When I first started working, I never thought about budgeting. The thought of tracking every penny of my spending seemed like a waste of time.
Budgeting isn't fun. I love Excel spreadsheets and consider myself to be a numbers junkie, but even I hate budgeting. The problem is, it's always trotted out as the one thing everyone should be doing to ensure one's financial future is sound and secure.
The experts are right. We should all be budgeting, but we don't because tracking your spending down to the penny is tedious. It's a constant reminder of how you aren't saving, and so many of us abandon it too quickly. If budgeting is on one end of the spectrum, we find ourselves on the other: not tracking our spending at all.
That's a mistake. Fortunately, there's a happy middle ground. There is a way to skip all the work of budgeting and get nearly all of the benefits. But to understand this idea, we need to start at the beginning.
Why should we budget?
It's so that we spend less than we make. It's as simple as that.
When you spend less than you make, you're able to put those savings toward your savings goals. The goal could be your retirement, a new home, your student loans or a vacation later in the year. We save money for the future so that we don't have to work to our very last days.
With a budget, you set aside how much you plan to spend based on how much you earn. The month of spending happens, and you put what's left over into savings. How much you save depends largely on your budget and how well you've stuck with it. Simple enough, right?
If the goal is to save money, the forecasting and tracking of spending is secondary. It only exists because you spend first and save second. Flip the script.
Pay yourself first. Before the money for your paycheck even hits your bank account, transfer a portion of it toward your savings. Get the savings done first, so you can spend without guilt. It's like having a glass of wine after you've already worked off the calories. You've done the good thing. Now, do what you want without guilt hanging over your head.
When you save, it could be toward your retirement. It can be a transfer from your checking account into your savings account as an emergency fund. It could be a payment toward your student loans.
How much should you save?
There are many schools of thought on this, but many recommend a 20-30-50 ratio for your budget. This means 20 percent toward savings, 30 percent toward housing and 50 percent for the spending in your life. But you need to adjust it to your financial realities. If you're an intern in New York City, you'll be saving less than if you were an engineer at Google, living in your RV on campus.
Don't know where to start? Try using the Pay Yourself First worksheet to approximate your budget and see how much you can save.
If you're starting from scratch, leave yourself 50 percent for personal spending, and calculate how much you're putting toward housing. If your rent or mortgage is costing you 35 percent, that leaves you with 15 percent for savings. Can you find 5 percent of savings from your other spending to get your savings rate at 20 percent? Push as hard as you can to hit that 20 percent.
If you can save more, push to save more. Many folks save 50 percent or more of their incomes because they cut ruthlessly elsewhere. If you live with your parents and your housing is at 0 percent, that's 50 percent of savings right there. Living with your parents isn't ideal, but if you sacrifice for a couple of years, that might help you get a down payment on your own home.
Don't beat yourself up over the percentages. The goal is to make saving a priority, not an afterthought. If you save $100 a month and grow it at 7 percent per year, it will be worth at least a quarter of a million dollars over 40 years.
What about debt?
When you calculate your savings percentage, remember to include your payments toward debt as savings. Eventually, you'll pay down those debts (yay), and you will get used to sending that money away. The debt payments can become savings payments to yourself.
We all know that budgeting is ideal. It's the perfect solution. The problem is, it relies on willpower, and that's something we often find in short supply.
A good solution we use every day is better than a perfect solution we abandon. If you have trouble budgeting, give the idea of paying yourself first a shot. Then, let me know how it goes.