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A big part of my job as a financial planner is helping my clients save and invest for long term goals, pay off debt, put the right insurance in place, and make decisions about equity compensation. , but I always start with budgeting, no matter what. . And while my clients are typically six figures, most of them need help putting together a budget that is realistic, sustainable, and doesn’t feel like torture.
Here are some of the worst budgeting tips I’ve seen, and what I suggest instead.
1. To start budgeting, look at last year’s expenses to get estimates for each category.
Going back and analyzing an entire year’s expenses is overwhelming and often ends up being a barrier to getting started. Additionally, I have found that clients often don’t want to look back because they don’t want to feel guilty about past expenses or be judged for it.
Instead of going back over every transaction over the past year, look at last month’s spend to get good estimates of your average monthly spend. Plus, list all the bigger and less frequent expenses you plan for the next year, such as property taxes, vacations, holiday gifts and annual donations, and plan how you want them. pay, maybe saving a little more. time.
Best of all, if you’re using budgeting software like Monarch, Mint, or You Need a Budget, you can easily see your average monthly spend and use transaction filters to identify larger and less frequent expenses over the past 12 months. Aim for your initial budget to be a better estimate and plan to adjust your budget in the first few months to refine it.
2. If you don’t follow every penny, it doesn’t count
I can’t tell you how many times I’ve seen budgets fail because they were too detailed – $ 12 on coffee, $ 26 on lunch, $ 38 on fast food, $ 336 on groceries. A budget that is too detailed poses two main problems. First, it can lead to feeling micromanaged every time you spend with very little flexibility. Second, keeping a budget that is too detailed can be time consuming and difficult to track over time.
In order to budget effectively and stick to it for the long term, consider having 10 to 15 broad categories. This will not only make it easier for you to track and categorize your spending, but it will also give you a little more freedom to live in the moment and some flexibility within the wider limits of your budget.
3. Save until it hurts
I wish financial advisers and other financial experts would stop saying this! Let’s be clear: save for your future is important, but it is not Following important as your life today. And it certainly doesn’t have to hurt to be effective. In fact, the less it hurts, the more likely you are to stick with it.
Instead of saving until it hurts, focus on finding the right balance between enjoying life today and saving for the future so that you can make sustainable progress for the long haul. Don’t be afraid to start small and increase your savings rate over time to get used to it and make it truly sustainable.
For example, you can start by saving 1% of your take home pay every payday and then aim to increase your savings by 1% every six months and every time you get a raise. Before you know it, you’ll be saving a solid amount every month without it being painful.
4. Sort your expenses by needs versus wants and eliminate wants.
Looking at your spending only through the lens of needs versus wants requires you to judge every spending decision as necessary or lenient. This filter based on judgmental spending often results in a feeling of guilt about spending, and creating a budget that eliminates all “wants” means that it will be next to impossible to stick to the budget in the long run. term. Emergency regimes don’t work and neither do emergency budgets.
Instead of viewing each expense as a âneedâ or a âwantâ, filter your expenses through a different goal called âcost per happyâ. Cost per happy is a way to measure the happiness (or satisfaction or value) you get from every dollar spent. When looking for ways to cut spending and find money for your goals, consider keeping the expenses that provide high happiness per dollar spent, and try to eliminate expenses that provide lower happiness per dollar spent. For example, you might decide that stopping at your local cafe and having a hot cup of coffee to drink on the way to work brings a little happiness, and paying for multiple music services doesn’t really bring much additional happiness. at all . Or vice versa!
A good budget gives you the freedom to enjoy your life and balances your life today with savings for the future. No guilt, no shame, no judgment, just progress.