Do you have (and stick to) a budget? I was reading an article about how different generations saved and spent money, and I was amazed to learn that so many people don’t use a budget. According to Forbes, after the Great Recession, “Millennials have no monthly savings plan, show little interest in retirement planning, and have even been reducing contributions to their employer-sponsored retirement plans, one Ameriprise study found.” How is that possible?
Call me a nerd, but I have always been passionate about my budget and saving. When I worked as a financial planner, one of the best parts of my job was getting people to dream about the future (i.e., retirement) and discussing ways to help them get there. I love dreaming about the future, and planning for it is the only way to get there. However, if you don’t have a budget in place and you’re overwhelmed by debt, how will you ever manage to get out of debt and save enough to retire or fund your child’s college savings plan?
The first step toward creating a budget is planning. You need to break your dreams down into small steps and slowly work your way toward them. Even if Amazon is having a great “Prime Day” sale, you need to remember that paying off debt comes first, and spending money unnecessarily (no matter how great the sale), just isn’t worth it. By creating a budget, you can focus on your biggest areas of concern, while still making sure that you have enough money left over for both necessary items (food, housing, transportation, etc.) and other items such as specialty items or gifts. Having a budget doesn’t have to mean that you go on a “spending diet,” it just means that you’re accounting for everything that you spend and make sure that you’re not spending more than you can afford.
The Types of Budgets
If you’ve created a budget and it just isn’t working or if you haven’t created a budget just because it seems so overwhelming and complicated, know that there are resources out there. There are many different types of budgets; which one you choose depends on your end goals.
The main types of budgets are:
- Line item budget: a budget system that breaks down each spending category into individual expenses. For example, “housing” would be listed as a category, followed by each housing expense, such as “mortgage/rent,” “utilities,” and “insurance.” Each line item is given a set amount of money.
- Percentage budget: a budget system that assigns each spending category a certain percentage of income. For example, the “housing” category would get 30% of the month’s income, while “food” would get 15%.
- End sum (envelope) budget: a budget system that uses the previous month’s income to pay the current month’s bills. Each budget category is assigned a set amount of money. At the end of the month, there should be no money remaining.
You may find that your situation doesn’t fit into any of these categories perfectly, and that’s ok! I tend to use a hybrid of the budget types. I like to save a designated percentage each month, before I even think about paying for anything else, and then I itemize each category. I’ve also researched recommended percentages for different categories like “housing,” which should be less than 30% of your income and include your mortgage or rent payment, homeowner’s/renter’s insurance payment, and utilities. I then try to make sure that I spend less than the recommended percentage. Although I like to compare my budget to the recommended percentages, I’ve found that the line item budget type works best for my family. Especially since we run a business, I need to be able to track each payment and keep it separated from our other expenses (for example, fertilizer is separated from pesticides, even though we may purchase them from the same vendor, and they’re both farm-related expenses). Also, I create my budget for the entire year because some bills are paid at different times throughout the year. For example, my auto insurance is due in January, but my homeowner’s insurance isn’t due until October. Since I don’t pay these bills monthly, I need to make sure that I have enough money to pay these bills when they’re due, so my September budget would look different from my October budget, even though my income is the same for both months. Other expenses, such as groceries, are pretty consistent from month to month, but if I find a great sale on meat, I buy it knowing that I’ll be able to spend less on groceries another month because I’ll have a stockpile in my freezer.
Start by Tracking Your Expenses
Creating a budget isn’t difficult (I plan on creating a budgeting series beginning in January 2016 if you need more help). If you’re new to budgeting, you need to begin with tracking your expenses. You can use cash and then record every expense, or you can use credit cards and record the transactions based on the statements. I tend to use credit cards to track every expense, though, because many budgeting programs will automatically download the transactions into your budget. Once you’ve tracked your expenses for a few months, you will begin to see spending patterns emerge. That’s when the fun begins (excuse the nerd talk)! Stay tuned for more tips on creating your customized budget in January.