Money and budgets can cause an increase in stress, especially when funds are low and money is tight. Effective budgeting, however, is a healthy habit, brings stability to a household and can also be stress-free with our 7 tips.
This is the fourth day in our 31-Day Money Challenge. Over 31 days we’ll publish 31 podcasts, each designed to help you move closer to financial freedom. Yesterday we walked through how to prepare your net worth statement. In today’s podcast, we discuss 7 tips for effective and stress-free budgeting.
Sponsors: The 31-Day Money Podcast is sponsored by Betterment and Personal Capital. Betterment and Personal Capital are two tools I use to make investing easier, less expensive, and more effective.
Effective and Stress-free Budgeting
Tip #1: Understand why you are budgeting
Budgeting without purpose is a waste of time. There are several important reasons to budget, but keep in mind that everybody’s financial circumstances are different. Some may budget to make sure they can pay all of their bills. Others budget to make sure they have extra money to fund retirement or pay down debt. The key is to identify why you are budgeting.
One approach is to ask the following question: “If my budget is successful, I will be able to _________.” Your answer to that question will tell you why you are budgeting and how to know when you’re budget is meeting your financial needs.
Tip #2: Budgets alone are useless . . . you must execute
How many times have you set up a budget in Excel or your favorite budgeting tool and then completely forgotten about it? Many times setting up the budget makes us feel like we are doing the right thing, but it doesn’t have any meaningful effect on how we spend our money. Budgets alone are useless; we need to execute on the plan.
Tip #3: Pay Yourself First
A very effective budgeting strategy is to set aside savings as soon as you get paid. By doing so, you avoid the temptation to spend that money later in the month. You also aren’t fooled into thinking you have more money available to spend than you really do.
The pay yourself first strategy can also be used to tackle debt. If you plan to have extra money to put toward credit card debt, for example, don’t let that money sit in your checking account until your payment is due. Make the payment immediately.
Tip #4: Budget Monthly for Periodic Expenses
There was a day when our car insurance bill drove me up a wall. Even though it came at the same time twice a year, it took me by surprise every time. It also put me in a bad mood for a day or two.
There are a lot of expenses in most budgets that aren’t monthly. In addition to car insurance there’s life insurance, vacations, gifts, property tax, and estimated taxes for some. The way to handle periodic expenses is simple.
Add up the annual cost for all of your periodic expenses. Then divide by 12 and set this amount aside each and every month. We put our cash for periodic expenses in a high yield savings account. Others keep the money in their checking account. Whatever you choose, you’ll have the money the next time the car insurance bill surprises you.
Tip #5: Expect the Unexpected (Emergency Fund)
There are some expenses you know are coming, but you don’t know when or how much. Home and car repairs are a perfect example. Here there is some guess work involved. We make the best estimate we can of how much to set aside each month. With enough experience, you’ll be able to make reasonable estimates for these expenses. And even if you come up short, at least you’ll have some of the cash you’ll need to handle these unexpected costs.
Tip #6: Budget for Big Items
Budgets often neglect the big purchases, like a car, that we know will eventually hit us. It’s a great feeling when you can pay cash for car. While some may view this as unrealistic, with a little planning it’s possible.
The last car I purchased was a used Toyota Camry. We paid cash. The trick is to start setting aside money for your next car now. Even if it’s years away, setting aside just a little bit of money each month now will enable you to pay cash when the day comes. The same is true with any other big purchase you plan to make.
Tip #7: Try the 3-Category Budget
Many people avoid budgets for one reason–the thought of tracking every dime they spend is just unbearable. If that’s you there is a simple solution–don’t. For many, there is no need to track every category of spending. Remember to think back on why you are budgeting in the first place.
If it’s to control your spending, figure out what spending areas cause you the most trouble. If you are like most, you can probably narrow it down to 3 categories or fewer. Then just track those 3 categories of spending.
Additional Resources
- A Simple Approach to Budgeting
- 10 Online Budget Tools
- 7 Budgeting Pitfalls and How to Fix Them
- 7 Reasons the Envelope Budgeting System is a Terrible Idea
- 3 Options for Budgeting with Variable Income
- 6 Steps to Creating a Budget that Works
- The Idiot’s Guide to Creating a Budget That Actually Works
Day 5: An interview with YNAB founder, Jesse Mecham
Topics: Budget
DoughRoller, I am on day 4 and I cannot wait to see what other information will be coming up in the next three and a half weeks! This information is so practical and easy to apply! And better yet, so far, following the day by day tips and EXICUTING them had made a huge project easy to break down! Setting the little goals for the large big goal is making this so much easier! As a single mother finances are super tight, and I’m already on track to being able to pay every single bill on time this month, plus the back payments I owe! This has been such a huge help since my husband passed, and I can’t begin to tell you how grateful I am to have found you!!! You’re the BEST!!!
I am coming into 50 and a later bloomer financially. While I have known and tried for years, the IRS just wiped out my cushion and I feel like I am starting all over. I’m a single mom and need to make a PLAN as I get into my 50s and beyond. This is my year of getting it all back in order. DoughRoller, you mentioned Northern VA in podcast. That is where I live. Do you do consultations in person? I want to get all my stuff in order then run it past an expert. Thank you!
Shortly after my husband passed away I started paying my bills at the first of the month even though they weren’t due. This allows me to not have to stress out that I may forget something. I’ve not missed anything in too many years to count but I feel into a trap of plastic use so I must kill that dragon and get back to the relief of just living expenses. Love your articles thanks
So, I signed up for Mint (I get email reminders to pay bills and they use the same strategy — it suggests that although the bill is due on the 15th it suggests the I pay now.). How do I track variable expenses on Mint? Do I need to have to use two tools?
Day 4… I am really so glad I found your blog, and this info is terrific! Day by day I am taking control of my life and my finances. Thanks for the information and for your sharing! Looking forward to the book! Wynn
We’re glad to hear that, Wynn, and hope you stick around! Let us know if you ever have any questions, and feel free to check out the DR Facebook page to learn even more from other readers.
Warmly, Stephanie
As of today I will save $20.00 a month no matter what. Thank you again!!!
Nice!
Sooooo blessed I found your site! Love the pod casts…short, concise and so educational! What about single income households? Limited money coming in…Can we still put these and other tips in place? Just an idea.