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4 Tips to good (or better) budgeting

True story: On graduation day, Alice tells her dad that they need to quickly stop by the Tuition Office before going to the graduation ceremony. Once they arrive at the office, her unsuspecting father is told that Alice has an outstanding balance of over $2000 and won’t be allowed to graduate unless it’s paid in full on the spot.

Man FrowningBegrudgingly, her dad pays the bill. Frustrated, he asks her why she hadn’t managed her money better and paid the bill.

Alice remarks, “I don’t know how this happend. I kept a perfect budget all four years and I can tell you where every penny went.”

Her dad responds, “That’s not budgeting. That’s accounting.”

So what’s the difference between accounting and budgeting?

The distinction may be subtle, but is very important.

  • Accounting is keeping a record of everything you’ve earned and spent.
  • Budgeting is setting limits and keeping to those limits.

Budgeting is a very proactive activity. Budgeting is taking the time to decide in advance how you are going to spend your money and how you are not going to spend your money. A good budgeter will rarely end up in bankruptcy. A good accountant can still end up in bankruptcy because accounting focuses on the past instead of the future. Accounting just tells you what you did instead of planning for what you are going to do.

Have I made my point clear? I hope so.

Now, let’s talk about a couple of basic tips for good budgeting.

#1: Start with a budget of how you are currently spending money, then tweak

A common pitfall is to create a budget that is completely unrealistic. So your first draft should just document how much money you currently earn and where you are spending your money. With that outline as a base, start making changes and tweaks. For example, here’s a real basic first draft just writing down what I’m currently spending:

  • Income after taxes: $2500
  • Mortgage: $900
  • Groceries: $700
  • Gas: $100
  • Cable/Internet: $100
  • Utilities: $125
  • Credit Card Payment: $75
  • Dining Out: $200
  • Cell Phone: $150
  • Clothing: $200
  • Other: $50

If you add all of that up, you’ll find that I’m spending $100 more each month than I bring home. No wonder, my credit card balance keeps climbing. Now, here’s a revised budget based on that first draft (with the changes highlighted).

  • Income after taxes: $2500
  • Mortgage: $900
  • Groceries: $500
  • Gas: $100
  • Cable/Internet: $100
  • Utilities: $125
  • Credit Card Payment: $375
  • Dining Out: $100
  • Cell Phone: $150
  • Clothing: $100
  • Other: $50

Just by controlling how much I’m spending on food and clothes, I am able to put another $300 each month towards paying off the credit card! What’s really cool is that as soon as the credit card is paid off, that’s $375 a month ($4500 a year) towards savings. That’s almost a fully funded Roth IRA.

#2: Simplify your budgeting by using a tool (I like online tools)

Creating a budget and then tracking just how well you keep to your budget can be a time consuming task. So make your life easier by using some type of tool. Here’s a list of options.

  • Microsoft Excel provides a real basic way of tracking your spending. But requires you to enter all of your transactions and can be very manual. If you are interested in Excel, you can download some budget templates on Microsoft’s website.
  • Intuit’s Mint.com is probably the most popular online tool. You can create budgets and sync your bank accounts so that Mint automatically updates your budget. You will have to “teach” Mint how to categorize your spending. But that’s pretty simple. For more info, check out this review of Mint.com. Or visit Mint.com, which is free.
  • PocketSmith is another online tool that features cash flow forecasting. Basically, they guess how much money you’ll have for the next 6-12 months based on your budgets. PocketSmith’s big thing is that they are calendar based. The basic plan is free with options to upgrade for either $5 or $12 a month. Visit PocketSmith.com.
  • Your bank may have a budgeting tool. For example, USAA.com offers budgeting for its members through its online site.

I’ve outlined just four options. Though, there are lots of tools out there. So do some research and find a solution that works for you.

#3: Only use cash if you need extra control

Okay, so this tip really could go on the prior point of using a tool, but I think it warrants its very own section. There is a very old school method of budgeting, that Dave Ramsey advocates, called envelopes. Basically, after each paycheck, you divide your money up into envelopes marked Groceries, Mortgage, Clothes, Gas, etc. You then carry those envelopes around and only spend the money in the envelopes.

For example, if I have $50 in my Dining Out envelope, then I can’t spend more than $50. Once the money is gone, I’m done spending money. The concept of not spending money that you already have is becoming, unfortunately, a foreign concept in today’s world of easy consumer credit.

So if you know that you have a problem with overspending, then use this simple system to get it under control.

#4: Have a Blow Money category

Let’s all just be honest and acknowledge that you are not perfect and will probably buy something you shouldn’t have. The thing is, it’s not a mistake if you plan for it. Give yourself a small allowance of discretionary money. Meaning, money that you can just blow on whatever you want.

If you are just starting out, then your Blow Money category may only be $20. As you remove debt and increase your savings, then you can increase your discretionary or blow money.

If you have any tips that have helped you budget, then please let us know in the comments. Also, follow Rabbit Funds on Twitter if you haven’t already.


Tags: , , , | Filed under Budgeting, Cash Management, Featured


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  • JMK

    I tried the blow money category and after 6 months stopped. I realised that if I set aside $x per week or month for frivolous spending, then inevitably the $x got spend. Since I’d already given myself permission, I didn’t give each of those purchases the scrutiny it should have had. Now our family’s  budget for the real essentials is set at about 60% of our take home pay. Every Friday I pay off the credit card with all that week’s planned spending (gas, groceries, any insurance or  utilities billed directly to the card). Anything left after that is theoretically available for “blow money” but normally I just skim off everything over $1000 in the account and make an extra mortgage payment or add to our retirement savings. If we did do some unplanned spending we simply have a little less to transfer out. Keeping a minimum $1000 balance means we never pay bank fees and have the first part of our emergency funds easily accessible.  Adjusting our spending on the essentials down to only 60% of our net income also means that a lay off isn’t a life altering event. We’re already living on essentially one income and using the other to whack down the mortgage and build up our retirment accounts. The only exception to our single minded focus on early retirement is to take a major family trip every other year. We’ve consciously cut out all the things we used to consider basics because we realised that they just don’t give us enough enjoyment to merit being in the budget (restaurants, car payments, a monthly clothing budget). We couldn’t care less about eating out and only do it when invited to a family event or while on vacation. We buy 3yr old cars with cash and drive them until they go to the dump. We replace clothing only when it’s worn out (or out grown for the kids).  We haven’t had cable in 20yrs, and our cell plan is just the basics. There’s nothing wrong with having saltelite TV, or a monthly clothing budget for the latest styles, or a monster car payment, it’s just that we aren’t interested in those things and consciuosly choose to spend on travel and save for early retirement.

    Great article. There are no right and wrong answers when it comes to budgeting, but you need to decide what your personal priorities are rather than blindly plugging numbers into a template with categories you may not value if you stopped to think about it. I’ve always had a problem with folks thinking if they are saving 15% (or whatever the current recommendation is) than everything else after the essentials is blow money.  Personally (and that’s key), I want to see how high I can get that number without living a miserable life.  If I can save 30% and not give up anything I actually value then why wouldn’t I?  I realise the 15% recommendation is to get those who currently don’t save at all to at least to something, but I wonder if it doesn’t let folk off the hook who could actually do more but figure they’re covering the bases.  Yes, 15% is great. If you want to retire at 65.  Ask those same people if they’d rather retire at 50 and if they’d be prepared to but a little extra aside every month and I bet most would do it, they just don’t realise the 15% is all geared to a standard retirement, and really who’d chose that if they did the math and realised they could retire early?

    • Hey JMK,

      First, thank you very much for the stellar comment. I wish more readers would give me feedback like this so that I can create better, more useful content.

      You made some very valid points. Creating a blow money category is certainly giving yourself permission to go ahead and spend it. And as you pointed out, it really depends on what your goals/priorities are. And you also need to know yourself. What you and your family is doing is fantastic but requires a lot of discipline. Unfortunately, not everyone is so dedicated to their own financial success. So a blow money account can be a good way to control overspending by giving yourself permission to be a bit frivolous if you are going to be frivolous either way.

      And I definitely agree that the 10-15% savings range is not going to be sufficient for anyone. We do need to keep lowering costs while increasing earnings so that we can sock more and more money away for retirement. It’s better to sacrifice now then to have to sacrifice your retirement later.

      Again, thanks!

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