by Katie Karlson, Guest Blogger writes our first post within "The Financial Planter series" that focuses on the the "Know!" stage.
Want to create a spending plan that actually works for you? Budgeting can seem tedious, even intimidating—but it doesn’t have to be.
Your budget’s purpose is not to constrain you. In fact, it gives you freedom by eliminating guesswork. Your budget lets you see how much money is coming in, how much you can save, and how much you can spend.
If you’re just starting out—whether you’re a recent college grad or just new to budgeting—it’s best to start by understanding the basics. Your budget is composed of 4 elements:
- Income. You can budget on your gross income, but basing it on your net (after-tax) income—even if you freelance—can be simpler, since that’s the cash you actually have available to save and spend.
- Savings. 401Ks, emergency savings funds, other investments
- Fixed expenses: rent/mortgage, car payment, car insurance, home/renters insurance, cell phone, utilities (which can vary, but are still required and due every month), student loans, Internet/cable, insurance, gas or public transit cards, and any other expenses that are basically the same month to month.
- Variable expenses: groceries, entertainment, clothes, salon services, beauty/hygiene products, vacations, etc.
The basic formula of a budget is this: Income – savings – fixed expenses = amount you can spend on variable expenses each month. When you know how much you have to spend, you can spend your money on what you love without confusion or guilt.
When it comes to budgets, there’s no such thing as one size fits all. We tapped experts to devise budgeting approaches for three money personalities. Read through all of them—mixing and matching methods can be helpful.
The track-every-penny type.
You save receipts, file every last document, and openly love spreadsheets.
But consider trading in that manual budget for a program that does the work for you. “Software saves time, since you don’t have to input everything by hand,” says Galia Gichon, personal finance expert and author.
Quicken’s downloadable Starter Edition ($40) organizes your bank and credit card accounts, while the Deluxe Edition ($70) includes investment and retirement accounts as well. YNAB offers similar money-management software for $60.
If you like Web-based programs, Mint.com is a free tool that lets you link accounts—banks, credit cards, retirement accounts, student loans, and more—to continuously update your whole financial situation.
All three programs let you pore over charts, track your spending by category, monitor progress toward goals, and check in anytime with mobile apps.
The “Can I get that to go?” type.
You’re always on the move, and you want a no muss, no fuss budgeting solution.
“Get into the habit of doing a quick round-up of your financial situation once a day,” says Erica Sandberg, personal finance and credit expert.
Every morning, check in with your accounts. Log in to checking and savings and scan your transaction list. Next, check your credit card balances so you know where you stand. Finally, open your wallet: How much cash do you have? (If you don’t save regularly, be sure to read the next section.)
“You don’t have to update a spreadsheet—you just see how much cash you have to spend or save,” Sandberg says. “It helps you calibrate naturally.”
The “I-hatebudgets” type.
If the term “cash flow” makes your skin crawl, it’s time to change your perspective.
“Turn it around in your brain,” Sandberg says. “You work hard for this money. Respect it and enjoy the process of putting it toward the things that make life worth living for you.”
Go automatic, Gichon advises. Set up automatic bill-pays and a monthly transfer from checking to savings (aim for ten percent of your paycheck). That way, you save without even thinking about it—and have a much clearer idea of how much cash you have to spend.