It’s Your Money: Let’s talk about the B word (budget!)

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NEWS: Inflation, caused in a large part by the COVID-19 pandemic and supply-chain issues, hasn’t gone away and likely won’t for a while.

WHAT THIS MEANS TO YOU: Everything costs more!

There’s not a lot the average consumer can do about inflation. (Pro tip: Even voting a certain way won’t decrease it, since it has very little to do with who is in office). The one thing you can do is find ways to manage your money.

If you feel you’re managing your money just fine, and don’t need more tips, that’s great. You can move on to something else. But that sad truth is that about two-thirds of us aren’t. Almost every source that monitors the topic says only about one-third of Americans have and follow a monthly budget. 

Yes. The B word. Whether you want to hear it or not, it’s inescapable that a budget is the foundation of managing your household’s money. The reasons (or excuses) for not budgeting range from not having the time, feeling it’s not necessary because you bank online or don’t use cash, it’s too hard to keep track, you’re so far in the hole there’s no point, you’re just not the budgeting type – you name it.

But there’s really no good excuse or reason not to budget. The fact is, if you have a monthly budget, you are doing the number one thing that will help ensure you can pay your bills and other expenses, and even have extra money to spend every month. Or, at worst, see where the problems are and have the information that can help you work toward a more stable financial life.

Most people cringe when they hear the word budget, so let’s break it down into easy, digestible bites. This all may be obvious, but often people just need to see it clearly to do it. Right?

What is a budget?

Don’t be afraid of budgeting. A budget is simply a record of how much money you have coming in every month, what your necessary bills are, what your other expenses are, how much money you have left over and what you’ll do with it. The important thing to keep in mind is that it’s interactive. It doesn’t just sit there and cage you and your money in. It’s something that you control monthly, depending on how your situation changes. It doesn’t control you – you control it.

What’s the easiest way to keep a budget?

The easiest way is whatever way that will keep you engaged in it. That will ensure you work on it every month and stick with it. It can be as simple as a legal pad and pen or a Google doc. You can use a spreadsheet, a phone app, or anything in between.

The reality is, though, that nothing will do the work for you. When you first put it together, there’s no way to avoid the task of gathering and sorting out all the numbers. Even an app requires you to do this (and may be even more initial work, because most involve linking all of your accounts).

The most important thing is to do it in a way that’s in line with your work habits and way of thinking, so it’s less a chore and more something that you can understand and control.

What’s in a budget?

The main features of a household budget are:

Income – How much money you have coming in every month from employment, child support, side gigs, anything else. This isn’t a legal document, so don’t be afraid to put any source of money that you have. It will not be subpoenaed or requested by the IRS.

  • Necessary fixed expenses – These are the bills that you pay every month that have a predictable dollar amount. They not only include your utilities (electricity, heat, cable, internet, etc.), but health care premiums (if your employer doesn’t cover them or you work for yourself), car insurance, home insurance, mortgage or rent, loan payments, car payments, etc. This also includes credit card payments even though they can change – there is still a minimum payment that’s necessary to pay.
  • Necessary unfixed expenses – These are the necessary bills that you have a lot more control over like groceries and gas for your car. 
  • Discretionary spending – These are the things you really don’t have to spend money on, but choose to, like takeout food and coffee, extra shoes and clothing, books, streaming subscriptions, club memberships and more. You could do without these things if you had to.
  • Foundational spending – This is spending that comes out of your discretionary accounts that are things you should have, but probably don’t if you’re living paycheck to paycheck. (And if you’re not, get in gear and do this). This includes monthly payments into an emergency fund that should grow to cover your expenses for several months; a household fund for unexpected things like the furnace conking out; and a retirement fund. You can also add vacation fund or boat fund or whatever, but not after having those first three.

Be honest about your spending and don’t leave things out. No one will judge you. You may have avoided writing down all these numbers because you know the math will be ugly, especially if you don’t make much money or have a lot of credit card debt. If that’s you, it’s time to face the music. I can’t stress it enough – you’re the boss, not the money. You are in control, and this is the first step toward fixing issues that aren’t going to disappear on their own.

But what’s the best way to keep a budget?

The best budgeting methods keep track of when money comes in, what amount, and when things have been paid. There are a lot of ways to do this, from just writing it down, to spreadsheets to apps. The best way is whatever way will keep you on track rather than being a chore you avoid.

I use a Google doc, where I show money coming in in black, bills that are scheduled online to be paid in orange, ones that I have to physically pay myself in red. When the payments show they’ve come out of my bank account, I change the orange or red to green. It’s fun! There’s nothing like seeing a month of “green bills” and still having some money in my account.

How do I figure out the unfixed and discretionary stuff? It’s different every month!

Modern technology has made things so much easier as far as tracking spending goes. Gather your bank and credit card statements (they’re all available online), get a highlighter, legal pad, or whatever, and go through three to six months’ worth. Separate out the different types of expenses by putting them into three expense categories – necessary fixed, necessary unfixed and discretionary. Divide each category by the number of months you’ve gathered. This will show the average monthly amount for each. Obviously, the more months you look at, the more accurate this will be. 

If you use cash to pay for things, you’ll have to keep track of your cash spending for several months to get a good feel for it. Don’t wait to until you’ve done that, though, to start budgeting. Give yourself a good ballpark to start with.

What happens after I’ve done all that math?

Take a serious, hard look at what you’re spending money on. Some things likely can’t change, at least for now. These include the big-ticket items like housing and your car. 

But, come on – you know there are places you can cut expenses. It’s hard in a lot of cases, but if you’re running up your credit cards or can’t feed your kids or put gas in your car or heat your home, it’s worth it. 

There may be ways to increase your income as well, though we both know that if that were easy, you’d already have done it.

[We’ll talk more about realistic ways to cut expenses and increase income in November].

But what do I do monthly with my budget?

Keeping track is key, because aside from assessing your spending, the other thing budgeting does is make sure necessary bills get paid.

Set up automatic payments on as many bills as you can. If possible, set them all for the same date or pay period, so that you know when they’ll come out of your account. The first day of the month, for instance, is easy to remember.  This includes credit cards – set up auto pay for either a specific amount that’s more than the minimum payment, or the minimum payment if you can’t afford more. When you have some extra money, made extra payments during the month (see the January It’s Your Money column for more).

Make sure you have the money in your account to pay the bills when they come in (budgeting!).

One way that works well is to have one checking account for bills and another one for everything else. If you are paid by direct deposit, either have the pay go to that account and then move discretionary money into the other account. Or, better, have your pay go into a second account and transfer bill money into the bill account where it won’t be touched by anything else.

If you want to get really fancy about it, have all your streaming and other subscriptions come from a third account that’s just for them – a great way to do this is a low-limit, low interest credit card account that you pay off monthly. It’s a great way to keep track of your streaming and other digital subscriptions.

Having a bunch of separate accounts is kind of a modern version of the “envelopes” method of budgeting. Back in the olden days, before digital banking, people who used this method would cash their paycheck, then put amounts into envelopes designated for certain bills. There are also apps and software that follow this method, but you still have to link all of your accounts and do some work to make it work accurately. You will likely find that moving the money yourself is much more efficient. Most banks allow multiple accounts and no extra cost, and moving money between them is seamless.

Can I change my budget?

Of course you can! You are in control. A budget should change. If your expenses increase or decrease, your income changes – whatever the adjustment is, make it in your budget. You’ll begin to see a clear picture of the money coming in and going out and how you control it.

Budgeting may seem like “too much work.” Or you may want suggestions on how to pay less for things RIGHT NOW. The reality is, though, you are an adult in a complicated world. There’s no easy fix or workaround to figuring out your household budget. It’s up to you to make good things happen financially for you and your family, and this is the start.

NEXT MONTH: If you’re looking to increase income or cut expenses, you’re probably tired of all the online advice. Get a side job! Eliminate one Starbucks coffee a week! Next month we’ll take a look at real-world ways to cut expenses and increase income.


About this Author

Maureen Milliken

Maureen Milliken is a contract reporter and content producer for consumer financial agencies. She has worked for northern New England publications, including the New Hampshire Union Leader, for 25 years, and most recently at Mainebiz in Portland, Maine. She can be found on LinkedIn and Twitter.