How to Live on a Budget with 4 Valuable Lessons

The concept of budgeting is, honestly, so very simple. Money comes in and money goes out. The money that comes in is your income, and the money that goes out makes up your expenses. The primary goal of budgeting is making sure that whatever money goes out never exceeds that which comes in.

See? Easy.

Except, learning how to live on a budget is often easier said than done.

My Own Journey In Budgeting

In 2006, I had around $2,500 in credit card debt and a $6,500 used car loan. Even though I also had a steady full-time job, I just couldn’t pay down my debt.

They say that ignorance is bliss and I, admittedly, was unwilling to take a step back and see where I was recklessly spending my money.

I got my paycheck and spent it until the next one. Or, if I was running low on cash, I would use the credit card to hold me over until the next check.

Eventually, that $2,500 credit card bill grew larger and larger… something had to be done!

I started my quest in budgeting in 2006 when I purchased my first budgeting tool, Quicken 2007. I even found my receipt!

At the time, Quicken had limited ability to link with bank accounts and download transactions, but it still allowed me to learn about my spending habits and why my debt was growing.

Related: 7 Alternatives to Quicken That Are Easy to Use

I learned that it wasn’t even big expenditures or significant purchases that were causing my debt to snowball.

No, it was all of those $10 meals I would buy for lunch, the five Amazon Prime purchases I was making on a weekly basis, and the yearly recurring necessities such as car registration and insurance, for which I had neglected to save.

I tried to make a few behavioral changes in order to get out of debt, but Quicken never really helped me formalize a budget.

Eventually, I figured it out, but not until after numerous trials and failures. If I were to start all over now, I would go about it in an entirely different way.

1. Ask Yourself: “What Do I Spend My Money On?”

Use a budget spreadsheet.

There are many templates out there…

*Don’t use Mint.com or YNAB (yet)!

If this is your first time, then I would start the simple template by Google. If you click on the Template Gallery will find an easy-to-use Monthly budget template.

Write down what you think your spending is. Go through each category and estimate how much you spend on each.

Budget Categorization Tips

Think about all the areas of spending for each category. For food, you may include things like:

  • Groceries
  • Fast food
  • Coffee shops

Transportation and travel categories may be a little difficult, so here’s how to do it. Think about things such as:

Since maintenance and insurance are typically not on a monthly basis, estimate your yearly cost and divide by 12 to get your estimated amount to budget for those items.

Learn More: How to Keep Auto Expenses from Dinging Your Budget

Budgeting for travel is a little different:

  1. Estimate how many vacations you took in the past X years (the more the better) and add up how much you spent on all those trips.
  2. Divide that number by X amount of years, then divide by 12.

(total spent on vacations / # of years counted) / 12 = Monthly Travel Expense

After you put all of your expenses and income into your spreadsheet, your IN should be more than your OUT. If it isn’t, then you either need to spend less money in a certain category or make more money. If you don’t, digging a deeper debt hole will be inevitable.

2.  Explore Your Actual Spending Habits

Use an automated tracking tool.

After a few years of sparingly using Quicken, my New Year’s Resolution for 2009 was to finally create solid a budget and tracking system.

I signed up with Mint.com in January of 2009 and have never looked back. Mint was a huge upgrade from Quicken. It tracked all my accounts and even created an automated, suggested budget based on my spending habits.

I learned a lot from Mint about how I really spent my money. By tracking everything, I realized the simple budget I had created was a lot different than what Mint was actually tracking. I was going further into debt that I thought!

Related: 10 Guardrails to Keep You On the Road to Financial Freedom

Budget Categorization Tips for Mint

Here are a few tips for categorizing purchases in Mint:

1) Categorize Everything

Go through your budget, and make sure everything is not only categorized, but categorized appropriately.  You should also categorize your ATM withdrawals so you know where your cash is going.

2) You Don’t Have to Use All the Categories

In the Food and Dining category, I usually rename the subcategories of Coffee Shops to Fast Food and Alcohol & Bars to Restaurants.

Since I don’t do a lot of shopping (anymore), I generalize all of the shopping categories to simply “Shopping.” Having so many categories and sub-categories on Mint can be overwhelming, especially if you don’t need them all.

To immerse yourself in your spending, actively track your account in Mint for at least 2-3 months. Use alerts, check your budget, set goals, and explore the features to see how they work. You can also read more about Mint on our Review of Mint.com For Your Budgeting Needs

3. Know your Net Worth

Visualize your progress.

A good budget will help ensure the preservation and/or growth of your net worth. If you are using Mint, you can find it on the left hand side of the Overview page .

You can also use other ways to calculate your net worth. The important take-away, though, is that you do it.

By knowing your net worth, you get to take a step back from your budget. Over time, you can see a higher level overview of how your budget affects your accumulation of wealth.

4. Make A Plan

Formalize your budget.

  • In step 1, you estimate what you think you spend your money on.
  • In step 2, you see exactly where your money goes.
  • In step 3, you see how a budget can affect your net worth.

You may already have a spreadsheet budget, a budget in Mint, and a net worth statement. However, no matter how you tweak your budget or increase your net worth, it really doesn’t mean anything until you define it.

Start with the “Why”

Why do you want to get out of debt? Why do you want to make more money? Why do you want to buy a house? Why do you want to retire?

There is no wrong answer here. It could be personal, small or large, short-term or long-term goals:

“I want to drink better beer.”

“I want to live in a secluded forest.”

“I want more space for my family.”

“I don’t want to worry about not having money anymore.”

Once you’ve picked a goal, your spending choices become more meaningful. The way to achieve your goal is the same — ensuring that “money in” is greater than “money out” — but now you have more data.

Hopefully, you also have a better grasp of your budget categories and how they can affect your goals.

Take Action

Now, you can start diving into your categories and see where you can save money.

Set Realistic Goals

I suggest that you set realistic goals.

When I first started budgeting, I would set goals of reducing a certain expense categories, like coffee shops, by 50%. Then, I would go over my allotted amount and not even want to look at my budget again.

A 10% reduction in a certain category, with incremental reductions leading to 50%, is more realistic, attainable, and rewarding.

Understanding your cash flow is the first step to successful budgeting. Budgeting is not a “do once” activity, either, so keep that in mind when you start. Your budget will constantly change, too. The longer you do it, though, the more you will understand the dynamics of your budget and what how it affect what you are trying to accomplish. Happy budgeting!

Topics: Budget

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