There are a few classic pitfalls that stymie many attempts at a successful budget: being too aggressive, forgetting the small stuff, and the ever-present belief that tomorrow will be different from today. But don’t worry. Armed with a few tips, you can create an effective budget that you can actually stick with. Read on!
1. Don’t budget every single dollar
Unexpected expenses do crop up. Rather than being blindsided, plan ahead and keep a small, unallocated fund. That way, you’re covered if all your friends happen to have a birthday in the same month, or you have a weakness for pumpkin spice lattes, or your car needs an urgent repair. If you haven’t spent your free-floating fund by the end of the month, treat yourself!
2. Allocate must-pay items first
Before you make your budget, list all your budgeting priorities in order from unavoidable to flexible. For example, your list might look like:
- Must pay: Minimum payments on loans, health insurance
- Can cut back with some effort: Rent, groceries, gas
- Can cut back easily: Eating out, entertainment, new clothes
Now that you have your list, put your funds to the must-pay items first, and keep going down the line. If you run out of money before you’ve run out of things to spend it on, eliminate the easy items first. Having a prioritized list makes cutting back a bit less overwhelming.
3. Build up an emergency fund
If you don’t have a rainy day fund, try to save a little extra for the time being in order to establish some breathing room. Your first priority should be saving enough to live for 3-6 months in case your employment situation changes. I’d also recommend establishing an idiot fund – you know, for the times when you do something really dumb. You might feel foolish when you drop your smartphone in a puddle, but you’ll feel slightly less so for having anticipated it.
4. “Debt-free above all” isn’t right for everyone
Many people are tempted to try and get debt-free before handling other priorities. While this can be an effective strategy for long-term financial health, in some cases, you’re better off only making the minimum payments and putting your money elsewhere. Here are a few such circumstances:
You don’t have an emergency fund yet. As we mentioned above, your first priority should be to make sure you’re protected for 3-6 months if you lose your job.
Your debts have very low interest, and you can make more money elsewhere. For example, if the APR on your car loan is 3% and your employer offers a match on your 401(k) program, you’ll probably get a higher return if you channel your spare funds into the retirement account.
5. Keep it real
Someone who smokes three packs of cigarettes per day isn’t the best candidate to quit cold turkey. Similarly, if your lifestyle is way out of line with your income, sticking to a rapid downsize might not be realistic.
Gradually trim your budget until you’re comfortable with your level of spending. This may mean reducing your entertainment expenses by 5% per month until you reach your goal of a 30% reduction, for instance. It’s better to take your time than to go all in, suffer a nervous breakdown and jump ship two weeks later.
With a little planning and a lot of grit, you can make and stick to an effective budget.