How to make & stick to a budget

How to make a budget


Part of any healthy financial plan, a budget is a critical tool to help you find out and control where your money is coming from and more importantly where it is going. Many people cringe as soon as they hear the word “budget” because they think that means never having fun ever again, which is simply untrue. The beauty of a budget is that YOU are in charge of it. You call all the shots, from what categories there are to the amounts allocated to each. And they can be amended as your life situation changes to allow for schooling, a raise, a job loss, a move, a marriage, a baby, a divorce, etc. 

So how does one go about creating a budget? 

Your first step should be sitting down with a pen and piece of paper, or a Word or Excel document, and writing down every single thing on which you spend money on a daily, weekly, monthly, or yearly basis. Include housing (rent/mortgage/taxes), transportation (bus pass/gas/parking), food (groceries/dining out/coffee shops), and entertainment (movies/books/games/hobbies/vacations), as well as any other special categories you might need (children’s activities/debt repayment/investments). 

Your next step is to either: a. keep track for a month to see what level of spending is in each category, b. use an online tracker such as Mint.com to track spending, or c. estimate the amount spent each month. This is your total spending. Now estimate or calculate your income each month. This can include paychecks, investment dividends, interest on savings, gifts from relatives, inheritance, side jobs, etc. This is your total income.

Your goal: Make the difference between your income and your spending as large & positive as possible

This is the “spending gap”, as covered in several great articles (Minding The Gap & The Gap Matters More Than Anything) by Trent from The Simple Dollar. You can increase your gap by either spending less or earning more, or ideally doing both. The larger your gap, the more room you have to pay down debt, invest, and sock away savings, and the less stressed you will be. 

Let’s look at an example:

In the scenario on the left, the person in question makes about $54,000 a year (take-home of $4,500 a month) plus some extra from interest (assuming there are investments). The smart thing to do would be to re-invest that interest each month, thus adding to the principal amount invested and increasing the amount of interest. 

Anywho, that adds up to $4,750 coming in each month. This person also appears to have a rather nice home and car, as well as a lively social life, causing spending to total $2,450 per month. Even at this spending level, this person’s “gap” is a healthy $2,300 per month. They could use this to pay off debt like cards or loans, save for retirement, pad an emergency fund, or take a nice vacation.

On the other hand, the person on the right makes about $26,400 per year, and has no income other than their paycheck, which is $2,200 per month. While they have a lower housing payment, they have the same social and entertainment level as the person with a higher income, leading to a tiny “gap” of only $50 per month. 

The best way to approach this, with the intention of increasing the gap, is to consciously choose a number smaller than the current spending level. If you then hold yourself to those smaller numbers, you will naturally see your spending gap widen in your favor. 

If, for example, the person on the right were to move to a smaller housing situation or obtain a roommate, drive a smaller or older car, save money on groceries and eating out, decrease shopping and eliminate unnecessary spending like going out to the movies, the gap can widen to as much as $1,150 per month! That can become a nice savings account to eventually full-out buy a nicer car, a house of their own, make a job transition, or whatever dreams are yet to be fulfilled.

How to stick to a budget


Once you decide on the amount you want to spend per month on a certain category, now all you have to do is hold yourself to it. Easy right? Not so much when you’re new to budgeting. Or really at any point in your life. You see, we all have a tendency to get used to whatever lifestyle we currently lead. Our “wants” will always greatly outnumber our “needs”, and that leads to lifestyle inflation. That means when your income increases, you can fulfill more wants, so you expect a nicer lifestyle. Investopedia explains how this keeps us in the “rat race”, working just to pay the bills. 

This more expensive lifestyle then becomes the new normal. Inexpensive or free activities aren’t as appealing because it seems “beneath” you since you have such a nice way of living. Unfortunately things happen which may decrease your income, but will not decrease your expectations. It is also more difficult to save and get ahead financially. The Simple Dollar also has a great article about Avoiding Lifestyle Inflation.

There are several ways you can avoid the temptation of lifestyle inflation. 

  1. If you get a raise, pretend you didn’t by putting that money straight into a savings or retirement account. If you don’t know it’s there, you can’t spend it.
  2. Do NOT take on unnecessary debt. Just because you make enough doesn’t justify a huge loan for the newest car out there or a bigger house or more credit cards or whatever.
  3. Forget about the Joneses. What other people have doesn’t matter, there will always be people with more money and things than you. Focus on your life, your relationships, and the things that bring you joy.
  4. Continue finding free and inexpensive activities that fulfill you. Teach, tutor, volunteer, read, or go for walks. Enjoy the simple things in life.

For more ideas see YahooFinance, GetRichSlowly, or FabandFru

The single best tip I can give you on sticking to a budget is to automate as much as possible. If 10% of your paycheck goes straight to a savings account minutes after it is deposited, you don’t have a chance to spend it at the mall. If you have accounts set up for grocery spending or entertainment and put only the amount you want to spend, then you can only spend as much as is in the account. This takes a lot of the work out of budgeting, and makes you accountable. Just be sure to keep an eye on amounts and balances every month.

How to save money


Another problem people have with budgeting is not being able to “find” any extra money to cover the bills, savings, investments, as well as social fun. A lot of people view being frugal as the same thing as being cheap or miserly. This is not necessarily the case. You can still have a vibrant social life and enjoy leisure activities without spending large amounts of money every month. And many easy tips that save you money over the long haul don’t even make a noticeable impact on your daily life. 

You don’t have to go to the extremes of making your own laundry soap, living with a 55 degree home in the winter and 85 in the summer, or eating wild flowers to supplement your diet if you don’t want to. There are boatloads of frugal money-saving tips, and of course each one will not work for every person. You need to evaluate each tip according to your needs and lifestyle, try a few out, and keep only the ones that work for you. 

My favorite way to save money is on food of course. I combine many different techniques to keep my grocery bill as low as possible. For starters, I very rarely eat out. Nearly every breakfast, lunch, dinner, and snack is made by me in my home. This saves me a TON of money yearly. Say I got lunch at work each day, for an average of $8 per day. $8 x 5 days per week x 48 weeks per year = $1,920! Nearly $2,000. That’s 2 1/2 months of rent for me, or 7 1/2 months of car payment, or 10 months of groceries. By making my own meals, I save that amount and put it towards savings, retirement, and other goals. 

I shop what’s on sale at the store, I stock on up frequently used items if there’s a good deal, I buy in bulk when I can, I pay attention to “per unit” prices, etc. I also take the bus to work in warmer months (I’m a student and we get a free bus pass, saving me $50/month in parking fees and gas), I insulated my apartment windows so the heating bill is lower, I buy clothes at Goodwill and consignment stores, and so on. 

For more great tips on daily money saving strategies:

America Saves – 54 Ways to Save Money
Daily Finance – 5 Tips for Frugal Living That Won’t Leave You Feeling Miserable
How Stuff Works – 5 No-Brainer Money-Saving Tips Everyone Forgets
Learnvest – 9 Frugal-Living Tips from the Great Depression
Little House Living – Frugal Tips
Living Frugal Tips website and Savings category
The Simple Dollar – Little Steps: 100 Great Tips for Saving Money for Those Just Getting Started
US News – 8 Painless Ways to Save Money
zenhabits – The Cheapskate Guide: 50 Tips for Frugal Living

What’s your favorite frugal tip?
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