Budgeting Basics - The 4 Steps to Successful Budgeting (3/3)

Hi, everyone!  This is Lara Hammock from the Marble Jar channel.  This is the final video of a three part series on Budgeting Basics.  The first one was on the what, why, and how of budgeting, the second was an overview of all of the different budgeting systems, and this one is a quick video on how to get started.

There are a ton of budgeting videos on YouTube -- many of them are really inspiring.  Folks who pulled themselves out of really tough financial situations by making a budget and sticking with it.  In the end, budgeting is really just a way to create behavior change.  Financial behavior change.  And because of this, following a budget has the same steps of all successful behavior change systems:

1. Determine your current behavior
2. Set a plan for new behavior
3. Track your actual behavior
4. Make adjustments if needed

These are the same steps used for keeping new years resolutions, staying on a diet, quitting bad habits, and forming better ones.  So, let's go through it. The first step is to

Determine your current behavior

How are you currently spending your money?  Where is it going?  Is your spending reasonable?  You can take all of your expenses for the last month and stare at them, but that's not going to tell you much.  What you need to do is group your expenses into categories that make sense for your life.  Think of each category as a unit of observation and control.  Some people have over 50 budget categories -- that seems overwhelming, hard to maintain, and too complicated to be able to apply expense control to any of these many categories.  Some budget systems only have three categories -- for example, Needs, Wants, and Saving.  Now that doesn't seem quite granular enough for my taste.  If mortgage, utilities, groceries, and gasoline are all in the same category -- how will I know what needs to be cut or where I'm spending too much?  I have about 26 categories -- and am considering cutting this way down.  I think 10-30 categories is about right depending on your level of comfort with complexity.  Although you can start with one month's worth of spending information -- the more history you have -- the better the idea you'll have of your current behavior and expenses that might not come up every month.  I think three months is a pretty good number.  Go through your bank account and credit card statements and try to estimate how you spent your cash over the past 3 months.  Put every transaction into a category and create an average amount per category.  Now that you have an idea of what your current behavior is, the next step is to

Set a plan for new behavior

This is where you make a budget -- which is just a financial behavior plan.  It's important to first know how you have been spending your money since behavior change is most successful when it is do-able.  In other words -- if you are currently spending $1,200 per month on groceries -- setting a plan to go down to $400 overnight is probably doomed for failure.  Your plan should be reasonable unless you are in dire straits and are about to have your house repossessed or have lost a job and need to stretch every penny.  Extreme times call for extreme measures.  Unless you have your back against the wall, a reasonable and do-able budget is more likely to be successful in the long run.  Here are a couple of rules of thumb:

• 70/30 - you should really try to live on 70% of your take home pay.  This assumes you have already paid into your retirement before you get your pay check.  If these cuts are impossible, redefine what is possible.  Do you need such a big house?  Could you drive an older car?  Think about what you consider needs and play devil's advocate with yourself.   If you really can't do it after that -- you may need to consider finding a more lucrative job or making additional income with some side hustles.  
• Food - 10-15% of your budget should be food.  This includes both groceries and dining out.  If you need to make cuts -- guess which one goes farther?
• Car - Car expenses (that includes maintence and licensing) should be less than 20% of take home pay
• Housing - Experts say that you should be spending less than 30% of your gross (that is pre-tax) income on housing expenses like a mortgage or rent.

Also, remember to include non-monthly expenses in your budget.  Things like insurance premiums that only need to be paid once every 6 months, tuition, or Christmas -- if you celebrate it.  Figure out on average how much you should be putting away each month for these non-monthly categories and by the time that expenses rolls around, you'll have accounted for the expense in your budget.  Now that you have a plan -- it's time to

Track your actual behavior

How do you make sure you are following your new plan?  You need to track your actual spending against your budget.  How do you do this?  Well, you can refer back to video 2 where I go through a bunch of different budgeting systems, but essentially, you are going to need to take each of your expenses -- assign it to a budget category, and at the end of the month, add them all up to see whether you are spending within your budget.  For many reasons, this needs to be something you do frequently.  First of all, you should be writing down expenses and putting them in the right category frequently so that you don't forget what you spent money on.  And secondly, tracking things frequently helps you to make better decisions and stick to your budget.  After all, when people are dieting, they don't write down calories once a month, right?  They have to do them daily or they will forget what they ate AND they won't get that regular reminder to eat less.  There are lots of ways to do record what you are spending -- you could use a cash only system, use worksheets or notebooks, spreadsheets, or budgeting apps.  However you do it -- you need to track your spending so that you can see whether you are staying on plan.  In order for this to be most effective, it makes sense to check your progress against your budget before making purchases, but at a minimum, you'll need to tally up your spending for each category at the end of the month -- or whatever budgeting period you have set -- and see how you did.  So, what happens if having a new plan and tracking your behavior doesn't seem to be doing the trick?  What happens when you find you aren't sticking to the budget?  That's the last step

Make adjustments

If you find that your actual behavior is not changing the way you want it to, you'll need to make adjustments.  You can increase the budget if you really don't think you'll be able to spend less in that category.  For example, I commute 25 minutes to and from work each day.  Even though I really want my gasoline budget to be $30 per month -- that may just not be feasible without a different car or a different job -- neither of which is going to happen any time soon.  Increasing this the budget for this category probably means having to decrease the budget for a different category.  What if you really just need to rein in expenses -- say for groceries?   Your budget is $400, but you are regularly spending over $600.  There are lots of ideas on how to cut expenses, but in the categories where you are struggling to stay within budget -- you may want to write things down by hand and calculate totals as you go.   This might be using a hybrid solution -- like a smart phone app for most of your expenses, but handwritten notebook for 1 or 2 categories that are hard to control.  In addition, you may want to divide your monthly budget into more manageable chunks so that you don't go too crazy at the beginning of the month and run out of money at the end.  So, instead of managing a $400 monthly budget -- try to do a $100 weekly budget and write things down as you spend the way Jordan Page at FunCheaporFree does.  This could really help to curtail spending.  The last thing is constantly examining each category for ways to save.  Do you really need a cable service?  Should you think about refinancing your mortgage if interest rates are low?  Maybe you should shop around for a better deal on car insurance.  These things take time and can be completely overwhelming if you try to tackle them all at once.  Focus on one thing at a time, but constantly be on the lookout for ways to trim your expenses.  

So that is it: figure out what you are spending now, make a new plan or budget to spend less by category, track your expenses against your budget, and make adjustments when needed.   These are the same steps for every successful behavior change system.  Let me know what you think!  Comments are always appreciated and thanks for watching!