Budgeting: Telling your dollars where to go

Are you spending more than you make? Does your checking amount seem to be dwindling down more and more every month? Many Americans live paycheck to paycheck, meaning that if their next paycheck didn’t come in, for whatever reason, they would be facing a financial crisis. Do you know where your dollars go each month? Knowing and telling your money where to go is one of the most powerful tools that will help you build wealth. Remember, money is a tool. Budgeting is just giving your money an assignment. Budgeting will help you get out of debt, find areas to save, and put your finances on track to building massive wealth.

What is a Budget?

A budget is an estimate of expected income and expense for a given period in the future. Dave Ramsey says that “A budget is telling your money where to go instead of wondering where it went.” A proper budget helps plan expenses and ensures you are saving an adequate amount of money and not spending frivolously.

You need to have a budget that outlines how you will spend your money in such a way that there is no overage or deficit in your budget. A budget serves a similar purpose as a shopping list, although it is multi-faceted. You do not (or at least should not) go grocery shopping without a list. If you walk into the grocery store without a list, you will walk out spending way more than you wanted to with a bunch of things that you probably didn’t need.

No matter what your income, occupation or age, I can tell you that if you do not have a budget, then you do not have a financial plan. Even small purchases everyday can add up over the years to significant amounts of money. Benjamin Franklin said it best, “Beware of little expenses; a small leak will sink a great ship”.

When Emily was working in the Army, we did not have a strict budget and were more lenient about how we spent our money. We went to get frozen yogurt (fro-yo) often, for dessert. I remember at the end of one month looking back at our expenses and realizing that we spent about $50 that month on fro-yo!! I remember thinking how ridiculous it was to spend that much on just desserts. I couldn’t believe how quickly that added up. That’s the problem with not having a budget. When you don’t give your dollars an assignment, you’ll reach the end of the month and realize all your money was spent on, often, unnecessary purchases.

How a Budget Can Help You

Budgets are lifesavers for families that want to live intentionally and save a set amount every month. When making a monthly budget, I use the Mint app on my Iphone because it allows me to enter set amounts for each category of spending. For example, I set our food budget to $400. Halfway through the month, I can login to the app and see where we stand, which should be about 50% or $200.

If I see that I have already spent more and I know that I will need to go “over” budget the next couple weeks for company visiting etc, then I know I will have to decrease spending in other areas like entertainment or shopping.

I have found from personal experience that having a budget helps me to practice self-discipline. I now tend to not purchase things simply because of want, and I instead think long term and ask myself “Is this purchase in my budget and is it important to me?” If there is an item that I want to buy but I had not previously budgeted for it, I have to consider how that will affect my other spending categories before just acting impulsively and buying the item.

A key to using and implementing a budget it to make sure that your entire income is allocated. Even if that allocation is to transfer to savings account or a ROTH IRA, you need to make sure that there is no money just sitting leftover. If there is leftover money, I can guarantee you that the money will be spent before you can even think about where it should go.

 

How Emily and I Budget

We put a portion of our budget down below so you can see how Mint categorizes spending. You can add or remove categories, change the limit amount, and even view spending trends from month to month. Using Mint, we budget all of our expenses in each category.

As soon as we’re done putting our budgeted amount, we have a nice spending graph that shows how close we are to reaching our budget in each category. Note: You will need to link your bank account or credit card so Mint can import all of your transactions.  Here is a portion from our spending categories for this month:

 

mint_budget

Some categories of our August budget

 

As you can see, we are getting close to reaching our food budget of $400 for this month. I only displayed a portion of our expenses above so you can understand the concept, but you can add as many categories as you like.

Once you use Mint to set / adjust your budget for a few months, you can also view your spending trends. Using Mint’s “Trend” tool, you can set ranges for Mint to view your spending and stay on track each month.

 

food_trend

Comparing July to August food expense trends

 

As you can see, I compared our July and August expenses from July 1 – July 16 (yellow bar), compared to August 1 – August 16 (green bar). Looking at the bar graph, you can see that we have spent less money on fast food and restaurants, and our grocery budget has gone up slightly.

Looking at spending trends can help you identify categories that you may keep over spending in. Likewise, you might find you under spend in other categories. The important thing to do is re-adjust your budget each month, if you know you’re going to spend more money on gasoline because of a road trip, you can re-adjust your budget to fit your needs. In addition, there are always different ways to save, and your budget can help you focus on saving in those categories for next month.

How looking at our budget saved us money

Over the last year we looked at our budget and found a variety of ways to save in a lot of different categories.

Here are just some of the items we decreased in spending by shopping around for a better rate:

  • Switching cell phone plans from AT&T to Straight Talk saves us $20 each month
  • Shopping at ALDI has reduced our grocery expenses by $125 each month
  • Buying household items like soap and toilet paper through the Amazon Subscribe & Save program saves us 15% each month on those items
  • Transferring our internet plan to a lower speed saves $30 each month

There are hundreds of ways to save money, but these are where we’ve seen some of the biggest savings over the past few months.

 


 

Your budget is such an important tool that will give you insight into your spending and keep you on track to be financially free. Be intentional with your spending and stick to it, instead of going over in your budget, find ways to save. Money will only go where you tell it to go, so you must be intentional!

 

Do you do a budget each month? Are you sticking to it? Has having a budget helped you find ways to save?

 

 

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