How and why to budget

Budgeting is an important process... for a while. I used to budget carefully each month, but now I don't. I track my spending monthly, but I don't expect to have a budget that I have to worry about. I know roughly (within $100/month) how much it takes for me to live for my basic necessities and beyond. There are a lot of ways to budget, but the best way to budget is whatever way will get you to get all of your transactions down either on paper or in a spreadsheet or in an application like Mint or Personal Capital.

If you've never budgeted, now's the time. Today, because it won't get any easier tomorrow. You'll have to add today's transactions on top of whatever you have to do right now.

Everyone has a different set of categories that are important to them. A friend of mine had these categories:

Taxes
Health Insurance
Mortgage
Student Loan 1
Student Loan 2
Car
Car Insurance
Gasoline
Electricity
Natural Gas
Water
Phone
Internet
Prescriptions
Groceries
YMCA
Netflix

My categories are these:

Rent/Mortgage
Internet
Mobile Phone
Gasoline
Water
Electricity
Heat
Lunch
Dinner/Restaurants Out
Alcohol
Groceries
Renters Insurance
Shopping
Hobby
Event
Medical
Travel
Car service
Car Insurance
Charity/Gift
Hair
Annual Fee
Taxes
Brokerage
HSA
401k


You can always change how you categorize later. Just start with something, today. Even if you happen to have a large Misc category when you start out, it's better than nothing. You can use web based applications like Mint or Personal Capital to make it easier with aggregation. And, after all the transactions have been categorized and added up, you can start making decisions.

First: Am I spending over the amount I bring in? Then you need to seriously stop the bleeding. You'll never get in a good financial standing. Sell things not in use, take a second job, consider asking for a raise if you're due one, cut back on things you don't need.

Second: If you are spending less than you bring in, congratulations! That is a great place to be. You can make decisions with the excess. Use it to create or increase an emergency fund, your retirement, or a vacation.

Third: Look at all of the categories in your list. Are there some that are making you feel uncomfortable? Do you want to decrease some, at least temporarily, to see if you don't feel like you need to spend as much on that experience or item? While you do that, look at categories that you know make you happy. I don't spend much on coffee - I buy the store brand, and wait for sales to stock up, but having at least okay quality coffee is important to me. Having really excellent coffee isn't as important, even though I like that kind of coffee as well. I could increase my coffee category (I used to have one, and spent $30+ per month) but I just didn't get any extra enjoyment out of it. I now drink the free coffee at the office, and store brand on the weekends, and I'm quite happy about it. On the other hand, I know that eating out is important to me, and I enjoy getting out of the office, and meeting friends after work. It's a socialization thing for me. I very rarely eat out by myself. I enjoy eating with people.

It's important to know why you spend what you spend. If it's truly important to you, you should spend the appropriate amount so you'll get the maximum amount of joy from that item or experience. Else, you're not getting the value out of your dollar. And, it's personal. I know a lot of people who don't go out to eat, and instead stay in and invite their friends over for potlucks and dinner parties.

It's all up to what you value. And you'll not know what you truly value until you look at what you're really spending your time and money.

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