I can’t tell you how many budgeting apps, worksheets, and plans I’ve unsuccessfully tried over the years until I finally got it. Budgeting sucked, and I was always frustrated for one reason or another.
At the end of the day, we know we can’t have a healthy financial life without a budget, right? It’s the blueprint for our financial decisions. There’s no way to choose how much to save, to invest and spend without making a budget.
The thing is, most budgets I tried were plain and simple inhumane. They demanded me to track expenses meticulously, assign each dollar to categories, and some even involved carrying cash in envelopes!
Life doesn’t work that way. The only thing constant in life is change, and if your budget is an evil dictator in your life, it won’t work out.
It wasn’t until a few years ago when I took a different approach based on prioritization that things became really simple. Here are 5 tips on how to make a budget that works!
1. Make tracking expenses very easy with automation
A budget is pretty much a way to visualize how much you make and spend. You know how much you make by heart, but what about expenses?
We’re in the 21st century, and there’s no room for reconciling receipts at the end of the month. It’s unreasonable to think you’ll be able to track expenses on your own, and we don’t need to!
Luckily, we have so many great apps to make our life easier! Have you seen these 5 most stunning apps for personal finances? They all have some great features such as:
- Track your every expense.
- Automatically categorizes them (restaurants, gas, education, etc…).
- Creates beautiful charts and visual tools.
- Alerts you via email and push notifications when you’re spending too fast or too much.
If you’re not using technology in your personal finances you’re not only losing time, you could be losing money!
Even If you’re not comfortable with giving third-party apps access to your accounts, you can still use them! Most of them will suggest you to connect your accounts, but if you don’t, you generally can still add transactions manually.
Another alternative is using the apps provided by your bank and credit card. Nowadays every expense leaves a trail behind. If you use your credit card for most transactions, your statement will tell your expenses too.
2. Use a ridiculously simple worksheet
Armed with your expenses is time to put in a worksheet. It doesn’t need to be the evil dictator I referenced above. It should be just an overview of the total amount you’re spending broken down by category.
The worksheet gives you vision over your finances. Without vision, you have no idea if you were spending $7000 when you thought it was only $5000.
But here’s the thing, because I’m using financial apps to do more complicated things like track net worth and debt obligations, I don’t need my spreadsheet to do that for me!
My budget worksheet ends up being super simple by not tracking more than what I need. You can download the spreadsheet template I use for my own finances here:
Instead of a full-fledged spreadsheet with tons of fields, I use the most basic version you could think about: categories in one column, prices in another. It also has plenty of flexibility built-in, and I’ve found to be the only one to survive year after year.
3. Build a buffer
If you’re trying to implement a new budget, it’s normal to have some hiccups in a few months of adaptation. For instance, you might be tempted to save too aggressively and end up blowing your budget in expenses.
It’s a good idea to have some savings on the side just as an emergency fund. Even if you calculated that 20% of your income goes to investments and 80% to expenses, you could be surprised with one of those unexpected expenses.
As they say, the only thing in life that is constant is change.
If you tracked your income vs. expenses to produce a surplus of $200 every month, take that away from your checkings account and into savings. It will give you much more confidence to stick with your budget for the long term.
4. Pay yourself first
This is a recurring theme with all personal finances books. It means you need to take out your savings first before you can spend it all.
The thought of taking savings out of the picture before expenses might be scary. Here’s the best way to make it work in a safe and progressive manner:
- On payday, money enters my checkings account
- An automated transfer sends X% to my savings account
- Some employers allow us to elect two accounts.
- If not, we can set up a monthly transfer from the checkings for the day after your paycheck.
- I keep that money in my savings account until the end of the month.
- I don’t invest this money right away.
- The savings account is easily accessible.
- This allows me to build confidence in my budget until I’m comfortable with it.
- If I get into trouble, I can tap into those savings as my last resource.
- Next month I start all over again, but that money on the savings from last month is now transferred to investment accounts.
Following this method, we can pay ourselves first, but still keep that money close by while we build confidence in our budget. It’s a great safety net and progressively grows more and more savings.
5. Don’t go overboard
When I first used an app for tracking finances, I got super excited that it could categorize every expense automatically for me.
So I started looking at my expenses and noticed that some were fairly regular, and I started setting aside budgets for them.
Until I realized, I was going way too far.
I had $80 reserved for books!
What was I thinking? I’m not really sure… but I think I was tracking just for the sake of it. Maybe just to make sure I have everything covered.
The thing is, for every money you set aside, you taking away from a different category.
I used to track restaurants and groceries separately, but I noticed I could simplify and just track “Food” instead.
If I see my food budget growing too fast, I slow down and cook more at home. If it’s the end of the month and I did great, I might have a nice meal with my wife and still make that budget.
6. Review your financial plan in less than 1 hour a month
An effective budget should not take more than 1 hour of your time per month. Reviewing it daily won’t help you, only make you more stressed about money.
The thing about budgeting is that it changes over time. You’re going to develop a “feel” for how your finances work and adjust accordingly.
Don’t be upset if it doesn’t work for the first month or so. Keep at it.
The last day of the month I pay all my credit cards, open my worksheet and mark how much I made that month, how much I spent, and if my budget is still reasonable.
I always withdraw my savings automatically from my income, and all the rest is for expenses. At the end of the month, I just need to make sure everything is still running smoothly.
7. Build flexibility into your budget
You need flexibility because life is not as deterministic as your worksheet looks. Don’t make your budget your wishlist. If you’re tracking everything down to the penny, you’re always going to be frustrated.
When calculating expenses, a simple budget that accounts for X% safety margin will provide much more freedom and make your life easier. I also like to add a “fun money” category that I can use in full, or cut back and redirect to more important stuff.
The most natural budgets are the ones that are based on prioritization. Life doesn’t go exactly like the numbers of the worksheet so you need that flexibility to prioritize what’s important going on right now with your finances, while still keeping a plan. Dropping a budget all together is not the answer, nor following exactly what the numbers tell you.
- We need a budget that works well with our lifestyle, not an evil dictator or like a super restrictive diet.
- Apps make you efficient, saving tons of time in tracking expenses and categorizing them.
- Have a buffer because your budget is likely to work differently than the plan every now and then.
- Pay yourself first in a safe manner by automatically transferring money but keeping it around for at least one month before investing it.
- Take baby steps and have balance. Don’t try to rush things and aggressively save 50% of your income right off the bat.
- Spend a maximum of 1 hour checking your finances every month. With time you’ll be able to do in less than 15 min.
- Build flexibility right into your budget to help you stick with it for the long term.
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