Budgeting, Personal Finance Blog, Saving

Optimizing Your Budget

As I mentioned in the post How to Budget Like a Boss, YOU are in charge of your money! You decide what you want those dollars to do, and it’s your responsibility to make sure that they do their job.  A budget is a tool that puts you in control of your finances instead of letting your finances control you.

Hopefully, you have started the process with one of the methods we discussed and you’re ready to move to the next level.  If so, here are a few more tips to help you optimize your budget:

  • Keep It Simple – Mind your categories and don’t stress too much about how detailed or broad to be.  You want your categories to hit the key expenses you need to track and plan for. We group ours into 5 broad sets, which includes:

    • Immediate Obligations – Expenses that occur frequently like Groceries, Gas, and Personal Care (i.e.: Diapers, and general hygiene products), for example
       
    • Bills – Mortgage, Water, Electricity, Phone, Insurance, etc. List out all of the bills that you pay each month – I include my due dates in parentheses so I can easily decide which ‘job’ (bills) I assign my current paycheck’s dollars to take care of
       
    • True Expenses – These are irregular expenses that sneak up on us (only because we don’t plan for them in advance) and compromise our budgets.  If you know you spend $500/yr for Christmas, plan to budget $41.67 each month so you have enough money in your account to cover your gifts.  If your car is paid off, budget a ‘payment’ to yourself each month to cover your repairs and the eventual replacement of your car.  That way you always pay cash for your automobiles and don’t have to stress out about maintenance on them. Clothing, gifts, Home Repair and Property taxes are a few other examples to include here.
       
    • Quality of Life Goals – Once we’ve covered our Immediate Obligations, Bills, and True/Irregular expenses we get to have a little fun in these categories.  If you still have debt (outside of your mortgage) that you need to pay off, I recommend SIGNIFICANTLY limiting or even removing these from your budget until you take care of those.

Once that’s done, reward yourself with some Personal Spending and Entertainment money.  Vacations and Kids’ Activities are other examples of categories that fall into Quality of Life Goals.  *Note: build in your fun money and spend it unapologetically, but don’t go totally ape-shit here… remember, you still have Stage 4 and/or 5 to work toward!

    • Long-Term Savings/FIRE Fund – Call this whatever you’d like, but when you’re in Stage 5 this goes toward things like: paying off your mortgage early, additional investments, etc. See: How Much Do I Need to Retire?

When you budget like this you will stop looking at your checking account balance as a way to decide what you can spend or afford.  By doing this, you WILL break the paycheck-to-paycheck cycle, because every bill and true/irregular expense is already planned for.  As a result, you will also see your checking and savings account balances continuing to rise.

If you overspend in a category one month, no big deal… just take it out of another category.  Don’t shoot yourself in the foot by stealing from other bills or irregular expenses all the time though – “Oh, I’ll just cover that with Car Repairs or Home Repairs” – if you do that often, your situation will never change.

  • Make it Habitual – Depending on your method, log transactions regularly: Nightly, or in real time… it only takes 1-2 mins to record your transactions and look at what you have left in your available budget for each category.

If you have a spouse, and you’re just getting started, have a little pow-wow once a week or so. Review and give each person a chance to weigh in on what is working and not working.  Change amounts as needed, keep it rolling, rinse and repeat!

  • Scrutinize Your Expenses – There’s an old saying that, “If you can measure it, you can manage it.”  Once you’ve got the budgeting process down, and you are regularly funding your categories and recording/monitoring your transactions, start looking at the amounts you’ve spent.

There are all kinds of tips and tricks to reduce your grocery bills, electric bill, cable bill, etc. Shop around for car insurance to be sure you are getting the best rates (I do this annually).  Negotiate prices on your bills, reduce and eliminate unnecessary expenses, look at other cell phone providers, or reduce your plan (Ahem… DATA USAGE!!!)

On the flip-side, you may be underfunding categories and need to increase some.  If your family is living on beans and rice, but you have 175 channels, you may need to revisit your priorities. Just be honest with yourselves about what you REALLY need and do not need!

Sample Budget Template

Conclusion:

Remember that your budget is fluid and always changing… Don’t get discouraged, but keep tweaking and optimizing it.  Do this regularly and you WILL hit your long-term goals.

 

Question for budgeting pros: What tips/tricks do you have for us? Let us know in the comments section below.

 

 

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