While visiting my best friend last weekend, we had an interesting discussion about budgeting. She and her husband are in the same place Tony and I were when we decided to start living frugally. They’re looking for ways to cut back after moving to a new city and taking a pay cut. Like a lot of 20-somethings, they have a lot of aspirations for their money, and they’re looking to make their dreams come true faster by saving more and spending less. They’re definitely on the right track.
During the conversation, we came to a conclusion that I think explains proper budgeting more simply than any way I’ve tried before: The problem is that many people choose the lifestyle they want, and they try to earn enough or stretch their money so they can live that lifestyle. Proper budgeting is the other way around. You need to look at how much money you have, and determine the lifestyle you can live with it.
This is the number one mistake I see new budgeters making. If you’re trying to make your income match the lifestyle you want, you’re setting yourself up for a life of debt, paycheck-to-paycheck living, and constantly feeling behind financially. Proper budgeting is about finding the best balance for spending the money you have.
Controlling my budget this way also makes it easier to increase savings. Extra money shows up as a surplus in our budget. I’m already used to getting by on less, so I’m more likely to throw extra money into savings. If I was constantly working on a deficit, that money would just be eaten up by daily spending.
I’m not against working harder to increase your income if you can do that. But don’t budget for that lifestyle until the money is in the bank.
Zero-based budgeting is the easiest way I’ve found to do this. If you’re setting up your first budget, don’t look at expenses first; look at income. Zero-based budgeting forces you to divvy up your income based on exactly what you earn. It allows for greater flexibility in your income. Some months you may earn more. Some months you have extra expenses. Creating a budget every month based on the money you have allows you to stay in control.
Remember, budgeting is about controlling your money. If you feel like you’re not in control of your money, it’s time to reevaluate your budget.
This article from my partners at Debt Advisory Centre * provides a little more budgeting advice.
Photo by think panama
*This post includes a link from one of my partners.