Tuesday, March 4, 2014

Life :: How to Find a Budgeting System that Works

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Just a warning, this is going to be a very lengthy post full of personal experiences and opinions. So, grab a cup of tea and settle in with a notebook. You'll want to jot down a few things if you're looking to work on your own budget this year -- which, since you're reading this, I'm assuming you do. Let's get started!

First, a bit about me and my own adventures in budgeting. A few years ago, my friend Dina sat down with me and helped me create a spreadsheet that organized my budget into different categories. For each category, I entered an amount that would be my monthly goal. At the end of the column, we entered my monthly income after taxes, the total amount of my expenses, and what was left over (the difference between the two). Truth be told, this system never worked, only because I didn't open that file again for a long time. A planned, organized budget only works when you actually pay attention and try to follow it. Therefore, I racked up a lot of debt and was pretty much a shopaholic for awhile. Whoops.

Fast-forward to last summer. I was struggling to pay off said debt when I stumbled upon And Then We Saved. I decided to try out Anna's Spending Diet in August. The rules were simple enough: spend only $100 on wants, and spend the rest on your needs, debts and savings. I actually did a pretty good job, but come September when I attempted it again, I totally failed. The problem was that, unlike Dina's system, this way of budgeting wasn't specific enough. I was supposed to stop splurging on wants after $100, but that usually lasted the first week or two, and then I couldn't spend on fun the rest of the month. In hindsight, it would've been better to spread that money throughout the four weeks. Also, there wasn't a goal amount for needs, debts or savings. I would make huge payments towards my student loan, car and credit cards, but then not have anything left to save.

Finally, this year, I had an epiphany. In order to properly set financial goals, I needed to keep track of what I was already spending. You can't budget correctly if you don't know where you're already at. So in February, I decided get super detailed. I pulled out my old spreadsheet, and created two more as well. You need a small amount of Excel experience in order to do this. If you haven't become familiar with Excel yet, it's easy to use, and it'll change your life.

Here are the three spreadsheets I created at the beginning of February and used throughout:

1) Earnings. If you have multiple streams of income, like me, you will want to keep track of your earnings. I make money from my normal day job, but I also do a couple writing gigs on the side and there is, of course, this blog. I was lucky to receive a good amount from my tax return, too, so I added that. (Speaking of taxes, these spreadsheets will come in handy next year. For more on that specifically, visit ABM and G&G for two great articles.)

2) Goals. Like I described earlier, you will want to make goals for everything you spend your money on. If this is your first time budgeting, think of these as loose goals, that you may be over or underestimating, and that's okay. Your first month can be a trial run. In the A column, you should put down your categories. The B column should have your goal amounts, and you should leave the C column blank so that you can fill in what you actually spent at the end of the month. It should look something like this (feel free to change the names of your categories to fit your life):

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If your earnings vary from month to month (like mine), base your goals on the bottom end of the scale. Normally, I don't make less than $2,300 per month. If I end up making more than that, I can use the extra for other columns at the end, like savings or debts. It is always better to see any extra money as a bonus, instead of anticipating that extra in advance. Try not to overestimate your earnings and you won't overspend!

3. Expenses. Over the past month, I kept track of every single cent that I spent. I kept every receipt and even printed out receipts for things purchased online. It may seem time consuming, but it didn't take nearly as much effort as I thought it would, and it was worth it in the end. I kept a notebook tucked in my planner to write down everything, and then once I got home I'd transfer that info onto the spreadsheet. Charisma does the same thing when keeping track of her tax deductions, which I think is a great idea in case your computer crashes. I also do it in case I forget something -- I can always go back and compare my spreadsheet to my notebook. At the end of the month, I also went through my Paypal account and bank account online, just in case I missed anything there. I didn't check my credit card accounts, because I'm not using them anymore until I get my debt down! I threw away any receipts I didn't need to keep (like groceries and Starbucks), tucking the rest into an expanding file. Your expenses sheet should look like this:

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Keeping track of which category each item falls into is essential. I was able to sort the data this way at the end of the month and add everything up so I could see if I estimated my spending correctly. I realized I was spending less on gas and groceries than I thought, but more on my blog (yes, a new design is coming!) and eating out. Since I was able to see how I spent my money for a whole month, I was able to properly adjust my goals and could start anew in March.

Some extra budgeting tips:

* If you can't stop using credit cards, throw them away! I plugged in my shredder over the weekend and finally got rid of mine for good. They were always maxed out because after making a payment on one, I'd just use it again. Totally pointless, right? Take control and destroy the little suckers. It'll feel SO good, trust me.

* Be honest with your friends about your budget, and make some new frugal-friendly ones too. Lots of people are struggling out there, but for some reason it's so taboo to talk about. If you think you're alone in your broke-ness, you're not. A lot of your friends are probably living on the cheap as well, and you can help each other out! Chances are, your pals will be inspired by your budgeting skills and want to try the same thing. Don't be ashamed.

* Think about EVERY purchase ahead of time -- even the little ones. A $5 coffee drink doesn't sound like much, but do that every day and you'll spend $150/month on espresso! Consider your budget when making plans with friends, too. Study the menu before meeting up at that restaurant, or look up how much movie tickets will be before you get there. Feel free to suggest carpooling to save on gas or splitting the cost of parking.

* Bring your lunch to work as much as possible, along with coffee and water from home too. There's really no point in spending money on water. I'm trying to get out of this habit. Water bottles are a waste for the earth too!

* Repurpose your clothes by cutting the sleeves off your autumn shirts or cutting your pants into shorts. New summer wardrobe! If you're bored with what you have, host a clothing swap with friends. If that's not an option or you want something even easier, sign up for Twice and send them your clothes so you can trade for something new.

* Click here for my previously published tips for traveling on a budget, and search Airbnb for cheap lodging.

These are the things that have worked for me, and I hope they work for you. Feel free to tweet me about your own adventures in budgeting. I'd love to get your tips too! Happy saving!
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