I’ll admit that I don’t have the patience to create a detailed budget myself (I practice “reverse budgeting” — make automatic contributions into savings, retirement, and investing accounts, set aside money to pay all my bills, and spend freely out of what’s left). It’s a system that works for many people, but sometimes you crave a more detailed way to plan.
Enter Gen Y Planning’s Associate Planner, Ashley Dixon, who’s a budgeting wizard. She works with clients with a variety of lifestyles, goals, and income levels who want to gain greater insight about their spending and saving habits. If Marie Kondo works on decluttering your stuff, think of her as here to declutter your spending!
I asked Ashley for her tips so you all can approach setting your own budget with less fear and more empowerment.
Step 1: Get into the right mindset
First, stop calling it a “budget,” because that word brings up negative emotions for so many people. Instead, think of it more as a “spending plan.” The idea is to find out where every dollar is going right now, determining if that matches your goals and values, and if it doesn’t, reassigning each dollar a new purpose. This helps you regain control over your money instead of feeling like it flies out of your bank account the second you get a paycheck.
A spending plan shouldn’t make you feel restricted or deprived. The idea is that you’ll still have wiggle room to make unexpected or seasonal purchases. The only difference is that now you’ll actually plan for those purchases by setting aside a small amount of money each month in advance, so you won’t suddenly realize there’s no money left for the December electric bill because you spent it on holiday gifts or car repairs.
Step 2: Select your system
Whether you track your spending in a notebook by hand, download a free budgeting spreadsheet, create your own spreadsheet, or use an app, the most important thing to do is actually start. Pick a method of tracking that feels easy and intuitive to you, so you actually enjoy returning to it again and again.
Be gentle with yourself. If you pick one method and grow to hate it, that’s okay! That just means you can try something else until you find the spending tracking system that feels right.
Step 3: Start tracking your spending
Look over your bank and credit card statements to see where your money goes each month. Think of this simply, in the form of “money in, money out.”
“Money in” is your total income, which could be from multiple sources if you, or your significant other, has a side hustle.
“Money out” falls into three categories:
- Fixed costs: These expenses are roughly the same each month and include things like rent or mortgage payments, utility bills, subscriptions like Netflix, gym memberships, and cell phone bills. While the total you owe many vary, you know for a fact that you’ll be billed on a regular basis for these expenses.
- Future goals: Savings for longer-term goals like travel, buying or renovating a home, replacing your car, paying for your kid’s college education, buying holiday gifts, or saving for retirement.
- Everything else: These expenses fluctuate more because they don’t necessarily happen monthly, and what you spend can vary substantially. Think restaurants, bars, clothing, entertainment, plane tickets, holiday gifts, hobbies, and haircuts.
How does your checking account look after a month of bringing in income, spending some of that income on expenses, and moving some of that income into savings? Are you breaking even? Do you have to tap into your savings account to afford your expenses? Do you end up with a surplus of money? Gather this data without judgement — this exercise isn’t to determine your worth as a person, it’s merely to do some math and see where you end up. (Besides, your worth as a person isn’t tied to your bank account!)
Step 4: Take a look back at what sparks joy
Now that you’ve gathered data on how much money went toward different expenses, it’s time to ask yourself which of those expenses can be cut because they don’t really enhance your life.
Some cuts will be easy. Do you still read that magazine you’ve subscribed to for years? Do you pay for cable TV but actually get your entertainment from streaming services? If you’re habitually paying for things you don’t use, cutting them out of your life won’t change how you feel day-to-day at all. This is an effortless way to free up extra money to put toward other expenses and financial goals.
Other cuts will take some self-reflection and habit changes. Take food, for example. For many households, food is a major expense. Cooking at home is one way to cut back on food bills, but are you throwing spoiled or expired food away on a regular basis? Start meal-planning and creating shopping lists before heading to the grocery store so you can right-size the amount of food you buy. As for dining out, think about your reasons for doing so. Is it for date nights and nights out with friends? Special occasions? Or is it because you didn’t plan for a home-cooked dinner so you default to going out because it’s easier?
The point of a spending plan isn’t to deny yourself dinners out or HBO access. The point is to begin anticipating these upcoming costs and making room in your budget for them, so you don’t have to sacrifice saving money for long-term goals in order to afford short-term costs.
Step 5: Make changes going forward, beginning with your pay day
Begin with pay day, because you get a nice financial cushion in your bank account and are likely to time bill payments for when you earn income. What fixed bills are due before you get paid again? What savings do you need to incorporate? What’s left over for your variable expenses? Do you need to buy a gift? Do you have a hair appointment? Do you have to buy new shoes or an outfit for an event? Do you want to buy concert tickets? Are you going out to the movies? Plan it all. If something comes up that wasn’t in the plan, that’s okay. You can you can always rearrange the amounts you allocated. It’s your money, after all!
Once you commit to planning out your spending each pay period, you’ll start to become more mindful each time you’re faced with an opportunity to spend your money. You may realize you didn’t plan to spend money on this item, event, or dinner out, and decide to wait and plan it into your next spending plan period. Do you enjoy big holiday sales, like Black Friday, After Christmas, Fourth of July, or Back to School shopping? You don’t have to forgo your favorite shopping days, just plan for them. Save a little each month so you have an amount already set aside when those days arrive. I like automating savings from your checking account into several online savings accounts because you can nickname those accounts for different goals, like “Holiday Shopping” or “Travel for Friends’ Weddings.”
Let make a plan set you free
There’s so much power in knowing where your money is going, and in knowing that when you’re faced with an unexpected expense, you can afford it. Creating a spending plan helps you free up your money so you can put it toward the things that make your life better, instead of just letting money constantly stress you out.
A special thanks to the client who inspired this blog post when she told us she was “Marie Kondo-ing her spending.” You know who you are and we hope this post inspires even more people to take a look at their spending and slash the items that don’t spark joy.