When you're getting used to budgeting for the first time, knowing these budgeting basics will help you manage and stay within your budget.
- First and most importantly, allow yourself to be flexible. If you want to spend more on groceries one month because you're having a party or craving something gourmet, there's nothing wrong with that. Just spend less in another area to compensate. Don't expect to always stick within the guidelines you set when you first created your budget. (For related reading, see Secrets You Should Know When Buying Groceries and Top 7 Money Saving Tips for Buying Groceries.)
- Next, make sure to leave room in your budget for fun things. Maybe your budget is so tight that the most fun you can afford are the ingredients to make some chocolate chip cookies, but at least allow yourself that. Or maybe you're in a better situation financially and the choice is between saving 12% for retirement one month or buying a concert ticket and still saving 10%. You should reward yourself occasionally. For most people, lifestyle tends to inflate when income goes up. This isn't inherently a bad thing as long as you are still meeting your financial goals and obligations. After all, if you reward yourself the same way on a $7.50 an hour wage or a $75,000 a year salary, where's the incentive to work harder? If you don't reward yourself, it will be emotionally difficult to stick to your budget in the long run. That being said, if you can avoid inflating your lifestyle, you might be able to retire early or achieve other pricey goals. (See How to Manage Lifestyle Inflation.)
- Always keep your spending below your income. You may not be able to do this every month, but you should be able to do this for the year as a whole. For example, your expenses might exceed your income in December when you buy Christmas gifts, but that’s not a problem if you’ve saved extra from January through November to account for your higher December spending. (To learn how to budget for the holidays, read Keep Holiday Debt From Snowballing.)
- Don't go into debt for things that are not long-term investments (a house or an education that you can reasonably afford). Consumer debt will strike a major blow to your finances. When you finance a car, for example, not only does the asset depreciate every year, cost money to maintain and eventually become obsolete, you're also losing money on interest every month. (For more insight on consumer debt, see Digging Out of Personal Debt.) But even things like a home and a college degree that we tend to think of as investments aren’t guaranteed to make us more money over time than we would have made without them, so it doesn’t make sense to go into crushing amounts of debt to finance them. (See How to Pay for College without Lots of Debt and Do You Want to Pay Less for College?)
- If you don't have enough cash on hand every month no matter what, or if you tend to spend money you know you should be saving, consider adjusting your withholding. To do this, you'll need to fill out a new W-4 form and give it to your employer. You can download and print the form yourself from the IRS website. If you’re short on cash each month but normally get a tax refund, you can claim fewer allowances and get more money with each paycheck and a smaller or no tax refund. If you have more money than you need each month but you tend to save it instead of spending it, you can increase your allowances, essentially asking the government to save for you (the government doesn’t pay interest, though). Then, you’ll get a bigger refund in April, and you can have the IRS deposit it directly into a savings account, which might help eliminate the temptation for you to spend your extra cash. The catch to changing your withholding is that you might end up owing taxes in April, and you must pay at least 90% of your tax liability throughout the year or you’ll have to pay a penalty. (See Understanding the U.S. Tax Withholding System and What is the optimal level of withholding tax to enter on my W-4?)
- Likewise, if your employer offers direct deposit, you may be able to deposit a portion of your paycheck directly into a savings account. If you already have sufficient cash reserves, you could also improve your savings rate by increasing the amount of your paycheck that goes directly into your retirement account. Again, these options will put a portion of your money automatically out of sight and out of mind.
Additional Tips by Spending Category
- Rent: You don't have to wait until the first of the month to pay your rent. If you comfortably have the money in your account earlier and think you might spend it, just make your payment early. Be sure to clearly indicate which month the payment is for.
- Mortgage: If you're a homeowner, making an extra payment toward your principal when you can afford it will shorten the life of your loan and the amount of interest you'll ultimately pay. This tactic may not be terribly rewarding in the short term, and if you have a very low mortgage rate, you might be better off investing the extra money for retirement, but paying off your mortgage early is a better option than buying a bunch of stuff with no long-term value. (See The Benefits of Mortgage Repayment.)
- Utilities: Switching to compact fluorescent or LED bulbs, especially in the lights you use most, will shave a few dollars off your electric bill. Keeping your thermostat slightly lower in the winter and slightly higher in the summer than what you'd optimally like will reduce your heating and cooling costs, and you'll probably get used to it after a few days. Using ceiling fans or blankets and wearing more or less clothing are a lot less expensive than using more energy. (For more ideas, see Best 7 Money Saving Tips for Your Electric Bill.)
- Clothing: The deepest discounts are generally available at end-of-season sales. The rest of the time, you can save money by getting a store credit card that offers cash back rewards or coupons (make sure to pay off the card in full and on time every month or you won't come out ahead), signing up for store email lists to get special coupons, buying store gift cards at a discount and buying gently used secondhand clothing with apps such as Poshmark. (Read Get the Best Prices on Clothes and Are Discounted Gift Card Websites Safe?)
- Groceries: Many of us have stockpiles of food in the freezer and pantry that we've seen so many times, we've forgotten they're there. Determine how to incorporate these items into your meals and you'll get a break on the cost of groceries while creating more space. (See How Cooking at Home Can Save You Real Dough.)
- Transportation: Plan errands so that you don't make multiple trips. Go to the grocery store on the way home from work, or do all your errands for the week on Saturday morning. You'll save time in addition to gas money and wear and tear on your car. (Also, check out Car Maintenance Tips That Help You Save Money.)
Now you have many ideas for how to stick to your budget. In part 6, we'll discuss how to use your budget as a tool to achieve your goals.
Budgeting Basics - Goal Setting
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