Budgeting is one of the best tools you have to improve your personal finances, but simply starting a budget is no guarantee of success. While there are many different approaches to budgeting, and plenty of room for customization, there are some wrong ways to budget—and some fundamentals that are impossible to ignore.
Why Budgeting Is Important
So why is budgeting so important in the first place?
· Transparency and tracking. First, a budget gives you more transparency into what you’re regularly spending. It allows you to track what you make and what you spend, and increases your awareness of your own habits. Sometimes, simply knowing that you spend too much on wine is all it takes to curtail the habit.
· Control. Second, a budget gives you a sense of control. There will be some categories in your budget that are somewhat beyond your control; for example, you may pay a monthly fee for a parking spot near your workplace. However, other budgets will allow you to exercise more control, and a budget allows you to see that.
· Goal centrism. Third, structuring a budget gives you a platform to set, measure, and hopefully achieve your goals. For example, with the help of a budget, you may aim to save $200 per month, or you may structure your budget to reduce your monthly expenses by $150.
The Elements of Successful Budgeting
To stay true to those benefits, you’ll need the following elements to make your budget work:
1. High-level goals. Before you make a budget, you should set some high-level goals. Why do you want to make a budget in the first place? Are you trying to reduce your expenses? Are you trying to gain control of your impulse spending? Are you hoping to save up for a major purchase, like a house? Are you trying to save for retirement? Putting your goals first can help you choose the right type of budget, and give you something to work for consistently.
2. A convenient app. Next, make sure you’re using some kind of budgeting app. There are many different apps to choose from, each with different features. You may want an app that gives you the bare-bones experience, allowing you to simply keep track of your money, or you may want something more sophisticated, like an app that comes with a digital assistant to help you make wise purchasing decisions. It’s up to you, but it’s a good idea to employ the use of some technology to make things easier on yourself.
3. Consistency. Budgeting only works if it’s done consistently. If you budget for a month and cut out some of your entertainment expenses, you might feel good about yourself—but the money you save will be negligible if you spend it all the next month on lottery tickets. If you want to achieve your goals, no matter what they are, you need to commit to budgeting every single month, ideally indefinitely.
4. Category splits. Most budgets have some way to split expenses into different categories. For example, you might have a “utilities” category that tracks your spending on gas, electricity, and water, and a “transportation” category that tracks spending on fuel, insurance, car repairs, and public transportation fees. This can help you better assess your spending distribution, and detect small issues before they become big issues.
5. Forecasting. A budget should also allow you to forecast your expenses in at least some categories. For example, if you paid $150-200 on utilities every month for the past year, you can guess that your next month’s utilities will be in the same ballpark.
6. Fixed and variable components. Some of your expenses are fixed, while others are variable. For example, you’ll likely pay the same amount of rent every month, but you might spend very different amounts on restaurant food. Focus on your variable components to save more.
7. Adaptability. Your budget isn’t going to be perfect when you start. You’re going to overestimate some things and underestimate others. You’ll forget certain categories entirely. You might even come to hate your initial format. Remain adaptable, and keep changing to consistently improve.
8. A definition of success. Finally, you need some definition of success. Are you trying to hit a certain amount of money saved by a certain date? Are you trying to come in under budget every month for a year? Set specific targets, and strive to achieve them.
As long as your budget achieves these fundamental goals, you should be in an excellent position to improve your personal finances. Feel free to experiment with different apps, budgeting methods, and goals, so long as you eventually settle on something you can use consistently in pursuit of your long-term objectives.