Over the years, I’ve come across a lot of different approaches to budgeting. Naturally I feel that my approach is the best. That’s mainly because it works well for me. I finally realized that the method isn’t entirely critical as long as you’re accomplishing a few key things with your budget:
Write your budget down on paper.
Just writing something down often means you’re more likely to accomplish it. By writing down the end state, you have to start thinking about the behaviors you’ll change to help you get to that end state. When budgeting, it’s important that your plan include every dollar you make.
It’s also ok to plan in some fun for some of those dollars, as long as you don’t interfere with the plans for your other dollars. But every dollar should be planned out on paper. This helps you spend or invest your money with confidence. As long as you stick to the plan, you won’t have to wonder if you have enough in the account to cover certain expenses or investments when the time comes.
Evaluate your performance compared to the budget.
Writing a plan doesn’t do you any good if you don’t stick to the plan. And you can’t stick to the plan if you don’t track your progress compared to the plan. On a somewhat frequent basis, you need to check your actual income and spending to see if you’re on track to accomplish the plan, or if you are way off track.
Adjust your budget accordingly.
If you’re off track and won’t be able to complete the month as planned, you have two choices. Both start with Adjust. You can adjust your spending patterns on the fly to hit your target spending (budget). Or, you can adjust your budget on the fly to reflect what your actual spending is doing.
Whichever one you choose, you’ll need to adjust the budget for next month to avoid this situation in the future. The budgeting process is iterative. It’s all about planning and adjusting to dial in the plan and get more and more accurate.
If you’re married, do the budget with your spouse.
I could write a whole book about this subject. Hmmm, new project?? Basically, I’ve found over the years that if either spouse does the budget alone, there just isn’t the same level of communication about the plan or the spending behaviors. You can’t fix spending problems effectively if you aren’t talking about them in relation to the overall plan.
There’s also the element of trust in here. It’s awful hard to build trust if you can’t talk openly about money, spending patterns, long term goals, etc. And when only one spouse is involved in creating the plan for these things, it’s next to impossible to create that open, transparent, trusting environment.
Use real numbers to create your budget
I’ve seen a lot of budgets fail (including my own) because they weren’t realistic. You’ve got to know what your current spending trends are before you make a plan for the future. Even if you don’t have that baseline established, you’ve got to have a realistic first stab. You can’t decide that next month you’ll only spend $200 on groceries when you have a family of six. It just won’t work.
Similarly, you can’t base your plan on unrealistic income numbers. You can’t plan on overtime being there every month. It may have been there every month for the last two years, but it’s not a guarantee. Plan your budget based on your normal wages, and think of overtime, bonuses, and raises as extra, unexpected money. Having a plan for the unexpected income is fine, but don’t plan your lifestyle around it. I’ve seen too many people base their budgets on bonuses and overtime, only to lose it and wind up in a lot of trouble.
Repeat the budgeting process every month.
One thing I really like about how we do the budget in our house is that we do a new budget each month. I think it’s important to do an annual budget so you can do some projections and planning, but reviewing the budget and revising it on a monthly budget is a key component to success here.
The reason for this is that every month is different. Every month has different expenses. Many months have different income totals, too. Doing the budget every month helps make sure there is a plan for every dollar before it hits your bank account. When you have a plan for that money, you can avoid spending on a whim, which can really eat away at your financial success over the long term.
As I said before, I don’t thing there’s one magic solution or easy button for creating an effective budget. However, I do feel strongly that the steps mentioned above are definitely important ingredients in the recipe for success. That’s about as close as I can get to a magic formula.
Readers, what key factors contribute to success (or failure) in your household budget?