How to Make a Budget That Actually Works
February 28, 2019
Like New Year’s resolutions and fad diets, budgets seem destined for failure.
How are you supposed to allocate every dollar of every paycheck without hiccups or unexpected expenses? Can you stick to a budget and still have fun?
There’s one thing that so many budget experts skip mentioning: There’s not a single perfect budget template to rule them all. Every person’s financial situation is different, so there can be many correct budgets.
Now that you’ve had that pep talk, you need to find the budget that works for you. It’s not just about choosing between apps and paper and pencil. It’s about cultivating a habit that supports your financial goals.
But it’s hard to get to the healthy-habit philosophy if you’re stuck trying to figure out what’s coming in and out of your bank account each month or how to plan for your wacky billing schedules.
We’ve got answers for that. Read on for some basics and advice for tackling four major budgeting obstacles you’ve probably already encountered.
How to Find the Right Budgeting Method for You
Your biggest budgeting problem may not have anything to do with your income, spending habits or savings goals; rather, it’s that you haven’t found the right budgeting method for you.
With so many online templates, apps and blogger-designed financial planning tools, the search for the perfect budgeting method for your needs can take longer than you hoped. Here’s how to brace yourself for the inevitable trial-and-error process.
Start With Info You Already Have
Whether you’re downloading the app your friend recommended or trying to pick the perfect notebook to track your budget by hand, you can take a few steps to increase your chances of budgeting success.
“Before you actually sit down to make a budget, print out the last two or three months of statements from your credit and debit cards,” Bridget Todd, COO of The Financial Gym, says. “Go through and categorize everything.”
You can export your statements to a spreadsheet or use highlighters on printed statements. Doing this helps you see patterns in your spending in the categories that fit your life — not just the categories your old copy of “Budgeting for Dummies” suggests.
“So many people track spending but don’t use that information,” Todd says. “What are you spending money on now? Where is there room for improvement?”
Let It Percolate and Adjust as Needed
Lillian Karabaic, CEO of Oh My Dollar!, likes to remind her clients that the first month you set up your budget, you’ll forget about things.
“That’s OK. You’re just getting better information” each month as you remember expenses, she says. “The third month is the point at which, if you’re still doing it, you start to feel like you’re in charge of the budget.”
Key words there: If you’re still doing it.
You’re likely to fall off your budget in one of these two ways: You set restrictions for yourself but fail to meet them, or you forget to keep up with your budgeting method and give up.
“Budgets can be flexible,” Tonya Rapley, founder of My Fab Finance, says. “Give yourself space to adjust as needed. Pick it up and use it whenever you remember.”
You only really need the parts of a budget method that serve you and your plans for the future. Todd doesn’t like to think of a budget as a money diet, but rather as a place for goal setting.
If she’s working with you on your budget, she says, “You’re going to save every month, then pay your fixed expenses, and then I don’t care what you spend your money on — as long as you meet your savings goals.”
Feeling motivated to set up your first budget or revive your abandoned one? Get ready to face these money issues that can trip up even the most confident budgeters.
How to Overcome 4 Common Budgeting Obstacles
These four budgeting obstacles can trip up even the most determined budgeter.
1. Weird Pay Schedules
Monthly, twice monthly, biweekly — all you really want to know is when you get your money and how long it’s going to last.
Getting paid biweekly can throw off your budget when you come across a three-paycheck month. “That magical third paycheck usually means that something is going to be wonky elsewhere,” Rapley says. “It means you might not get paid until the middle of the month the following month.”
Todd suggests pretending you get only 24 paychecks so the occasional bonus paycheck doesn’t throw you off. She advises her clients to “identify the month the third paycheck hits and try to save that entire paycheck or devote it to paying down debt.”
If you have extra money in your checking account, that wonky third paycheck may not faze you at all. Karabaic suggests building up a buffer of about one month of expenses and leaving it in your checking account.
While it can take a while to build up that buffer — she says the average time is seven months — it’ll help you avoid overdraft fees and weird pay-schedule surprises.
2. Irregular Income
If you don’t rely on steady paychecks, it’s hard to determine how much money you’ll actually have on hand in a given month.
If you’re a server, bartender or other professional who relies on tips for much of your pay, we like bar manager Jeff Morrison’s system of figuring out your income.
Morrison recommends tracking your income after tipping out other staff. Total your income for 10 weeks, then divide by 10 to get your average weekly income.
It’s not a perfect science, but it can help you figure out what to put on the “income” line in your budget. Tip-based workers can find more info on how to budget in this post.
If you’re a freelancer or one of the 33% of Americans involved in the gig economy, Todd recommends backing into the amount you need to live on by evaluating your monthly fixed expenses. Include line items like rent, utilities and debt payments, but don’t forget to work in a savings amount — Todd says it should be at least 10% of your gross income.
Self-employed budgeters can benefit by taking a step back each quarter to examine their income. “If you’re paying quarterly taxes anyway, you have this natural stopping point to look,” says Karabaic, who tries to increase her income by 10% each quarter. “It’s a good way to check on the health of your business.”
3. Irregular Expenses
What about expenses that don’t come on a regular monthly basis? We’re talking your twice-yearly car insurance. Your subscription to a pricy trade publication or professional association. That dental crown you know you should get replaced sooner rather than later.
First, tally up those annual or twice-yearly expenses. It can help to keep these in a separate list or spreadsheet than your actual budget, as the list may change as you keep or drop subscriptions, or remember additional expenses.
Then it’s a matter of adding up those expenses and dividing by 12 to find out how much they cost each month. “You might open a separate bank account for your annual expenses,” Todd suggests. “Then when the bills come, you don’t have to adjust your spending. It’s similar to saving for Christmas shopping” throughout the year, she says.
It can also help to earmark cash for expenses you know will crop up eventually. Karabaic calls hers “a wish farm: categories for things I want or feel like I should be saving for.” They’re not necessities or the highest priorities, but she says it takes the panic out of making those purchases.
“Cellphone replacements are a huge one. Glasses,” she says, adding the laptop she drowned with coffee to her personal list. If money’s tight this month, maybe you don’t contribute to the wish farm, Karabaic says. “But if you’re feeling flush, you can take care of future you.”
Once you start saving for irregular expenses, Rapley advises to plan ahead to anticipate them. “Set calendar reminders for two months before it’s due, then one month until it’s due, two weeks until due. Don’t let these expenses take you by surprise. A reminder on the day it’s due isn’t enough.”
4. So Many Due Dates
This one’s easy: If you have a hard time remembering which bill is due when — or those dates just don’t jibe with your cash-flow situation — you can ask to have them adjusted.
“If you’re a responsible credit user, [credit card companies are] very flexible, and you have some control,” Todd says. “It might mean you pay two bills in one month, a regular one and a small one,” while your billing cycle adjusts.
Utility companies are similarly flexible, and you can ask your internet and cellular providers, too.
“Don’t change your due date to the first” for anything, Rapley says. “You usually have a mortgage or rent due then, so space it out.” But she says that if you have the money for a bill ready before your due date, go ahead and pay it. “You don’t always have to wait until the payment date.”
Lisa Rowan is a senior writer and producer at The Penny Hoarder.
The Penny Hoarder Promise: We provide accurate, reliable information. Here’s why you can trust us and how we make money.