The foundation of any solid financial freedom plan is in knowing the best ways to budget your money and save effectively. It’s absolutely fundamental to preserving your wealth.
Have you ever wondered why so many lottery winners end up going broke a short while after winning? Fortune reports that nearly a third declares bankruptcy within 5 years.
You’d think that all those millions of dollars would solve their financial problems. But as it turns out: If you don’t know how to budget your money normally, than more money isn’t going to make a difference.
But “budgeting” … Most people cringe at the word!
And likely because they get the false idea that every dollar they spend is somehow bad (which is not true at all).
The truth is that when it comes to budgeting, you don’t really need to break out the calculator or jot down every $1 purchase you make.
Instead, I’d really like you to think of budgeting as more of a “habit” building skill. If you can change your financial habits and realize the benefits, then it can put you on the right path forward.
With that said, here are 10 of the best “practical” ways I know to budget your money properly that will help you to save more in the long run.
1-Know Your Limit
Forget everything you think you know about budgeting money for a second and ask yourself one simple question:
What’s my limit?
In life, everything has a limit. Exceed the limit, and there is likely to be a corresponding consequence.
- Drive too fast, get a ticket.
- Eat more than 2,000 calories per day, you get fat.
- Miss too many days at work, you’ll get fired.
Budgeting your money should be no different. Inherently, there has to be some number in your head that triggers a “red alert” for when spending goes from normal to unacceptable.
For example: In early 2017, actor Johnny Depp filed a lawsuit against his management company cover the mishandling of his finances. But what’s interesting is that it was revealed that the actor spends approximately $2 million dollars every month!
Okay …so you’re not a big-time actor. But the same thing happens to regular people too. Think about a conversation with a friend or co-worker where you thought this. Perhaps they said something that sounded crazy to you like “Our vacation cost $10,000” or “Like my new $80,000 SUV?”
Ding! Ding! Ding!
The important part, though, is in knowing what your number is. At what point if you spend $X is this too much?
Your number will be revealed after doing a little effort on the front-end and setting up your annual budget.
Yes … I said annual budget.
2- Budget for the Year, Not the Month
Every time I see articles or gurus suggesting that the best way to budget should be your monthly income minus expenses, I shake my head.
Why? First of all, that’s not how life’s expenses works. Your spending isn’t the same month to month. There are a great deal of things that happen only every so often.
- Christmas gifts
- Lump sum insurance payments
- Seasonal expenses
- Back to school shopping
This is not unlike what a business will do. When most professional businesses lay out their financial projections, they do so for the entire year. Not just one month.
In both cases, the goal is the same. To truly not let any expenses slip through the cracks, you need to capture the big picture. Therefore, you need to layout what your income and spending will look like over the course of the year.
The good news is that once you do this, you’re good for the year! You don’t have to drudge through the process every month. I usually do mine once while on Christmas break, and that’s it! After that, I’m in monitor and report mode for the rest of the year.
Setting up an annual budget is not at all as bad you’d think. Open up Excel or Google Docs, layout the 12 months, and start putting in numbers of how much you think you’ll spend.
After you layout your usual monthly expenses, start adding in those one-off or non-regular expenses. Again, review your past 6-12 months of credit card or bank statements to get an idea of where you’re spending. The more you capture, the closer to real life you’ll be. And the better your chances that your budget will be a success!
Find out more about why and how to setup an annual budget here.
3- Redefine Fun
One of the easiest ways to destroy your budget is to let it slip away in the name of “having fun”.
Hey, … I get it. Isn’t life meant to be fun?
Of course it is! But just like beauty is in the eye of the beholder, “fun” can also be a matter of perspective.
When our family was just starting out and the kids were babies, my wife and I would find ourselves going to the local malls for something to do. It was a great way to get back out in public, walk around in an air-conditioned environment, and maybe pickup a few nice things along the way too.
But then the kids got bigger. They started wanting cool clothes and shoes. They also went from eating tiny kid’s meals to full size dinner orders. Suddenly our little “get out of the house” trips were costing us a few hundred bucks every time we stepped out.
We had to re-think our options for fun. Now when it comes to things to do on the weekends, we:
- Get some stuff done around the house.
- Head to the gym.
- Visit with family.
- Let the kids have their friends over to spend the night.
- Play a sport or go to the local school sport event.
- See what’s at the Redbox or on Netflix
- Grab a cup of coffee (just me and my wife)
All of these things cost way, way less than one trip to the mall. Yet everyone seems to enjoy them just as much; probably even more!
Again: There are many ways you can fun with someone. The focus is (and always should be) about the memories you make and the way you engage other people. Never about how much money you spend.
4- Get a Handle on What’s Going In and Out
Tell me how many times this happens: Your credit card statement arrives and it’s a couple thousand dollars more than what you were expecting.
You and your spouse turn to each other and say: “What the hell did we buy? Where did all of our money go?”
Obviously purchases were made. But no one has a clue what they were for.
This is how we spend our own money. But if you happen to work at a large company, have you ever noticed it doesn’t seem to work that way? I know every time I need to make purchase, it has to go through several layers of approval:
- A manager will ask the purpose of the purchase before they tell you which account to bill it to.
- Someone from Finance will then ask if you got multiple quotes to ensure you received the best price.
- When the invoice finally arrives, you have to approve that you actually received the purchased item.
As individuals, there’s a lot we can learn from this process. We need to not only be more aware of what purchases are made, but why we are making them.
Our goal here is not to restrict or stop purchases from happening. But rather to become aware that they are even happening.
Naturally, along the way, you’re bound to find some purchases that are just plain unnecessary. And that’s when you and your spouse can start to weed out the ones that don’t quite fit in with your goals.
5- Challenge the Cost of Everything
Building upon that last section, another thing I’ve found to be incredibly helpful when it comes to sticking to a budget is to challenge the cost of nearly everything.
Because as it turns out: You can almost always find a cheaper price. You just have to look.
Earlier this year, my wife and I were buying some new furniture for our patio. It was already on sale, but before we went up to the counter, I did a quick Google search and found a 25% coupon.
Boom! $100+ off – just like that for 15 seconds of work!
The next time you plan to buy something, try it yourself. I’m sure you’ll quickly find some sort of coupon code or discount just waiting for you to take advantage of.
Where this has always been particularly useful is whenever we want to get work done around the house. Usually this means spending hundreds or even thousands of dollars. As a general rule, we get three quotes and compare them to make sure we’re going to receive the same level of service from each potential provider. Without a doubt, one is always more affordable than the others, and that means we end up saving tons!
6- Buy What You Need Versus Want
Another thing that can leave a bomb crater in your budget: The impulse buy.
While there are many obvious examples of this, sometimes even when you think you’re being financially strategic, the damage is still the same.
Ever seen one of those extreme couponing shows where people have stock-piles of household goods? While they might have gotten a great deal, the question I always ask is: Are they ever actually going to use all of that stuff? Do they really need it?
Here’s a personal example. For years when we’d go to the mall, I’d see some men’s clothes on clearance and think to myself: That’s a great deal! I should buy that.
This went on for some time until one day when my wife and I went to clean out our closets, we found all kinds of shirts and pants with the tags still on them. Never worn; I had practically forgotten about them. Great price or not, without any utility, they were simply a waste a money.
Now when we go out shopping, my objective is simple. I keep a short list of certain types of clothing I’m looking for – a new white dress shirt, black shoes, etc. This way, no matter what kind of deal I find, it has to pass the “do I really need this” check first. And if it’s not on the list, then I put it back.
7- Think About the Return on Investment
One of the big things I took away from one of my favorite money books “Rich Dad, Poor Dad” was that there are two types of things you can buy:
- Things that put money back in your pocket, and
- Things that take money out of your pocket.
A good example of this was when I really wanted to finish the basement at my old house. My wife and I did a number of home improvement projects through the years; most of them by ourselves. But one that we knew we’d have to contract out if we ever wanted to get it done right was to finish the basement. And it was going to be expensive!
While I really wanted to do this, I hesitated because I knew that there was a high likelihood that we would move someday. And then we’d never see a return on that investment.
Sure enough, I was right. We eventually moved, and ended up selling our house for almost what we paid for it originally. I was glad we never sunk the money into finishing the basement and instead put it towards something more sensible – the down payment of a new house! (Which by the way included an already finished basement.)
There are lots of other expenses in our lives that apply in the same way. Autos, recreational vehicles, clothes, electronics, jewelry, etc. While many of these things may be fun in the moment, the sad part is that a lot of them will not hold their value and be essentially worthless by the time we’re ready to get rid of them.
On the other hand, things like mutual funds, dividend stocks, and rental properties are purchases that can put money back in your pocket. In fact, given enough time, investments such as this can easily turn you into a millionaire!
Keep this simple classification in mind every time you make a purchase.
8- Don’t Replace Things That Work Just Fine
It can be fun to have new things. But at some point, you’re going to pay. And pay BIG!
I used to know a co-worker who was always trading up his vehicle. Every few years, he would trade in one of his vehicles for another, … then another, … and then another!
Meanwhile I drove the same car until it literally almost died. Why? Because 1) it was paid off, 2) I serviced the car often and knew that it was in tip-top shape (all things considered), and 3) I was commuting to work every day, so why put the miles on a new car?
But it doesn’t just stop with automobiles. Some people love to redo every room in their house, or get the latest iPhone, or buy new clothes because their current ones are a year old.
Hey …, I understand. Its fine to update your house or wardrobe every once in a while. But it needs to be done constructively and in line with your budget. Plan for these sorts of things on your annual budget plan. Don’t let it be a surprise or count against one of your other goals.
And certainly don’t update things for the sake of boredom. Remember that financially the best thing you can do is to use something until it absolutely works no more.
9- Set Realistic Savings Goals
If every month you add up your expenses and find that you’re way over your budget, but yet you’re not spending unnecessarily, then it might be time for you to consider that your goals are too strict.
Yes, I know. You’ve read a bunch of personal finance blogs and really want to save 50% of your income. That’s a great goal.
But is it realistic? If your natural spending just simply doesn’t allow for it, then perhaps you’re cutting yourself too short too soon.
Compare your spending to a diet. If you’re used to eating 2,500 calories per day and then suddenly cut down to 1,500, how long do think that’s going to last? Probably not long at all.
A better strategy would have been to cut back slowly from 2,500 to 2,250 to 2,000 and so on. Your spending works in much the same way.
Remember that budgeting is a series of tiny victories. Your savings goal today doesn’t have to be your savings goal tomorrow. You can get better and better until you reach your ultimate goal. But until then, start off gaining momentum by crushing the ones that are just within your reach.
10- Have Backup Money (Yes, an Emergency Fund)
In life, we need insurance. Insurance for our cars, homes, lives, etc.
When it comes to your money and, in particular, your budget, there’s only one insurance policy you can rely on: Your emergency fund. It can literally be a life-saver!
Forget about needing to have 6-12 months of savings. That would be great if you could do that, but its not always realistic. Your emergency fund should simply be a decent sum of money that sits in cash (… yes, cash) and is reserved for only those absolute times when you need it. (I prefer to keep $10,000 in mine.)
Here’s how this can help. Emergency funds are what keep you out of going into debt when the unexpected happens. Rather than rack up credit card debt or dip into your 401(k), you can grab from your emergency fund and take care of business. This keeps you out of the financial doghouse and on track.
Readers – What are your best ways to budget money and save more? What practical strategies do you use to stay on track and not get buried in the details?
Images courtesy of Pixabay
Mrs. Picky Pincher says
Oh, I like the idea of budgeting for the year! It gives you an idea of how much of your salary you’re using to fund each budget category.
Thanks! That’s been a HUGE help in our house in terms of budgeting. At any time from now until Dec 31, I know if we’re going to run out of money before the year is out. Then we can make adjustments as needed.
Great question. So so tricky because when you budget, you’re effectively setting the expectation to SPEND. We do budget, be the true effort is questioning EVERYTHING. We avoid going shopping for “fun” and we limit dining out to once a week. To save some money, we rely on credit card bonus points for air travel for our once a year trip to visit the in-laws.
Very true! Some people do get caught up in the idea that a budget of $X means the green light to spend all the way up to $X. I try hard to use it only as predictive model for cash flow throughout the year.
You are right that challenging everything is the key. It’s a great mantra to adopt and really sets the precedent for always succeeding in getting the best price. I tend to treat it almost like a sport: What’s the maximum value I can get at the cheapest price?
I was just looking at flights the other day and scheming which credit cards I need to open to get them for free. I love travel hacking! Saving thousands!
What a great list of ways to save. IT really is simple as a foundation of finance, do not over spend, and then stick it in an account away from the checking. Do this consistently by paying yourself first and you will be amazed at the results in a few months.
Exactly! A budget really isn’t just a spreadsheet that you make once. Rather its the act of everyday working towards spending less than you earn. Do this long enough and progress will be made.
Charmi Gupta says
Hey, thank you for sharing this useful tips.
Joe @ Average Joe Finance says
Great tips. Love the idea of budgeting by year instead of by month. Rarely are expenses an even 1/12 each month, so looking at the entire year really helps to keep things in perspective.
Thanks Joe. The 12 month projection has worked out really well for me for some time now. There are just too many one-off expenses throughout the year that don’t get caught otherwise but have a big impact on the bottom line. For example – I’m researching a set of new tires for the car as I type this!
Oak Laurel says
Hi MMD, I agree with you. Budgeting for me is not about a spreadsheet with how much I can spend this month. It is about ‘Do I need this?’ ‘Why do I need this?’ ‘I don’t really need this now.’ As in the end consumer habits don’t really make people happy but being broke seems to make people unhappy.