgeting is only as strong as your willingness to stick to it. One way to stay disciplined is to make it as easy on yourself as possible by putting some of your choices on autopilot. For example, you can pay yourself first by automatically diverting a portion of your earnings into a savings account or other designated account before it even reaches your main spending account.
From a psychological standpoint it’s easier to adjust your lifestyle to a level when you’re automatically saving a set amount each month, by treating savings as a kind of “bill” that you need to pay (yourself) first. This way, you can keep accumulating savings without the risk of impulsively spending it. Read our other blog post for more tips on how to get started savings.
But that’s not to say impulsive spending can never happen. Part of your budget should definitely include indulgences that are no less a part of life than buying a car or making a down payment on a house. The “no-fun budget” is similar to a diet that only lets you eat lettuce and carrots – they never last, so make sure you can still have some fun, enjoy life, but also do it in a way so that you can begin saving for your eventual retirement!
