Last Updated on October 6, 2020
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What is a budget?
So, what is a budget? A budget is a broad term that encompasses the numerous ways in which you can plan for and track both your expenses and savings with the intent of meeting a specific financial goal. There are an almost unlimited number of budgeting options. You may choose to utilize a budget for a variety of reasons. It could be to maintain overall financial health, save up for a vacation, plan for your future, or all of the above.
Why do you need one?
Perhaps you’re thinking, I know what I make, and I know what I spend…so I don’t need a budget. Wrong. Everyone needs a budget. Why? Because budgeting is about more than simply spending less than what you make. Which, by the way, is also the case for any smart personal finance plan. Spending less than what you make keeps your focus solely on the present. That’s no way to prepare yourself for the future.
How to set one up?
As we mentioned, there are many reasons why people choose to budget, and why they choose to budget in a certain way. It can be intimidating if you’re just starting out. If you find yourself in this situation, check out our 5-step beginner’s guide to setting up your first budget.
How to stay on budget
So, now you’ve got a great budget in place but you’re wondering how to keep yourself accountable? Here are 7 budget tips for beginners to keep yourself on track:
1. Make your budgeting goals visual
Budgeting can be a very freeing way to manage your money when you realize that its intent is to help you get what you really want. It keeps you organized so that you can focus on spending your money on the things that truly matter to you. Keeping an eye on your goals can make it feel exciting and purposeful, rather than like a burden.
Maintaining some type of visual representation of those goals also helps keep that perspective fresh. So whether it’s a sign on your fridge, a vacation countdown app on your phone, or simply telling your friends about your goals to retire early – having an external reminder can be incredibly helpful to keep your eyes on the prize.
2. Reevaluate your budget annually & after big life changes
Reevaluating your budget annually and after big life changes will help you stay on track. Big life changes include things like getting a promotion at work, losing a job, taking a pay cut, or having kids – anything that may significantly affect your salary or expenses. Many articles suggest a monthly reassessment of your budget, but here at The Ambitious Dollar, we believe that a budget should be used as a tool, not a burden.
Suggesting that you ought to reevaluate your budget any more than necessary is likely to drive you crazy, or – let’s be honest – a monthly reevaluation is simply not realistic. Budgets aren’t supposed to make life difficult, they’re supposed to make it easier for you to attain your financial goals.
3. Involve the necessary people in your budget discussions
If you share finances or costs of living with another person, make sure they’re included in the process of setting up and reevaluating your budget. If you aren’t on the same page, your budget won’t work.
4. Don’t punish yourself
Don’t punish yourself if (and more realistically, when) you fall off the wagon. We all slip up from time to time or give in to temptation when we shouldn’t. But there is no benefit to be gained by punishing yourself unnecessarily. The important thing is to make sure you don’t use your slip-up as an excuse to delay getting back on track. So, if in a moment of weakness, you buy a fancy new watch and regret blowing your budget, don’t rationalize buying a pricey wallet as well…
5. Beware of sneaky subscriptions
Beware of those sneaky subscriptions and monthly credit card auto-pay services. They can easily be missed when you’re managing a budget. They make it easy to pay, but through that very process, also make it is easy to forget about that money you’re spending. Moreover, since subscription services already have your bank account or credit card on retainer, you’re more likely to breeze over changes in fees or not notice when the price increases.
6. Don’t be afraid to switch things up
Don’t be afraid to switch up what type of budget you use. Your budget has to work for you or you won’t use it…and then what’s the point? So, if you start with one type of budget and realize it’s not helping or isn’t intuitive, be open to trying a different one. The good news is that setting up a budget for the first time is really the most time-intensive part – making a switch should be relatively painless..
Below are a few examples of different types of budgets:
In a nutshell, a 50/30/20 budget splits up your expenses into 3 categories and is one of the simplest methods to budgeting. The idea is that 50% of your take-home pay should go to needs (utilities, food, housing, etc), 30% should go towards wants (travel, eating out, etc), and the remaining 20% should go towards savings and investments.
You can also use categories to make your budget as specific or generalized as you like. On the simple end of the spectrum, you could create a three-category budget separating expenses into fixed, variable, and non-necessities. Of note, the three-category method doesn’t specifically allocate money towards your savings. Don’t neglect your savings.
On the more comprehensive end of the spectrum, some people create upwards of 20 different categories including everything from utilities, healthcare, mortgage/rent payments, travel, emergency fund, savings, and everything in between. This is a great way to really see where all your money goes and help you plan for the future, but it does take more time to set up.
A zero-based budget is perhaps the most specific option out there for budgeting. But, once it’s set up, you likely won’t have any questions about where your money goes. The idea is that you allocate every single dollar you make before you spend anything – that way there are no questions on what you can spend, and there’s also less likely to be any ‘whoops’ spending.
Basically, you take time each payday to divvy up your paycheck. First, you allocate dollars towards your fixed expenses and financial goals. If there is money left over, you get to decide how you’d like to spend it – either keep it for something fun or perhaps contribute more towards your retirement account. Either way, at the end of your tally, your paycheck should be zeroed out.
7. Determine a tracking method that works for you
How you track your budget is just as important as what type of budget you use. If the way you track your budget isn’t working for you, you aren’t likely to stick with it. Below are a few good options depending on your preferences:
Pencil and paper
If you’re a bit more old school, there’s nothing wrong with tracking your budget the old fashioned way. There are some really great binders available to help keep you organized as well. Whether you’re looking for something more professional, or fun, like this Sort Your Sh$t Out Budget Binder – your options are endless.
There are a few good advantages to track your budget with paper and pencil. To start with, you’re more likely to be focused on the task at hand if you are taking the time to sit down and write it out. It means you’re less likely to be distracted by anything else going on because you’ve dedicated some time to work on your budget and therefore are less likely to miss things.
It’s also been proven that physically writing things down with pen and paper helps you remember them. That’s a serious benefit.
There are also a few disadvantages to managing your budget by hand. It’s a less portable option than using an app on your phone, so you might forget to add expenses in if you aren’t carrying your budget binder around with you all the time.
Setting aside dedicated time to write out your budget by hand also requires you to be dedicated and self-motivated – if that’s not you, consider a different approach. There also isn’t a way for you to set up any alerts if you’re nearing or go over a budget limit – that’s up to you to figure it out.
Some people are simply more comfortable with certain software packages and if that’s you – have at it.
There is a tremendous amount of calculation power and flexibility in software programs like Excel. Whatever budget type you choose to proceed with, you’ll be able to manage it with a number of different computer software programs.
These programs are not really portable. Just like using the pen and paper method, you’ll need to stick to a schedule, otherwise you’re likely to fall behind and miss things. There also isn’t the opportunity to set up easy alerts when you’re approaching or have exceeded a budget limit. You may be able to see these alerts at the moment you’re adding information into the software, but that could be long after you’ve spent the money.
There are apps for everything right? That includes budgets too.
Apps are a great way to easily and portably track your budget. There are a ton of good free and paid options depending on what type of features interest you. One of the handiest features most apps offer is the ability to set up alerts when you are nearing or have exceeded a budget limit.
These apps also allow you to hook up your credit cards so all of your transactions are easily accounted for with no additional work necessary by you. Because all of that data is accessible on your phone – and none of us go anywhere without our phones – you should always have access to see how you’re doing.
Just because you have the ability to set up budgeting alerts, doesn’t mean you have to pay attention to them. Set realistic budget alerts that reflect your planned spending. If you get 15 alerts a day, you will quickly learn to ignore them. So, while these apps tend to be very user friendly, they still require you to be the responsible budgeter. It’s also important to keep in mind that colocating your credit card and account information could be a security risk.
At the Ambitious Dollar, we recommend choosing an app that gives you the option of utilizing two-factor authentication and setting a strong password. Most of these apps take security very seriously, but it’s also your responsibility to be smart about it.