By Brenda W Hargroves
The first lesson we are taught when learning how to manage our finances is to create a budget. This important step allows us to determine who and how much we have to pay each month. A 2020 Data.com survey indicates that approximately 79% of people budget. It also found that more people start to budget because they simply want to increase their wealth or savings. Other frequent reasons include:
debt
retirement
loss of job or income
divorce
loss of spouse
And the most stated reason people don’t budget is because they think they don’t earn enough to bother.
I believe you should take a slightly different approach to budgeting. Rather than simply aiming to increase wealth or savings, you should start with a vision followed by a goal. Debt reduction, retirement, divorce and other wants or needs are important reasons, but the driving force to budget should be establishment of and commitment to a specific identifiable goal. One that is reachable but requires discipline and sacrifice. After all, nothing worthwhile comes without some cost. When it comes to reasoning that you do not earn enough to budget, my standing mantra comes to mind. Do What You Can, With What You Have, Where You Are.
A written budget serves a number of purposes. Most people have a general idea of their monthly expenses and income, but that is not as effective as seeing it in writing. And if you are serious about the process, you will strive to include everything you spend money on like that daily Starbucks coffee or the lottery tickets you purchase twice a week. This form of traditional budgeting allows you to paint a complete picture and makes it easier to develop a money management method that focuses on reaching your financial goals.
All budgeting should include saving as a priority. The amount you can save does not matter! It can be as little as $5 a week but commit to saving something. I’m sure each of us can figure out how to save at least $20 a month. If not, stay tuned. Ways to do so will be the subject of a future article.
Your budgeting method may differ depending on the goal you are trying to accomplish. You can simply track the details of how much you earn (employment income, interest, stock dividends, etc.) vs. your expenses (how much you spend on everything). The optimal situation allows for a left-over amount that can then go into your savings. This method works best when you first start to budget or if you are working with limited income but want to start saving something.
The ‘Savings First’ System – You should pay yourself first and, if possible, automate those savings. Out of sight, out of mind. Saving (paying yourself first) is what’s known as reverse budgeting. You make saving your priority, then take care of your necessary expenses. What’s left over can go towards your wants. At this point, let me stress that saving should always be an expense category on your budget.
Three more points about saving:
1) As your income increases, you should up the amount you save. 2) If anything is left over after regular savings, necessary expenses and wants are taken care of, add it to your savings. 3) Try to assign a specific goal(s) to your savings (retirement, college education, purchasing a home, buying a car, etc.). You will be more committed when you are working towards something tangible.
The 80-20 Budget – Other budgeting methods categorize your income to specifically assigned percentages. For example, a 70-20-10 budget would assign 70% of your income to essential needs, 20% to wants and 10% to saving. If saving is truly a priority, you could adjust percentages to 20% saving and 10% wants. The 80-20 budget is even simpler. Essential needs are allocated 80% and the 20% can go towards whatever you want. Saving some amount should be included in the whatever. Of these two methods I prefer 70-20-10 because you are specifically committing to regularly saving a certain percentage of your income.
The Envelope System – A method I used during my childhood years was having an envelope for each of my upcoming expenses. My sister used to tease me about my envelopes, but it provided me with a very effective way to save. I had an envelope for my parent’s birthdays, for Christmas, for the bike I wanted, and whatever else my young heart desired to fund. As I received money for birthdays, Christmas or earned income, I would divvy it up among my envelopes. That way when the occasion arrived I would have something, if not the entire desired amount, saved towards my purchase. As an adult, I turned this method into opening several bank accounts, each for a different purpose.
Whatever method you choose, budgeting with goals is a most effective way to ensure financial success. My closing words, however, suggest a bit of caution. Years ago I dated a man who was so committed to tracking his expenses that he included me as a line item on his budget. While I now understand the overall purpose, his mistake was telling me and then constantly reminding me how much money he was spending on me. Some things should be kept to oneself. Perhaps he should have simply relabeled that line item. A word to the wise.
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