4 Ways to Budget Smarter, Not Harder
Creating a budget is a life necessity – one that consumers, businesses, and governments alike must address. Unfortunately, more than half of Americans lack a budget to help track and understand their personal spending habits.
Why do so many people continue to turn a blind eye to their personal finances? Many would likely claim that a budget is either too tough to follow, or too time-consuming to prepare. However, if you can learn to make smarter decisions, and take simple actions to control spending, then maintaining a solid budget could become second nature.
Here are four tips to help make your budgeting process smarter, more efficient, and easier to follow.
1. Understand opportunity cost
If you’ve ever taken a class in economics, you may remember this term. Opportunity cost is, to put it simply, the benefits you sacrifice by choosing one action instead of another. When applied to your budget and spending, this concept is an important one.
With a budget, you are limited by your monthly income, so choosing to allow yourself more spending per month for restaurants, for example, means that you will have to subsequently cut back in other areas (such as entertainment, clothing, or other discretionary categories).
After placing that budget into action, the concept of opportunity cost can help to keep spending under control. It will cause you to think hard about the value you’ll get from each purchase before you make it. You’ll likely find that there are many purchases you could actually do without.
2. Set goals
Without clear goals for the future, you won’t have much incentive to save rather than spend. A good goal might be anything from saving for a vacation to setting aside enough for a child’s education. You can have many goals at one time – what’s important is to know exactly what each goal is, and understand how you will reach it.
One way to start working towards a goal is to open a savings account specifically for each objective. This will keep funds separate from your other accounts and ideally out of reach of your debit card.
3. Be realistic
Optimism is great in many regards, but setting a budget that limits you more than is truthfully possible to maintain might only damage your spirit when you fail to stay within budget each month. The only surefire way to tell whether your budget is realistic or not is to test it out for real, especially if this is your first time creating such a plan. So don’t expect to get it just right the first time around – a good budget can be adjusted as you go, especially to incorporate special situations such as studying abroad or moving.
One trick to help make the process easier is to look back at your past year’s expenses (you can usually get this transaction information from your credit union). Then, average your monthly expenses in major categories and use that as a starting point for your budget going forward.
4. Use tools
You simply can’t be expected to stick with a budget that lives on a piece of scratch paper in your pocket. Luckily, there are nearly endless resources to help create a budget, and track your spending to it as you go. From mobile apps to websites to Excel templates, there’s bound to be one tool that fits your needs (though you may have to test a few out before you decide). Many allow users to categorize transactions (sometimes automatically) and warn you when you are reaching your limits for each month.
John Gower is a senior analyst for NerdWallet.com, a personal finance website dedicated to helping you make smart financial decisions about your bank accounts.