Feb 232007

As some of the readers know, I’ve started experimenting with budgets lately. I feel the need to have more control over my spending. I’ve been doing pretty well so far by simply making sure to put away money into savings, but that’s was a very simplistic approach that worked best when I didn’t have monthly bills or as many expenses I have now.

Surprisingly, budgeting isn’t as painful as I thought it might be. See, I allocate money for spending on a whim, so I can actually spend that money without any guilt that I shouldn’t be spending any more money. I’m sure many of you sometimes feel guilty for "buying too much" or "spending too much money", and in my experience, budgeting ahead of time for fun/plan money has really helped me deal with that kinda guilt. And I also feel more in control and empowered. It also takes a lot less time than I thought I would. I also didn’t feel miserly or penny-county at all. Win/Win.

For those of you who’re interested in budgeting but may think its too constricting, you can try it out for a month. That is, budget for one month and follow your budgeted plan. Give yourself a break, the first time you create a budget is usually way off. You underestimate how much money you spend going out with your friends, or how much you spend on groceries. Don’t be thrown off by that.

At the end of the month, compare that month’s experience with ones where you didn’t budget. If you decide you like budgeting, then great! Keep it up! It’s a great habit to get into. If you’ve read The Millionaire Next Door, you’ll find that most millionaires have budgets. Smart financial planning is how they got to be millionaires in the first place. If you decide that budgets aren’t for you (perhaps they’re too complicated for your situation) then feel free to drop them. What’ve you got to lose? But you do have lots of gain, including money that mysteriously "disappeared" in previous months.

Some simpler/easier alternatives to budgets which I used before I started budgeting include:

  • Paying yourself first. As soon as you get paid (especially if you get paid on a regular basis), automatically have a certain amount of money taken out of your bank account to go into your savings account. This savings account could be for retiring early (compound interest is magical), paying for university, saving up for a vacation, whatever. Or you could further allocate your savings between all those things.
  • Figuring out how you’re going to spend each paycheque. This is especially valuable if you don’t have a regular stream of income, nor many regular expenses. This is a ridiculously fast thing to do; that is, it takes very little time. Say you just got a paycheque of 200 dollars. I know I’ve got a phone bill coming up that’s gonna be $30. I know I also wanna save at least $75 dollars for university tuition. I also know that I want to treat a friend of mine who recently had a birthday to dinner, so I’ll budget for that. And so on. The crucial thing is to allocate your whole paycheque, including deciding what to do with a chunk of cash after your regular expenses are paid for. You can just allocate that money to savings.

Here’s a great site that gives the best introduction to budgeting I’ve seen yet:

How To Create a Zero-Based Budget

That blog is just wonderful over-all. If it seems like it’ll take too much time or hassle to create a budget, you should see how much time, hassle and money it takes to not have one, by doing that 30-day trial I suggested earlier.

Have fun and get rich!

EDIT: After I posted, I noticed this entry:
Budgeting on a Self-employed or Irregular Income

It has some great info about being in control of your money if you don’t have a regular income, or are self-employed. Enjoy!

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