Oftentimes, the most difficult thing about saving money is getting started. This is because budgeting has gotten a bad reputation. Many people view it almost as a straitjacket – a way of cutting out all the fun in your life.
In reality, budgeting doesn’t restrict your freedom. It gives you freedom. A budget is simply a plan for your money. Instead of going through every paycheck with just a vague idea of where it goes, you gain an understanding of your spending habits, and you can allocate the money you worked so hard for toward something you genuinely about. It’s an essential part of taking control of your life.
If you’re reading this article and trying to learn how to budget, it probably means that you spend too much money somewhere, but you’re not quite sure where. Whether you want to get out of debt, achieve long-term saving goals or simply develop healthier spending habits, you will see our tips will help you get a hold of your finances without making you feel constrained.
Track Your Spending
The first step in learning how to save money is figuring out where it all goes. For the next couple of months, all you have to do is track your spending. This includes rent, utilities and any debt you may have, but also any other expenses. Write down how much you spend on groceries, gas and going out. Even if you go to the store to buy yourself a cup of coffee and a granola bar, write it down.
A dollar here and there adds up, and you’ll be surprised how expensive these small purchases can get in the long-term.
To track your spending, you can either use a traditional notepad and pen or your smartphone. There are a ton of free apps out there that were created specifically for this purpose.
Once the two months are over, you can divide your expenses into categories and draw conclusions.
Identify Areas Where You Can Reduce Your Spending
At this point, you should have a clear idea of your spending habits, so you can look for areas where you and save some money. You can start by cancelling subscriptions you’re not using. We all have at least a couple of those. They renew automatically, so we simply forget about them. Still, even if it’s $10 or $20 per month, in a year, it will be $120 or $240. Why spend that money on something you don’t use?
Next, you’ll want to divide your expenses into needs and wants. Needs means rent, mortgage, debt repayment, utilities, groceries and medical bills. You can reduce some of your spending here as well. For example, if you have credit card debt, you can refinance it by taking out an installment loan with a lower interest rate. For your utilities, you can call your providers and renegotiate, or you can do some research and find better offers.
When it comes to groceries, you could look for special offers, buy some of them at cheaper stores and create a meal plan so you’ll spend more efficiently. If you think you tend to overspend on groceries, you’re either buying more food than you need and you end up throwing it away, you’re buying products from expensive stores, or you tend to give in to impulses and fill your cart with things you never intended to buy.
Wants means everything else. Whatever you spend just for fun is not a need, but it’s important to remember that you do need to make room for fun or recreation, or you’re going to become allergic to budgeting. You may be able to restrict your expenses down to the bare minimum for a few months if it’s really necessary, but this will most likely make you unhappy, so it’s not sustainable. Instead, you could follow the 50/30/20 rule – you spend 50% of your income on needs, 30% on wants, and save 20%.
Set Savings Goal
To keep yourself motivated throughout this process, you will need to set some goals. You’ll notice that saying you want to save money or develop healthy financial habits is too vague, and it won’t do much to help you through this transition. In the beginning, we recommend you set a short term goal. It could be something like buying a new phone, a new TV or a new laptop – something that doesn’t take that long.
Most likely, it will only take you a few months to save enough money for it, but that will be enough to get used to this lifestyle and get better at tracking your spending and resisting impulse purchases. As it gets easier, you can set slightly longer goals like saving for a vacation or a down payment on a car.
At this stage, you can move on to creating an emergency fund, saving money for a down payment on a home, college tuition for your kids and retirement. Rome wasn’t built in a day. Getting used to budgeting may take a few months or even a couple of years, but you’ll have the rest of your life to benefit from the skills you’re learning now.
Stop Comparing Yourself to Others
Many of us have trouble sticking to a budget because we compare ourselves to others. If your neighbour has an expensive car, you feel the need to get one because you don’t want them to think you’re poor. If one of your co-workers came back from an exotic vacation now, you want to plan one so, again, your co-workers won’t think you’re poor.
That’s how many of us get into debt. We spend money we don’t have to keep up with other people that might also be spending money they don’t have. Ultimately you don’t know if your neighbour or co-worker can actually afford these things or they’re in debt. You don’t know their financial situation. You only know what they tell you.
Remember that this is your life and you’ve earned this money so when you want to spend it, give yourself some time to decide if you really want these things or if it’s just a question of image. Your money should go on what truly matters to you and your family.