How to Budget

vertex42.com/ExcelArticles/how-to-budget.html

When we talk about how to budget, we're really talking about how to plan. So when you're thinking about
how to make a budget, you're basically figuring out how to plan what your money should do. There are five
basic budgeting tips you'll need to know when learning how to budget.

1. How to Budget for Large Purchases

2. Your Savings is an Expense
3. How to Budget in Flexibility
4. Facing Budget Reality - Cut Back or Increase Earnings
5. Creating Breathing Room by Cutting Back on Debt

In "How to Make a Budget", Jon outlined the steps to setting up your initial budget: (1) tracking expenses (2)
grouping them into categories and (3) creating the budget to live within your means. These tasks are all
ongoing as you continue to plan, modify your plan, and try to stick to your budget from month to month. But,
you will also need to understand the Five Basic Budgeting Tips listed below to be truly successful at following
your plan and achieving your financial goals.

Five Basic Budgeting Tips

Tip #1: How to Budget for Large Purchases

When planning for large purchases is to make sure you include not only the fixed, known expenses, but also
the variable, unknown expenses. Your six-month car insurance premium is a fixed, known expense. Your tires
needing replacement is a variable, unknown expense.

The key is to estimate these purchases and break down your obligation into monthly increments, then make
sure you're setting aside those amounts each month. With the traditional envelope budgeting method, you
would set aside $100 into your Car Insurance envelope each month for six months if your 6-month premium is
$600.

Back in the days of pencil and paper, tracking these types of things was doable, just not enjoyable. In these days
of computers, software built with budgeting in mind makes handling large purchases a breeze. You simply
budget that $100 into your Car Insurance category in the software, and it tracks the balance accumulation for
you.

Tip #2: Your Savings is an Expense

You would never dream of not paying your electricity bill, rent, or gas bill. But, we see a lot of people not paying
themselves. The key is to treat your own personal savings as a legitimate top-line expense. You want to
pay yourself first, before you set aside funds for your other obligations. You're basically paying yourself now, so
you won't have to work later!

"Pay Yourself First"

If you're using software such as YNAB or Quicken, you can create a Savings Expense category and record all
outflows to savings as an expense. Doing this also lets you run meaningful reports. For example, a great
number to know would be what percentage of your gross income is being saved for retirement.

1/3
Tip #3: How to Budget in Flexibility
An important principal in budgeting is to make sure you give every dollar a job. You must make sure every
dollar is accountable. This does NOT mean that you're required to only spend the minimum possible in every
single spending category. If you need more flexibility in your budget (you'll feel it if you do) then you should
build that into your budget. Don't like counting pennies while you're at the grocery store? Budget a bit of
padding in there and be content with that!

"Build in a Little Padding"

Budgeting is planning, and you can plan some padding into your budget so you don't emotionally rise and fall
on every over or under in your spending categories.

If you are using personal budget software, make sure it allows you to modify your budgeted amounts. What
you don't want is to be restricted in how you assign your dollars jobs just because the software won't let you
make a few adjustments. Adjustments are a part of life -- if you are not having to make adjustments, you are
probably not budgeting!

Tip #4: Facing Budget Reality - Cut Back or Increase Earnings

Most of the time when people learn how to budget, and implement these basic principles in their life, they find
they have "more money" than they did previously. This appearance of more money stems from the fact that
their awareness has changed, and they are being more selective about where they are spending their money.

On occasion however, people realize that they have being living beyond their means. If this is your case, then
feel comfortable in the fact that you at least KNOW where you stand. You are faced with two options -- and you
can choose both if you want to.

Your first option is to cut back. Evaluate discretionary spending such as subscriptions, eating out,
entertainment, etc. If the discretionary expenses are not offering any wiggle room, it's time to evaluate larger
commitments such as the car you are driving -- even where you are living.

Some data analysis can go a long ways here. If you can run a
report showing all of your category expenses, you'll quickly
see what may be reduced, and what is fixed for the time
being. The YNAB Software lets you run multiple reports that
show you your categories as stacked bar charts, or pie charts.
Use budgeting software to show you where you may need to
make adjustments. Whether you actually make those
adjustments is still up to you.

Your second option in facing your budget reality is much

more enjoyable. You can actively search for ways to increase
your income. If the expenses are temporarily higher, you can
look for temporary ways to increase your funds by selling
things on ebay, working some overtime, or picking up some side jobs. If you're looking at an expense situation
that is longer-term, you may consider these short-term tactics, along with some longer-term tactics such as job
searching, education, etc.

Tip #5: Creating Breathing Room by Cutting Back on Debt

One of the biggest strains on a budget comes from a person's debt load. If you can pay down your debt, your
monthly cash flow situation will improve immensely. Consider implementing the debt snowball method, where
you pay extra toward your highest interest rate debt, and minimums on all others. Once that debt is paid
2/3
down, you roll its minimum and all extra funds toward the debt with the next highest interest rate. You may
consider using a debt reduction calculator to do all of these calculations for you.

How to Get Budget Help

One of the great ways to get help when learning how to budget, and then implementing those practices, is to
find a support group -- whether it be local or online. Finding like-minded people all striving toward the same
goals can be very motivating. I'm obviously a fan of the YNAB Community -- friendly people committed to
budgeting!

3/3