One in three Americans keep a detailed budget according to Gallup. We've found that some people love budgets while others loathe them, and some have them but find it easiest to simply ignore them. The question is, does one really need a budget and how detailed does it need to be? The answer is: yes, but we don't think you should get hung up on how detailed it should be. You budget, and budget process shouldn't own you. If it does, you're doing something wrong. There are many valid reasons for having a budget which we will dive into in a bit and more importantly, we think there are some great tools out there to help you in the process.
Why a budget?
So you don't spend more than you make
To pay off debt in a planned, consistent manner
To prepare for emergencies and build a cash reserve
To save for retirement and family needs
As a tool to discuss general finances if you share finances with a partner or spouse
Our Recommendations (before we dive into your 4 specific to-dos):
Commit to having a budget!
Consider which system will work for you. It may be pen and paper, spreadsheet or an app. Go with what you are comfortable with and stick to it.
Decide how detailed you need to be. If you know being super detailed is not going to work for you, then abort mission and stick with something less detailed.
If you have a partner, get their buy-in. For this to work, you'll both need to commit to a budget.
Consider how much you should be allocating to spending, saving and debt payoff. An industry rule of thumb is the 50/30/20. 50 percent to needs, 30 percent to wants and 20 percent to savings. If you're like many of us and want to strive for that little extra, swap the 30 and 20. Put 30 percent to savings and 20 percent to wants. You can do it; push yourself.
Do a little research and plan how much you want to save, and where that "next dollar" should go. Nerd Wallet has a graphic we love on this topic, especially if you have debt...
What's your method? An App? Pen to paper? Excel? Find it and stick to it, for at least for six months. If after six months it isn't working, try something new.
How detailed should you be? Be realistic. If you like detail and the thought of typing in each expense into an excel spreadsheets sound fun, then have at it! If it sounds miserable, consider something more high level. Aggregating your accounts with a platform like Mint will allow you to scroll through your expenses as frequently as you like, just taking note of each expense may be sufficient for you to track and have a hold on your spending.
Digital tool? Pick the platform: If you chose to go with a personal finance app or digital platform they will do a lot of the heavy lifting for you, like importing real time transactions and current income in addition to simple rules of thumb. Check out platforms like Mint, YNAB, Personal Capital and Wally. From here each app has it's own process, but it shouldn't take more than 15-30 minutes to integrate your accounts.
Be Inclusive: If you are calculating your budget manually, include the following:
Income from all sources: Include not only steady income but any other income you expect periodically (real estate rental income, frequent gifts, etc)
Expenses: Best to use the last 12 months to see what you spend in a given year. When looking at periods less than that, spending can be inconsistent. Include everything. We all fall victim to "that was an atypical expenditure" to make ourselves think we spend less than we do. There are always atypical expenditures.
Your Follow Up Evaluation:
After each month, compare your expenses and income. If your expenses are exceeding your income, it is time to make changes in your budget.
Make goals. After you have established your budget, it's time to take a step back to consider your financial goals. Do you need to save more, or plan better, think about your complete financial goals, like spending down debt and saving for retirement and kids' college plans.
Look for improvements. It can be tougher to alter your income, but you can surely make changes in your expenses.
Monitor your growth: The final step is to monitor your progress in financial terms to check whether you are making right efforts or not.
Great news! The Pocketnest app is now available for iOS! Download Pocketnest and get your finances in order—in just 10 minutes a month! No jargony finance-speak, pricey fees or in-person meetings required. Download now!
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