If you've never implemented a budget before, it can be an intimidating endeavor. Although many people find that living by a budget is a satisfying experience (even if challenging), creating one and committing to it is a large hoop to jump through for some. Here are some tips for implementing a budget:
Collect Data to Establish Budget
Spend a few months collecting information on your spending and then use the data to establish a budget. Unless it’s necessary - because you are saving too little or overspending versus your plan - don’t feel that you need to immediately curtail your spending. Changing your spending habits on top of trying to implement a budget make it more likely that you’ll ultimately do neither. (For related reading: Budgeting Basics.)
Establish Short-Term Reserves
Reserves have been key to the success of our budgeting and we have set them up for spending categories that are intermittent but involve significant amounts. We have reserves for predictable events like birthdays and Christmas and for unpredictable things like car repair, home maintenance and veterinarian care for our 17-year-old cat.
The reserves for predictable things are invariably drawn down at some point during the year, while the reserves for unpredictable spending will hopefully grow until they hit a specified level. Once they reach that level, these reserves will only be funded when they drop below the specified level.
Be Flexible in Reallocating Non-Reserve Funds
You will invariably find that from time to time, you’ll spend more than anticipated in a specific category. For example, if you have family and friends stay with you for an extended period of time, you may go over your budget for eating out. In this situation, you may able to reallocate funds from groceries and or other other categories so that you remain within your overall budget for the month.
You might be tempted to reallocate from reserve funding to cover non-reserve spending, but I would avoid that if possible. You might have to learn the hard way though. If you reallocate from your reserve spending, you may find that you need that amount down the road for weather damage, or something more serious, and it will be short of what you need. (For more, see: Best Budgeting Software for 2018.)
Couples Should Have Personal Spending Categories
If you want to maintain domestic harmony as you implement a budget, make sure to fund personal spending. More specifically, each of you should have a line item in the budget funded to an agreed upon amount that you can use to spend on whatever you’d like, no questions asked. Any amount that is unused rolls over to the next month, so you each benefit from your specific approach to spending.
Stay on Top of the Books
You can use software to import all of your transactions and it will classify them for you, but you might prefer to enter things manually for two reasons. First, you're more cognizant of spending in each category, and second, manual entry reduces classification errors.
One idea is to enter transactions using a smart phone or another electronic device as they occur. If you can’t enter the transaction at the time, save your receipts and enter them at home. Then, you can reconcile transactions and accounts once a week.
Balancing the books once a month takes a great deal longer, given the number of transactions. If you reconcile all of your transactions weekly, you'll likely only spend around 30 minutes per week.
Implementing a budget doesn't have to be complicated. By following the steps above, it's possible to consistently remain within a budget that you've created without feeling that you're too constrained or spending an inordinate amount of time on your finances. (For more from this author, see: Money Issues: Couples Combining Finances.)