Fundamentals of budgeting for beginners
December 08, 2016
Budgeting is a simple concept, yet many people fail to follow.
What best describes your household budget:
- A series of mason jars with money stashed for different expenses?
- You simply spend until you start getting overdraft notices when you try to use your debit card?
- A theoretical concept with few details that you expect will get easier when you win the lottery?
- A carefully-planned, electronically-monitored program that helps you meet your current and future needs?
If number 4 is your answer, then good for you - you are probably in the minority of people with disciplined, well-executed budgets. It's a shame so few fit into that category because efficient budgeting can not only help you use your money better, but it can help grow your wealth and your savings account. A better financial standing can ultimately save you on credit card interest and other borrowing costs, and help you invest your savings more effectively.
The following is a comprehensive overview of budgeting basics to get you on the path toward meeting your financial goals.
Match income and expenses
Budgeting is a way of planning for the flow of money in and out of your bank accounts - usually a checking account, since that is the best suited to regular transactions.
Think of it as an old balance scale. On one side, you have your income and any other money you expect to receive. On the other side, you have expenses and any other money you expect to pay out of your account. The primary objective is to make sure the expense side does not outweigh the income side.
That might be fairly simple if it were a one-time, static comparison, but of course income and expenses are occurring in all the time. That's why another fundamental component of budgeting is planning not just how much you will receive and spend, but when these transactions will occur. Getting the timing to line up is crucial.
Look at recent transactions
If you are starting from square one, the best way to do this may be to look at your check register for the past few months. You can see what amounts flowed in and out, and at what intervals those flows occurred. Now try to project that same pattern forward for the next few months. Once you do that, you will have the beginnings of a budget.
How to deal with expenses that happen irregularly
What makes this a little more difficult is that income and expenses don't always come in regular increments. You might receive an annual bonus, or do project work with variable earnings. Certain expenses, like a dental bill, may only come up now and then. In addition, the cost of seasonal items might be considerably greater in the winter than in the summer, like a heating bill.
Think through these types of things, and try to anticipate them. This is one of the values of budgeting: It helps you see things coming even when they are not routine, month-after-month expenses.
Budget for future needs
The type of budgeting described so far helps you deal with expenses as they come up, but another benefit of budgeting is to anticipate future needs far in advance. For example, if you start setting a little aside for your next car each month, it will cut down on how much you need to borrow when your current vehicle finally needs replacing. Then, of course, there is the big one - creating room in your budget to save for retirement.
Budgeting makes future needs easier to meet because you can spread their cost out over a longer period of time, rather than having to scramble for the money when the need is imminent.
Don't expect to get this all right the first time. An essential part of budgeting is regular monitoring. This is so you can see where you went wrong and adjust accordingly. Budgeting is always a work in progress, rather than a one-time project.
Should you use budgeting spreadsheets and apps?
There are a variety of tools you can use to help automate your budgets. A simple Excel spreadsheet can work, but there are also several web-based programs and apps, many of them free. The advantage of these is usually a managed interface that will help guide you through the budgeting process. Also, being able to access and update tools on a smartphone or other mobile device can help you manage your spending in real time. Just be mindful of security because this also make a lot of sensitive material vulnerable to loss or theft.
You can use state of the art technology, or you an use an old paper ledger. However you do it, making a budget and sticking to it can help grow your money and shrink your financial anxiety.
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