I’m someone who understands a concept best after applying it. Maybe that’s why I suffered for years with a budget that was completely unrealistic; it took living and learning to understand exactly how a budget should work. I’m older and wiser now, so through this trial and error I’ve learned how to build a better budget.
I know I’m not alone in my budgeting mistakes. When you first begin budgeting, you’ll do a great job of documenting all your expenses. You’ll cover your housing, food, and clothing. You’ll look at how to pay off debts or save for a housing down payment.
However, you might overlook savings. You might tell yourself you have no extra money for unnecessary expenditures. You might forget to have a plan for extra money. These are the three components to building a better budget.
If you want to improve your budget in a way to make it work for you instead of against you, take them into consideration.
I thought savings was just for retirement or … something. Every time I saw “savings” as a category in an example budget, I really had no idea what I was supposed to be saving for.
I owned a home. I had a 401(k), so I was saving for retirement. I had a car. We even had a small emergency fund. The major things that people saved for, I had.
I knew our emergency fund could be more robust, but since we were in debt payoff mode, we assumed we’d reinforce the emergency fund after our debts were all paid off. The problem is, without having a good savings plan, we were practically forcing ourselves to stay in debt.
I was only thinking about the next year or two; had I looked further out, I would have seen we needed to start saving for some things today, in order to avoid putting them on payment plans or credit cards in the future.
A replacement car
You might be able to drive your car until it has 250,000 miles on it, but one day you’ll probably need to replace it. The best possible position to be in is to have the cash to buy a car so you can avoid financing.
Even if you need financing, the more money you put down, the less you’ll end up paying in interest. Saving for your next vehicle saves you money in the long run.
You might have a new couch now, but more than likely, you’ll eventually want to replace it. Maybe next time you won’t get a brand new couch because you’ll check Craigslist instead, but you’ll still need cash to buy it.
The only way you’ll have that money is if you save for it. New couches have a life of about 10 years. Mattresses are good for around 10-20 years, depending on the brand. Make plans to replace furniture that will need to be replaced. Otherwise, you’ll be tempted to finance it or you’ll have to do without. (Ever slept on a bed with a bad mattress? You don’t want to do that long term!)
We moved recently, but our vacuum apparently didn’t come with us. We filed a claim with the movers, but I had to buy a new vacuum this week. I had a mild panic attack over the price and I realized I should have been saving up for a new vacuum all along – and not just a vacuum.
In the past three years, we’ve also had to purchase a refrigerator, dishwasher, and microwave. We didn’t save up for any of these purchases explicitly, even though we knew these things could (and would) stop working at any time.Are you #budgeting for #savings outside of retirement? Click To Tweet
The fact of the matter is you have several expensive appliances in your home. At some point, these appliances will fail. Plan for that by having a savings account that can fund their replacement.
Sometimes you’ll be lucky enough to have time to check for good deals. Other times, you’ll need a replacement quickly, like a furnace during the winter, a water heater, or air conditioning the during summer. If you have an emergency fund, you can fall back on it for the replacement of key appliances.
However, you’ll need to have a plan to rebuild your fund! The alternative is to have a separate fund that’s always growing and always ready to handle these failures. Leave your emergency fund for the real emergencies you couldn’t see coming.
The Known Unknowns
No matter how well you budget, other things come up. Your iron fails. You need new batteries for the smoke detectors. Your neighbors install a new outdoor light and now you need black out shades for your bedroom.
No matter how great you think you’re budgeting, you probably don’t have categories for any of these things. Having some savings will prevent you from feeling like you aren’t managing your money well. The moment you feel like that, you might give up on your budget altogether.
My husband and I created budget after budget that had no discretionary spending allowed. We had six figure student loan debt to fight – we thought any leftover money should go to slaying our debt. We felt like we had no money to enjoy.
It will come as no shock that we actually did spend money on ourselves. I’d find myself at Starbucks far too often. He’d buy yet another sweater or pair of jeans. We never really fought about these things, though we did have a few tense exchanges from time to time.
We would have been much better off acknowledging we were going to spend money on ourselves. Some people call this “blow money” – it’s yours to blow however you see fit. You can each have your own account to manage this small pot of money. There are three great reasons couples especially should have blow money in their budget:Always #budget in money you can spend on indulgences so you don't feel restricted Click To Tweet
Indulgence Within Limits
With a “blow money” account, I might be able to stop at Starbucks 5 times each month. That allows me to have what I want, but encourages me to pace myself. When the $5 charge is hitting an account with thousands of dollars in it, it’s easy to tell myself I have the money for the cappuccino.
In that moment, I’m forgetting I have to pay thousands of dollars toward our student loan debt and living expenses.
Within my much smaller “blow money” account, I’m forced to keep better tabs on my discretionary spending. I could stop at Starbucks as I rush to work. But that means some other day when I’m really tired, I might not have the money. I can indulge, but I keep myself in check.
We’ve never really fought over purchases, but many couples do. If you’re resentful of the way your partner spends money, the “blow money” account can solve that problem. As long as their expenses come from their own account, you can rest assured that your budget isn’t getting derailed.
We’ve routinely had a tight budget for gift giving. It’s a little bit of a mood killer when my husband comes to me to ask how much money he can spend on Valentine’s Day or my birthday. I’d much rather be touched he even remembered the occasion!
Some couples go over the books together frequently, and I imagine there’s a similar feeling when a gift purchase (and amount) is noted before the gift is ever opened.
Our newest plan is to include our gifts to each other in our “blow money”. We have separate accounts for this money since I’m in no way obligated to share my purchases from that account with my husband (and vice versa).
I can buy Starbucks until my account runs dry, but when I save some money to buy my husband a gift, the gift will have more meaning to him. He’ll know the gift came at a sacrifice to my own spending, and wasn’t some figure we set aside and committed to spend.
Having a Plan
You can have a great budget and spend wisely, but you may lose your mind when some extra money comes your way. Quite a few people can’t even tell you what they spent their income tax refunds on last year.
Something similar happened to me one year. I was eligible for a sizable work bonus. I actually had to pour through our accounts to see if I ever received it. We spent it on goodness-knows-what before we ever realized we had it!
A good budget includes a rule of thumb for windfalls – the extra money life sometimes throws your way in the form of tax refunds, insurance benefits, or bonuses. Let’s say you’re in debt payoff mode. Maybe 100% of any windfall goes to your debt. Or perhaps you split it 50/50 between your debt and some fun goal, like a vacation.
If you don’t have a plan, the money is likely to sit in your account, and you might spend it in $10 increments before deciding how to use it. With a plan, you’ll wisely put the money to work the moment it hits your account.
In the end, building a better budget is all about allowing yourself flexibility – within the limits of your income. It’s also about being proactive; you save for things before you even know you need them and you plan for money you may never receive.
What has been the biggest lesson you’ve learned about budgeting? What are some budgeting mistakes you’ve made?