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5 Steps to a Budget that Lasts

| September 30, 2016
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Part of America’s aversion to budgeting may be rooted in language. The word “budget” – much like the word “diet” – has negative connotations. Budgets and diets are viewed as restrictive reminders of things we cannot have. This is linguistic nonsense. A budget and a diet are both tools. If the tools are used properly, they lead to a desired outcome.

Investopedia Staff

Now, I’m not the first person to compile a guide to budgeting, and my goal is not to claim that I hold the only keys to a successful budget.  I only seek to provide a concise, actionable way to implement a meaningful budget that lasts.

This is an issue that is near and dear to my heart.  After all, my collegiate thesis was titled “Why Everyone Needs a Budget” (boring title, I know).

Getting Started

For many, this part is the hardest obstacle.  An object at rest is much more difficult to get moving than an object already in motion.  Likewise, a budget becomes easier to manage the more it is used; the real pain can be just starting with it.

1. Make a list of your values.  

Once you have them, put them in order.  This step may seem like the equivalent of reading a prologue at the beginning of a long novel, but this is the difference in having a budget that is effective, and one that is meaningful.

2. Clearly set out your short, intermediate, and long-term goals.  

A budget that isn’t tied to specific, worthwhile goals is like loading cargo on a freight train without any idea where the train is supposed to go.  If a budget doesn’t help you meet your goals, then what utility does it really provide?  A plan that ignores intermediate and long-term goals is foolishly short-sighted, and in the same way, one that ignores short-term obligations and goals is destined to fail.  Goals provide the framework for your budget to last and provide you with the motivation to keep at it.

3. Know your income.  

This is where the most excuses and objections come into the process.  These excuses are often about the amount of income produced, whether too much (yes, some people think they’re “too well off” to need a budget) or too little.  People also often place the frequency of their income in the way of a budget as well, citing that their incoming cash-flow is too inconsistent to have a foundation to base a budget on.  There are countless other excuses people use and I could spend time refuting every single one; perhaps in another post.  The main point is, regardless of your income situation, you need a budget.

4. Know your expenses.  

There are two ways to go about this part of the process.

The first way is to track all of your expenses for a month to two months by writing every single purchase down and categorizing them.  This is very effective, but can also be very hard for someone who is new to the discipline of budgeting.  For those of you that make a lot of purchases with cash or use a bank that is not supported by the software below, you may have to use this first method.

The second way is much faster and allows someone to get up-and-running with their budget without having to do as much data gathering.  Mint is a powerful free tool for seeing all of your financial data in one place.  Here is a guide on how to get started with Mint and how to track your expenses with it.  Mint will go back and track each of your monthly purchases made through the linked accounts and put them in a nice pie chart for you to see.  To see this, go to the top tab that says “Trends.”  When you do this, make sure you go in and categorize each and every “uncategorized” transaction; there should be no transactions left unsorted.

I use Mint for an overall picture of my finances and for a look back at what I’ve been spending, but I use another software to actively budget going forward. Some use Mint for the actual proactive budgeting and love it, but my wife and I use the software below and love it.

5. Create your budget.

This is where it all comes together.  Your values, goals, and expenses should all be used in unison to create a budget that is truly tailored to you.  By holding your past spending habits accountable to your values and goals, you can truly know how your budget needs to be changed.  For example, if your biggest value is your faith, and you find out through tracking your spending that you spend 3x as much on eating out or entertainment than you give to your church and charities, maybe your spending doesn’t line up with your values.  Or maybe you have a goal of putting a down-payment on a home in two years, but at the current rate that you’re saving, that goal won’t be reached for another 5 years.  A budget puts you back in control.

Since this post is updated for the 21st century, naturally, I recommend using a type of software or app to put together and follow your budget.  I could come out here and say that this app is better, or that app is better, but frankly, the best budgeting method is one that you’ll use.  I don’t care if it’s pencil and paper, an Excel spreadsheet, or even some kind of envelope system, whatever motivates you to consistently track and control your spending is what I recommend.  However, since I believe that the vast majority of people in today’s day and age, including me, need some kind of interactive and intuitive software to motivate them to be consistent in following a budget.

There are plenty of great apps and software out there that facilitate this process wonderfully, and I’ll wait until a later post to walk through some of my favorites.  For this post, however, I’ll tell you about the one I use.

I use You Need A Budget (YNAB) for my budgeting.  Currently, YNAB runs at $5/month or $50/year.  There are plenty of great free pieces of software out there that work wonderfully for a lot of people, but YNAB has some features and an interface that I’m willing to pay for.  There’s an old adage that says “If something is free, then you’re the product.” I don’t always agree with that statement, but it’s often true. I don’t get a single thing from YNAB for using or recommending them, I just happen to like them.

I use YNAB because they have an interactive, cloud-based software that I can access from anywhere, whether that’s on my computer or on my phone.  Their app (currently on iOS  and Android) was also a huge plus for me; the ability to enter transactions immediately and easily was a feature that I really wanted.  Another thing that was important for me was the ability to have my wife and me on the same page with our budget, and YNAB allows us to have the same budget and enter transactions and have them updated immediately to the other’s phone.  I won’t go into too much detail on YNAB, but if you’re interested, try their 34-day free trial.

My advice is if you find a free app out there (and there are plenty of them) that you like and that works for you, use it!  Find something that you like, implement it, and keep up with it.  Don’t make the search for software into a “search for the perfect budgeting technology.”  The perfect piece of budgeting software doesn’t exist, and a prolonged “software dating” window will only hinder your progress, not help it.

Happy budgeting and feel free to shoot me a message if you have any questions!

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