Budgeting Basics

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There are many different methods of budgeting, and I will do a spotlight on each of them in future posts. This post is dedicated to elaborating on essential elements of an effective budget. If you are a seasoned budgeter, this will likely be common sense but for anyone who has not budgeted before or who has tried and failed to keep a budget, you may find some helpful tidbits in here.

Essential Elements of Effective Budgets

  • The spend amount is fixed/set at the beginning of the budget period (but specific category budgets are a bit flexible)

  • Tailored to fit/serve the goals and values of the person or people who are setting and using the budget

  • Plans are set ahead of time to determine what to do with leftover money

  • Each expense is recorded, categorized, and deducted from the budget total (and/or category total)

  • Evaluated after a set timeframe, then tweaked and re-evaluated as necessary

Fixed Spend Amount

This is the most basic of budgeting elements. In order to start a budget, you need to know how much money you have to work with. This is usually your total monthly household income (for zero-sum budgets) or a portion of your monthly household income, as most budgets are set, tracked, and reset on a monthly basis. However, if your income is a little less regular (I see you, freelancers), you may benefit from budgeting for a contract period or on a quarterly basis. Regardless, once you have the overall amount set to budget, you can either just track expenses without setting category limits (not recommended but if it’s the only thing that works for you then go for it), or you can determine and divide your overall budget amount into categories. This tends to hold up a lot of people and it needn’t be – if you’re unsure about categories, I suggest you just start with two: necessary expenses and discretionary expenses. This probably is too vague for most, so for anyone else looking for the most common basic categories, here they are: housing, food, entertainment, education, children, debt, travel, vehicle, personal, medical, utilities, and miscellaneous/other. Don’t agonize too long over this, as it is the first thing you will likely tweak in the “evaluation” stage.

Tailoring the Budget to Fit Your Life

Now, you may be asking, “How do I know what amount to set in each of these categories”? This is where the “personal” of personal finance applies. It depends on each person and what is reasonable or realistic for for them, and what their goals are. Just like with dieting, if you are heavily restricting your spending in a category that you NEED or thoroughly enjoy, sticking to your budget will either be impossible or, at the very least, an unpleasant experience. To get a sense for what these amounts “should” be, I suggest looking back at what your current (or past month’s) spending has been in those categories, and if you are overspending your income, determine which categories wouldn’t hurt to put on a diet. Now, this may not be entirely painless as you’ve gotten used to living a certain way, but some changes will be felt harder than others.

Another thing to note is if your initial budget for a category is off and you’re spending more than anticipated, you can “borrow” from another category where spending is less than you budgeted for, or a category you can afford to cut back on for the rest of the budget period. Just be sure you actually cut back/stop spending in that category you borrowed from.

Some tips: I suggest spreading out restrictions amongst as many categories as possible if you are used to overspending, as this will soften the pinch. If you are at bare minimum in all your necessary expenses, I don’t recommend restricting any discretionary spend categories by more than 20% if you’re hoping to realistically stick to the budget long term, unless you have done a values assessment and recognize there’s an area you’re grossly overspending in and ultimately aren’t getting equivalent value out of it.

Pre-Planning Where Leftover Money Goes

This is an often overlooked step, but the benefit of creating a plan for any leftover money is boosting your satisfaction with the budget as a whole. Planning ahead for this scenario also reduces the amount of decisions you’ll have to make later, as decision fatigue can lead us to make choices that aren’t always in our best interest in the long-term.

Everyone is going to have their own preferences for what they’d like to do with leftover money, but if you aren’t sure what you would prefer, here are some ideas:

Budgeting Basics

  • Throw it all into a savings account (either Emergency Fund or a revolving savings account)

  • Use it as fun money that doesn’t have to be tracked

  • Invest it in a retirement investment account

  • Carry it over to the next month/budget period (either same category or distribute evenly among all categories)

  • Use it to make an extra payment toward debt

  • Add it to a Health Savings Account (HSA), if applicable

Another option would be to do a mix of any or all of these, in which case you’d want to pre-plan the percentages of the leftovers that will go toward each option. The possibilities are endless, and the list above is by no means exhaustive, so you could get creative and come up with your own ideas to customize it to you. An added benefit to this planning in advance is it can serve as extra motivation to stick to the budget and new spending habits, as you know what the reward for being under budget will be.

Recording, Categorizing, Deducting (Tracking Spending)

This is the systematic part, and sometimes the system is also the method. I will do deeper dives on each individual budgeting systems and methods in future posts (and for those of you reading this in the future when those posts are complete, the text below will be linked to the related article). Here is a non-exhaustive list of some of the systems you might use for this step:

Budgeting Basics

  • Checkbook Register

  • Spreadsheet

 
 
  • Notebook

  • Envelopes

 
 
  • Bank Account
 

  • Digital App/software

 

For folks who prefer pen and paper, a checkbook register, notebooks, or envelopes might be some systems to try. For the tech savvy individuals, a spreadsheet, digital banking, or a budgeting app/software might be a better fit. Some folks prefer a combination of these for best success. If you’ve tried one or more of these systems, please share your experience in the comments!

Budgeting Basics

Reflect, Evaluate, Modify, Rinse and Repeat!

This step is often missed or neglected, which is a shame because this is the step that usually makes the difference between someone who continues with budgeting and someone who “falls off the wagon”. There are many different things you can evaluate. Here are some questions to consider:

  • Were you able to keep within all budget limits within the initial timeframe (usually a month but, as mentioned in the first section, some may budget for different timeframes)?
    If so, great! You may not need to change anything and keep it up as is and reassess after a longer timeframe (or if you find yourself no longer satisfied by your budget, that’s your cue to reassess). If not, continue to further questions below.

  • Was there a particular category you were underspending in or overspending in (and perhaps borrowing from the underspend to cover the overspend)?
    If this happened for you, it may be wise to adjust the allowances in those categories and do another reflection after the same amount of time has passed as your initial period. Continue to adjust as needed until you get to the balance that feels right.

  • Are you still dissatisfied or feeling bad about spending and don’t feel like you have the right category for that guilty pleasure or discretionary spending that you’d like to cut back on?
    This can happen often when we use more vague categories. Sometimes vague categories are fine for folks if the spending in the category is infrequent enough or within a range they’re satisfied with. For others, sub-categorization can help rein in specific spending – Food is a common budget category that folks choose to sub-categorize as some food spending is essential and some discretionary. You will likely not need to modify this part much more after your initial reflection, but I recommend re-examining these at least twice a year to see if anything needs sub-categorizing or no longer needs a sub-category.

  • Is the system you’re using to track spending working well for you and are you able to do it regularly at consistent intervals (multiple times a day, daily, every other day, weekly, bi-weekly, etc.)?
    Keep going if it’s working for you! But, if you’ve found yourself reluctant/resistant to tracking sometimes, it’d be good to reflect on why that might be. Was it because you knew you overspent or made a purchase you weren’t proud of and didn’t want to have to record it, or was it because it was inconvenient/you didn’t have time/you forgot? If it’s the former, your mindset may be holding you back rather than the budgeting system or method – this is something coaching could help you overcome and is my favorite work to do with clients. If your issue is the latter, you may either want to adjust the intervals (either more frequent or less frequent), or you may need to try a different system. You’ll need to reflect more on the specifics and consider whether the issues that arose with the current system would be resolved by another method or not.

  • Do you feel overwhelmed or are you feeling a sense of clarity about where your money is going?
    It’s okay to feel a little bit of both, especially if you have never budgeted before! Keep going if it’s helping you gain clarity about your finances. If you are feeling more overwhelmed and think you’d do well with a support system or accountability partner, you can always reach out to me for a free coaching consult or reach out to a friend/family member you think could support and hold you accountable (take special consideration when choosing a friend or family member, as some of these people could end up sabotaging your efforts and enabling bad habits if they’re not committed to supporting your success).

It’s always good to reflect and evaluate periodically throughout the year and continue to tweak and adjust as necessary. The more you check in with yourself on this budgeting process, the better you will be able to tailor it to your specific wants, needs, goals, and values. Your budget will become second-nature to you and one of your best tools for maintaining sustainable financial habits.

Wrap-Up & Questions

So, hopefully this was a helpful breakdown of all the elements of a successful budget. In future posts I will go in depth into each of the budgeting methods/systems/philosophies out there (including the “no budget” budget). Feel free to share your personal experiences with budgeting in the comments.

Do you keep a budget? If so, how long have you been doing so and what method do you prefer?
If not, have you ever tried to? When did you stop and why?