Budgeting

Budgeting often gets a very bad rap: it is a boring way to spend less than you are now. The core of budgeting, though, isn't necessarily about spending less. It is only about predictability of when and how much you will spend. If you budget $2,000 a month on travel, then you are able to spend that much! One of the major problems in our personal finance journey is not knowing where our money is going. The answer is to budget. This doesn't necessarily mean to spend less: it only means try to predict what you spend on each category.

Categorize

The major categories for Americans are housing (including utilities), commuting, taxes, food and entertainment. The first step to understanding how to better spend your money is to understand where your money is going! If you don't know the problem (remember, it may not be a "problem"), then you are unable to fix it. One of the other insiduous ways that budget creep occurs is by discounting "miscellaneous" or "emergency" purchases. "My car blew a tire and I needed to replace it." "My son's little league team needed to buy new uniforms." Often, these are unpredictable, but miscellaneous and one-off purchases still impact the budget like any other regular, scheduled purchase.

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Evaluate Every Category

Most of the categories are mandatory. Living an entire year without paying a penny on entertainment may be a possible existence but is probably not a preferred or sustainable existence. There are often compromises in every category of the budget. Housing is the largest expense and an entire ~20% of Americans' budgets are spent on rent/mortgages. Is it possible to downsize the size of the apartment/house? How about roommates? Maybe living in a location closer to work but with less desirable schools? This decision often ties in closely with the commuting category so it is tough to divorce the two issues.

We have a whole article on commuting so I won't touch on that here. Entertainment is one of the easiest ways to cut fat from the budget if you are having difficulty getting by. I do not recommend spending $0. Instead, I recommend evaluating the decisions that lead to an inflated entertainment budget. These usually entail some form of data plan (for phones) and cable plan (for TV). For the phone data, there are options that allow an a la carte approach to spending on data, and provides information to help you properly manage your usage. I have been without cable for ~8 years, replacing it with Netflix, Hulu and HBOGo (also heard Amazon Prime is decent). Each of these run in between $10-$20/month. Outside of live sports, I find that I do not miss anything at all. In fact, I find it better (if you get Hulu, make sure to go with the ads-free version for $12/month instead of the version with ads)! You are able to watch on your own time, any of the episodes for shows you love without commercial breaks. When we have professed optimizing your time, this is what we mean.

Food is often difficult but there are options to help cut your food budget. Crock pots are fantastic ways to prepare inexpensive food with relative ease. Buying/eating in bulk is also preferable as well as ensuring that you use your leftovers. Similar to entertainment above, I would not recommend spending no money on eating out: it can be an enjoyable and relaxing experience. The key is to make sure you properly budget and prepare for it.

Conclusion

Again, budgeting is all about preparation and there are as many forms of budgets as there are people in the world.  Being able to see in advance what you will spend your money on is as much an art as it is a hard skill, but practicing, accounting your decisions and a little bit of self-forgiveness can ease the process.