This post is a response to a reader who’s asking about budgeting as a way to free up more of her income. Here’s her question — our response follows!
I recently graduated college and landed my first job. My pay is right around $45K a year which has helped me be able to live on my own. The biggest challenge is I always feel like I’m out of money – and I was expecting to have more for play.
What are the best ways for someone like me to start a budgeting system for myself so I can enjoy the fruits of my labor and still not live at home?
Dear Young Professional,
Congratulations! Good for you to address your money problems, not simply by incurring debt, but by asking for solutions.
Let’s start with budgeting. What is a budget, and how can it help you have the money you want? Basically, a budget is a plan for spending – and saving. The idea is that if you make an agreement with yourself about how much you need to spend, you won’t spend more than you should.
Basically, with a budget, you
- Put your living expenses into categories. For example: Food, rent, utilities, car, health care, recreation, and so on.
- List what you need or want to spend in these spending categories. This is your “budget.” Utilities include mostly things you can’t live without: Phone, electricity, Internet, and so on. Food includes essentials like milk from the grocery store, but it also includes other “grocery” items like wine, and eating out is also a food expense. Once your budget is underway you’ll be able to decide how much you actually want to spend on non-essentials like wine or eating out.
- Keep track of what you actually spend. This is the “actuals” side of your budget. The easiest way to track spending is to enter all of your monetary transactions in an accounting program like QuickBooks. But you can also use Excel, or pen and paper, or one of the free accounting programs out there.
(As money experts, we don’t love the free programs because their “marketing” misleads many folks into seeing the process as something they can just hand over to the computer. Budgeting isn’t hard, but you, not a computer, have to assign your spending to the correct spending categories. Most budgeting software will try to do at least some of your thinking for you, and then you end up with an eating out expense in the utilities category, and there’s not a lot you can do about utilities, right? So you miss an opportunity to do things differently. No matter what your software, you need to check to be sure that the computer made the right guess, or your budget will be meaningless.)
For individuals and small businesses that really want to manage their money, we think QuickBooks is the accounting tool of choice. If you’re open to using it, don’t let the software scare you. We can refer you to someone who will, at a fraction of typical bookkeeping costs, help you set up your budget and even do your tracking for you.
- Compare what you’re actually spending to the numbers you came up with in Step 2. Again, this is easiest with QuickBooks, but you can do it with Excel or pen, paper and a calculator. The main thing is that you need to compare what you’re actually doing with what you want to be doing. And to make this comparison, you need to have a clear picture of what you’re actually doing.
- Compare what you’re actually spending to the numbers you came up with in Step 2. Sound similar to Step 4? We just want to emphasize how important this step is. Before you do your first comparison, make a plan to do this once each week, and put that on your schedule. Remember, you’ll also need to document your expenses or enter them into software each week, so you’ll have the actuals you need to make your comparison.
And if you’re having trouble staying on target with your spending, try this: At the beginning of the week or the month, put cash in envelopes that you label – “fun,” “groceries,” “clothes” – whatever expense you need to cut back on. Then spend only the cash from that envelope on that item. Using a predetermined amount of cash instead of plastic or the Internet makes it easier to see how much you actually have to spend. In turn, this makes it easier to limit your spending.
But is budgeting enough?
A budget helps you save by helping you to see when you spend more than you want to. But spending is only one side of the equation! You also need to look at the earnings side.
Are you making the money you need to cover your expenses? Do you make enough to save in an emergency fund? And what about tomorrow? Are you saving for that house, or those college funds – or that time when you no longer want to be working? When it comes to having enough money, we want to look at spending, but we also need to look at income. If you don’t have enough money coming in, you need to see that, so you can do something about it. Some things you can do when you don’t have enough income include
“Saving? I don’t make enough money to save!” We put this one at the top because we’ve learned that money really is an attitude, a way of life. Figure out a way to save something, on a regular basis. Cut back on Starbucks. Movies. Eating out. Alcohol. You don’t have to give it all up, but systematic saving is a crucial piece of the real point, which is to feel like you have enough money to live the way you want to live.
The other aspect to saving is that if you save the right way, your money grows. So saving is actually a way to earn money. Did you know that if you qualify, you can put your savings into accounts that have been paying 10 times what you would earn in the bank? Some of these accounts have fees, but others do not. (If you’d like to see if you qualify for one of these high-earning accounts, shoot us an email at [email protected], or text us at 614-769-3563.)
Earning more money
When you’re managing expenses and saving but you still don’t have enough, sure, you can always downsize, but we believe it’s also important to look for ways to get more. Orienting yourself toward having the income you want is another important part of the mindset that’s required for financial wellness. Consider whether your work pays you what you need, and investigate how you might move forward in your career so that you’re earning more. Take part in the Gigs market on craigslist. And do a Google search on earning extra, too. There are numerous ways to make extra money, and you’re likely to find an idea or two that appeals to you.
Creating a budget – knowing your expenses and planning to spend accordingly – is a crucial first step towards financial health. It’s also important to know whether you need more income. And whether you think you have enough or not, it’s very important to save – in such a way that your savings works for you.
Now that you know how to create a budget, make a date with yourself – and go create it! If you need to make more money in order to have the life you want, make another date, do some research, and make a plan to get more. And remember, shoot us an email or text if you need help.