Like you, I hate to budget. And, frankly, long ago I determined that if I played my cards right, I’d only have to budget once. But, that one-time process is worthwhile.
What makes it worthwhile? Let me illustrate with a personal story. Many moons ago, when I was young and just getting started, my husband and I bought a house that had no stove. We theorized that buying the house was all we could afford, so the stove had to wait. And I was fine with that. We had a microwave, a coffee maker and a toaster. At the time, that seemed like enough.
But as the months rolled by and we wanted to renovate our “fixer,” we never could find the money. We weren’t out spending extravagantly. But somehow, the money we earned just seemed to slip through our fingers. We needed to get a better handle on where our money was going . So we sat down with pad and pencil, credit card statements and check registers. (This was before debit cards…gasp.) And lo and behold, we found our money pit — Pepe’s. The inexpensive Mexican restaurant down the street was eating up about $500 a month, which was an extraordinary amount of our after-tax income. I like to eat out, but that was more than the payment on a luxury automobile at the time. And I didn’t like eating out more than I would have liked driving a Mercedes. Incidentally, the cost of the stove was less than what we were spending eating out in one month. We bought the stove.
The moral of this story is that budgeting isn’t about deprivation. It’s about priorities. You do a budget to see whether you are spending your money in ways that reflect what’s important to you. All too often, we’re not because we’re spending unconsciously, allowing whim and habit to control our pocketbooks.
Creating a budget puts you back in the driver’s seat. And it’s pretty easy. If you sign up for something like Mint or Personal Capital, the software does the heavy lifting for you. You just need to categorize the expenses that are not obvious. If you prefer to use pen and paper, pull out your bank and credit card statements and start jotting down where you spend your money. When you’re done, ask yourself two things: Do the expenses surprise you? Do they reflect the things that you want in life? If not, start nipping and tucking.
Notably, what I’m calling a budget, other bloggers call a“spending plan.” And many argue that you should cut discretionary spending to the bone in order to get long-term goals, like a fat savings account that might allow you to take a gap year or time off to have a baby. If you have big long-term goals like these, cutting discretionary expenses is smart. But I think budgeting is a lot like dieting. If you get too extreme, it’s tough to stick with the program.
What if the numbers don’t add up?
In any event, writing down where you’re spending your money is illuminating. And for many it creates a new mystery: why do your spending numbers not add up to the after-tax income amount you calculated up-front? Does your partner have a secret slush fund? Or do you have a Pepe’s problem? If you can’t quite get to the bottom of it, start carrying around a notebook to record every dollar you spend — or jot down notes on your cell phone. My sister did this years ago and found that her family’s cash drain was car washes. Their sparkling clean cars were costing $600 that they couldn’t afford each year. They opted to wash the cars themselves and redirect the car-wash cash to other priorities.
Again, the point of this exercise is not to deprive you of things you want. It’s to draw attention to where and how you are spending your money. If you find that you are spending in ways that make you happy and allow you to afford the things you want now and in the future, leave it alone. Know, too, that you can now use your current budget to estimate your retirement budget, which will help with your long-term planning too.
Here’s a great budget worksheet to get you started.