Handling money is something we all have to learn to do in order to survive. And the basic concept of budgeting - spend less than you make - seems so, well, basic that we fail to look closely enough at how budgeting can help us handle our finances well. If you think you know everything there is to know about setting, maintaining and succeeding with a budget, think again. These tips are less obvious, running counter to our commonly held intuitions about money.
TUTORIAL: Budgeting Basics
1. Indulge in what matters to you.
Quick: what's the first thing you do when you start making a budget? Usually it's make a list of your expenses, add them all up, grimace painfully at the total amount, and then start figuring out which expenses you can eliminate. There's no point in spending money on things you don't want or need. However, common budgeting technique often has you cutting out absolutely anything that could fall into an "optional" category. The $5 latte from the coffee shop is a favorite example; cut that daily or biweekly or weekly expense out, budgeting experts say, and you'll save X dollars per year for your savings account! (For related reading, see How Budgeting Works For Companies.)
The problem is that cutting out every optional expense may lead you to meet a new and bigger foe to your budget: the feeling of deprivation. It's the same concept that makes you want to cheat on your diet, even though you really do want to fit into your skinny jeans again. You start a diet, or a budget, and cut out all the eating or spending you enjoy (but don't necessarily need), and soon all you can think about is what you can't have.
Do go ahead and make your list of expenses, and definitely get rid of the optional things that don't add value or enjoyment to your life. But don't just get rid of the optional stuff that you do really value; instead, make it part of your budget, even if it seems like a luxury. You're much more likely to stick with a budget that allows you the little luxuries you do enjoy than one which leaves you feeling continually deprived.
2. Don't automatically choose the cheapest option.
Choosing the cheapest option, whether it's for food or a car or clothes or a vacation, will certainly save you money in the present. But spending a little less for the cheapest choice isn't always smart. The old adage of "you get what you pay for" should be echoing through your memory right about now, and that's the point. When you always get the cheapest option, you end up with lower quality items.
In some cases, it doesn't really matter: disposable items, or name-brand versus big-brand. You can't always tell the difference beyond the packaging. But sometimes if you save a few dollars on the initial purchase but end up with a much lower quality item, you'll end up having to spend more to maintain it and then spend again, sooner, to replace it because it won't last as long as the higher quality option. (It appears that the overwhelming majority of Americans do not have or correctly use a personal budget. For more, see The Beauty Of Budgeting.)
3. Skip the coupons.
If you've watched an episode or two of "Extreme Couponing," you may have visions of free groceries dancing in your head. And what could be better for the budget? If you can save all that money on groceries and household supplies, you'll have more money for paying off debt, saving or, um, indulging in that latte.
However, coupons aren't always a boon to your budget. In fact, many of us end up clipping coupons for stuff we wouldn't normally buy, and then spending our money on grocery and household items we really don't need just because we happen to have a coupon handy. It's tempting, and you feel good about your purchase because you just saved $1 off the normal price! But wouldn't it be better to save the total price by not buying that item at all?
4. Increase your income rather than simply decreasing your spending.
Cut costs, reduce spending, limit expenses; however you word it, this concept is unavoidable in most budgeting methods. Instead of focusing only on spending less, try putting your attention on making more. You can pick up a part-time job, sell your excess stuff, consult, start freelancing or find another way to turn your talents and a little extra time into some additional income. In fact, once you get to a certain point in the reducing-expenses exercise, you'll find that it's actually easier to make more than to spend less. (For more, see Debunking 10 Budget Myths.)
5. Spend money on maintenance.
When you're concerned about your bank account, the last thing you want to do is spend money that doesn't have to be spent. So you skip certain, non-urgent things, things like getting the oil changed, getting the chimney cleaned, getting your sore tooth checked out.
And you are saving money - until the car's engine locks up because it ran out of oil, or the chimney catches on fire because of the soot build-up, or you end up having to pay for a root canal because you didn't get that cavity taken care of soon enough. Take care of maintenance before the need is urgent, and you're almost certain to spend less than you'll have to if you wait until it becomes a crisis.
TUTORIAL: Setting Up A Budget
6. Don't panic about your non-existent savings account.
You need and want to save money. And every financial expert has told you that you should be saving money. Meanwhile, you're paying off a car loan, a house mortgage, a student loan and a couple of credit cards, plus trying to avoid more debt with the costs of daily life. But every now and then you wake up in a state of panic, with one thought beating in your budget-weary brain: "I've got to start saving! I've got to start saving! I've got to start saving!"
Having a hefty savings account will be a great feeling once you get there. In the meantime, however, take a deep breath and calm down. If you take money away from paying off an interest-bearing debt in order to put it in a savings account, you'll likely be losing money because that debt will keep accumulating interest at a much higher rate that your savings account will. Focus on paying off the debt as fast as you can, which will save you hundreds of dollars in interest. Then focus on building up your savings. (For more, see 8 Financial Tips For Young Adults.)
The Bottom Line
We tend to be kind of private about our money, but there's one last tip that might help you reach your financial goals more than all the other tips put together: talk about your budget. Tell your friends. Tell your family. Go public. Why? Research shows that people who talk to friends about what they want to accomplish and set up some sort of accountability system are 33% more likely to reach their goals. And if your goal is to set a good budget and stick to it, you might as well get all the help you can get. (For related reading, see Budgeting While You're In College.)