Everybody manages its budget in its own way. There is no one single way of doing it. But, everybody needs a budget. This is very important. There are many reasons why it is important.
In this post, I am going to go over the reasons why you need a budget. I am also going to talk about the way I am managing my own. It is only one of them, but if it works for me, it may work for you!
What is a budget
For many of you, this is obvious. But let’s start with the obvious anyway. What is a budget? I am talking here about a personal budget, from a single person to a family. I am not going to talk about corporate budgets.
A budget is an estimate of your income and your expenses. You can use a monthly or a yearly budget. Or even a weekly one if you feel like it. You use it to keep track of your expenses and see how much you can still spend. At its simplest, a budget is simply the amount of money you can spend each month.
A lot of people are using categories in their budget. For instance, they give 300$ to the Food category, each month. Whether you use categories or not is not important. The most important thing is the amount of your budget. Ideally, it should be lower than your income. For instance, with a current income of 6000$, you budget for 5000$. The rest is what you save by default. Of course, there will be months where you will be over your limit. The idea, in that case, is that you will compensate with other months by spending less.
Some people also include savings in their budget. With that, you can account for each dollar you got each month. If your balance is always zero at the end of the month, you got a zero-based budget.
As you can see, there are many variations and you should use the one that suits your needs the best. I do not think there is such a thing as the best budget strategy. On the other hand, there is probably a best strategy for each person.
You need a budget
There is no best budget. But everybody serious about its finance needs one. There are many advantages. At the bare minimum, tracking your expenses over each month is very helpful. But allocating money to spending categories will be even more helpful. An analogy I really like is this one:
You would not build a house without blueprints
and you should not spend money without a budget
Just as blueprints are a plan for your house, your budget is a plan for your money.
The most obvious reason to get a budget is to not spend more than you make. If the sum of your expenses is greater than your income, you are in trouble. By having a budget, you always know during the month how much money you got left. And you should use this to know how much you can spend. It does not have to amount for your entire income. In fact, it should not! You should budget for less than your income. This will allow you to save money easily.
Another reason is to avoid bad spending habits. Once you have a budget, you will see all your expenses together. This can make you realize that some small expenses are accumulating very quickly. If you get a coffee at 4$ every workday, that is 20$ a week, 80$ a month and 960$ a year. I am sure you can cut that coffee price to 1$. A lunch at 10$ each day accounts for 2400$ a year. You can take it from home.
Seeing all my expenses accumulated together showed me I was spending way too much on some things. For instance, in 2015, I spent almost 3400 CHF on home computers. I was having fun. But I could have fun with less than half of this. Before I saw the real amount, I did not realize it was that much. Recurring monthly expenses can also be an issue. I was always saying that 100 CHF a month is not much. But once you put it for a year it is 1200 CHF. And if you have several of these expenses, it can make a huge sum at the end.
This leads us to the next reason, having a budget will help you save money. Once you realize how much you are spending on everything, it is time to start reducing these expenses. Maybe your budget is fine. But most likely there are areas where you can save more. It is a continuous effort to improve your financial situation. You do not have to restrain yourself. But you can always spend in a smarter way. Find out these big recurring expenses and optimize them! For instance, I saved a lot on my car insurance and on my mobile plan. Find out these small expenses that sum up quickly and optimize them! Every small bit helps!
Finally, once you have a budget you will be in control of your finances. This helps you worry less about your finances. Once you got a budget and respect it, you will not worry that much about it. Once you get used to it, it is becoming automatic.
How I budget
Now that you know you need a budget, let’s see how I do my own. I work with a monthly amount. I defined several categories of spending. Each category has a monthly amount. What I do differently than most people is that the sum of the categories is always equal to my income. Currently my income is 5950 CHF per month and my categories are:
- Apartment (1400 CHF): Rent, power bills, …
- Communications (250 CHF): Internet, Phone bills and various internet services
- Insurances (350 CHF): Health insurance and legal insurance
- Food(600 CHF): Groceries and going out meals
- State (650 CHF): Taxes
- Transportation (400 CHF): Gas, car insurance, car maintenance
- Personal (2300 CHF): The rest (books, gifts, going out, …)
This makes a total of 5950 CHF. It works very well for me because I also keep track of the current savings rate. My goal is not to fill the Personal categories. But to have a good savings rate. I do not advice this to everyone. But it works well for me. With this strategy, some people may spend too much in the Personal category. You can simply set the total to your income minus your savings goal. For instance, you can set the total to 4500 CHF. This would give you a Personal category of 850 CHF.
I keep track of every single expense. Even if I spend 1 CHF, I try to keep track of it. I think it is very important. Of course, I may miss a few of the smallest one, but it is rare. The only time where I am not that precise is in vacation. I try to. But, often in vacation, I am more lazy and simple over-estimate a bit. For instance, here is my budget for March 2018:
One thing I do not do is pay myself first. It can work for a lot of people. But I do not like this strategy. I believe it is a strategy for lazy people. If you are smart enough with your budget, you do not need it. If you have issues saving, you may give it a try.
That’s it! There is nothing fancy going on here. I do not do anything special, but it works. You do not need anything very complex for your budget. Just account for your expenses, your income and keep your expenses low. And you should be set!
By now, you should now believe you need a budget. You also find out how I manage my budget. It is only one way to manage it. There are many ways to do it and no best way. The most important thing is that you have a budget!
You may have noticed that I did not mention budgeting tools in this post. I am using a tool called budgetwarrior. I do not want to go into details now, I will present it in details in another post. But it is a really geek tool. I doubt it would be very useful to my readers.
Again, there is no best budgeting tool. There are many tools that do it just fine. You will have to find the one that works the best for you. Spreadsheets are fine! I advice you to have it online (Google Sheets for instance), just to make sure you do not lose it. But paper is fine as well. A lot of American are using Personal Capital (free for budgeting). There is also You Need A Budget (YNAB). But YNAB is not free. I do not recommend spending money to manage your budget. There are tons of software to do this. You can look around to find the one that suits you the best. Do not hesitate to test several of them.
That’s it! If you were not already convinced, I hope I convinced you to have a budget.
How do you manage a budget ? Do you do something different ? What tool do you use ?