Are you a budgeteer? Are you sure?
Perhaps you use one of the many popular apps that track your spending automatically, presenting you with colorful charts of your spending behavior. Clearly you are tracking your spending…but is that the same as having a budget?
Let’s review. A budget is a spending plan. Emphasis on the word “plan.” The fact that you know that you spent $77.53 last week on take-out food is interesting in its way, but this does not tell you whether or not you should have. Tracking your spending without a plan is…well, just tracking for tracking’s sake.
Before you start linking up your bank and credit card accounts to your chosen app, take the time to set out your guardrails. How much do you want to spend each week on take-out food? What is your budget for tacos and burgers? Then, when you review your report of spending, you know clearly if you are within budget or not.
There is a particular instance when tracking your spending activity without a well-defined sense of your budget parameters makes a lot of sense. You may decide that $25 a week is a reasonable target for take-out spending, but is it? Do you have a clear idea of how much you usually spend on take-out (and why)? As a precursor to establishing your spending plan — your parameters for each line item of spending — it is supremely helpful to know what your starting point is. If you regularly spend $77.53 on take-out food each week, immediately setting a limit of $25 may not be realistic. Tracking your spending, just observing your behavior for a set period of time, will give you the necessary insight to locate the opportunities in your spending behavior to make changes, and to set budget limits that are both challenging and realistic.
Here’s a step by step plan:
- Set preliminary budget targets for each category of discretionary spending. (You don’t need to set a target for items such as rent/mortgage, utility payments or insurance premiums; you know what they cost and, in the short run at least, you can’t change it by much. But of course, knowledge of those fixed expenses will influence your budget targets.)
- Absolutely include in your budget a line item for savings, even if it is small.
- Track your spending for 30 days, perhaps using the app of your choice.
- Based on your tracking, re-adjust your preliminary budget targets. Where were you too aggressive? Can you do more to increase your allocation to savings?
- Continue to monitor your spending against your budget targets, adjusting your spending actively during the following month to stay within the guardrails.
As you become more settled in your new budget habits, you may decide to check in with your budget in detail less often, focusing your attention weekly or monthly only on the savings line item. Are you consistently hitting your savings targets? Are there new financial goals that you can pursue?
Additionally, you may also find that there are particular budget line items that require close attention at all times. (I’m looking at you, grocery store!) That said, do check in with your overall spending plan at regular intervals, perhaps quarterly. Don’t get too complacent.
A final note. We are often asked what is a reasonable amount to spend on various categories of expenses. Everyone is different and there is no one true answer. But with that said, our Ideal Budget tool is a great starting place to compare your budget to a few usual norms. It can be extremely helpful in identifying problem areas in your budget. What else is helpful? Having an accountability partner to keep you on track; Your Money Line is here for that!
Lisa is an Accredited Financial Counselor (AFC) leveraging her professional and educational experience in finance and economics. Lisa’s 18-year career in international development has given her the opportunity to appreciate the value of diverse societies, and to work across cultures to improve lives. As an AFC, she plans to continue that perspective, working with all households to achieve financial wellness.