budgeting

8 Tips for Effective Budgeting

#1: Find a platform that fits your lifestyle

The biggest roadblock in budgeting is finding a tool that makes it easy to budget. Pen and paper or spreadsheet budgeting are rarely effective because they don’t integrate easily into your daily life. But a smartphone app is easy to check every day.

So, the best budgeting tip we can offer is to find a platform that fits seamlessly with your lifestyle.

• First check with your bank or credit union – you may have a budgeting tool already integrated with your checking account.
• Look in your app store to find free budgeting apps
• If you’re concerned about security, you can opt for desktop software, although this option is rarely free

#2: Recognize that budgets are not set in stone

One of the biggest mistakes that people make when they budget is that they set up a budget, then leave it be. Budgets are not set in stone! They are constantly changing, based on your income, needs and wants. Recognizing this means that you give yourself more flexibility. You set targets that you aim for, instead of defining concrete numbers that you can’t deviate from.

Always remember, a budget is really just a recommended spending guide. It helps you stay on track. But if you color outside your budget lines every once in a while, that’s okay!

#3: Set targets to control your spending

Whether you use an app with built-in categories or you make a budget from scratch, always make sure to set spending targets. These help you keep flexible and discretionary expenses under control so you can avoid overspending.

Flexible expenses are necessary expenses that don’t have a set cost (as opposed to fixed expenses, that have set costs). Discretionary expenses are all your wants, whether they have fixed or variable costs.

In both cases, you should set spending limits for each category of expense that you have. For instance, you set a food budget of $100 per week or $400 per month.

#4: Use alerts to your advantage

Most budgeting tools that are popular today offer alerts. They track spending and alert you whenever you approach a spending target. This helps you keep your spending under control. The alerts are usually sent via email, text message or through on-screen notifications if you use an app.

Using these alerts helps you stay on target without depending on you to check the app every day. Instead, your budgeting tool will tell you when it’s time to check in and adjust your spending.

#5: Pad your budget with free cash flow

Your budget should always balance your expenses versus your income. But that doesn’t mean that every dollar should be accounted for as an expense. If you spend exactly what you earn, you haven’t built an effective budget. Instead, you’ve built a strategy that ensures you’re always going to live paycheck to paycheck.

Instead of budgeting down to your last dollar, you need to leave yourself some breathing room. Ideally, you should only spend about 75% of what you bring in each month. That extra 25% is called “free cash flow.” This is basically money that you use to cover those unexpected expenses that inevitably come up each month.

#6: Savings is not free cash flow

Another big mistake that people make when budgeting is treating free cash flow as savings. You basically decide to save whatever you have leftover at the end of each month. This is a sure way to ensure you never save anything.

Instead, savings should be treated like a fixed expense. You decide how much you can afford to save each month – ideally, between five and ten percent of your income. Then you set this as a fixed expense in your budget. It’s like a bill that you pay yourself every month.

This keeps saving separate from free cash flow. You have money to cover all those unexpected expenses, but you also save consistently.

#7: Adjust your budget at least every six months

As we pointed out above, your budget should not be set in stone. Anytime you have a change in income or a new recurring expense, you need to revisit your budget.

But in addition, you also should make seasonal budget adjustments.  Expenses from summer to winter vary widely. For instance, your electric bill could vary by up to $100 or more, depending on where you live. You can’t just decide to use less energy and leave your family freezing in the winter, so you need to adjust the target.

This also allows you to build in money for seasonal costs, such as a back to school budget in the summer and holiday budget in the winter. The more accurately you track these seasonal cost, the easier it will be to control your spending.

#8: Make sure to keep needs and wants separate

With budgeting apps, this usually involves customizing your categories. Most budgeting tools categorize transactions automatically. But the categories may blend needs and wants that are better kept separate.

For example, most applications auto-categorize food purchases. So, all your grocery store and restaurant purchases are lumped in together. But that isn’t a fully effective way of budgeting because it blends a need and want together.

Groceries are a need because you need food to survive. By contrast, eating out is a luxury – it costs more and should be curtailed when you’re worried about overspending. With that in mind, you should customize your app to split food into two categories: groceries and dining out.

This allows you to have one food budget that necessary (and fairly constant) and another for treating yourself and family. This also makes it easier to cut back when things get tight.