How to make better budget decisions
When was the last time you made budget decisions? Changing your budget is important. A good budget makes a difference between financial success and crisis. This isn't just making sure your extra money is moved into the right investment vehicles. This could also be dealing with a loss of income or other financial setbacks.
How We Budget
We look at our budget all the time however we don't make a monthly budget in the sense of planning what we are going to spend month to month. We take the whole year and determine how much money we want to allocate to each category and then as expenses come up we spend as needed. For example in the winter when we know we are going to entertain more and have more people over for visits we don't increase our budget to accommodate that. I'm not sure why we don't but it's something we don't do. I get doing it and it makes sense but it's just not the way we work our budget. Our budget amounts stay fixed until there is a reason to change then.
We do practice zero dollar budgeting. This means that we assign every dollar that we make. It takes time to go through this to make sure we are happy with where we are putting the money. We also take this time to make sure our budget makes sense with our priorities and future projected spending. Budget decisions are taken very seriously in the Couple of Sense household.
However those two traits combined together mean that we don't change our budget very often. Our budget stays the same until we have more money or less money and we don't have extra money hanging around to be allocated. There have been changes in the last 6 months that have caused us to re-look at our budget a lot so recently we have been doing more budget changes than we do in a normal year.
Why Would You Need to Make a Change
Sometimes you need to make changes when you have more money coming into your household. This could be a raise or bonus or side income coming in. I would caution against budgeting a monthly expense unless you know for sure the money is going to come in regularly. As a practice we don't plan our budget around bonuses or money that's not in hand. If it gets to our hands we then figure out where to spend it; usually mortgage or retirement.
You would also have to make a change if you are going to lose some income. Scott mentioned that we had to deal with a reduction in our yearly income. We lost about 25% of what we brought in a year. That was a significant change to our lifestyle and budget and we had to cut back to keep the things that we wanted to keep in our budget. It was a lot of things like, out with the cable but keep Netflix. We had to make some decisions but we were not choosing between food and rent. We are very lucky to not have to make tough decisions like that.
Where Should you Increase or Decrease?
This lines up to what your priorities are. Where do you want to spend your money? Depending on what type of drop or increase you are looking at it might be small changes to certain categories or big slashes/increases.
While it's important to focus on the future and saving I would not recommend focusing only on the future while sacrificing today. Maintaining a balance between the two is important. And even if it's a 90/10 split it's important to take some of that money to have today while put the majority aside for future goals. If you are cutting instead of increasing I would flip that and cut 80-90% of today's money in an effort to protect future savings. When you are losing money it's important as much as possible to keep the future together to not derail your long term plans if you can handle some cuts to the current earnings.
Making The Most Of The Money You Have
Once you have made the changes to your budget make every effort to maximize your money. This is especially important when you increase your budget and often happens by default when you are taking money out of your budget. When we get more money we tend to be a little looser with how we spend. If things were tight for a while and you get a huge raise or influx of money it makes sense. But making sure that extra spending is kept between some guardrails is important. Lifestyle inflation is real and that extra money you were living without will quickly not be enough and then you will feel that you are tight again and need more to feel comfortable. The cycle will continue and likely won't end.
There are some categories that are easier than others to stretch a dollar. Meal planning is a great way to extend the money in your grocery fund. Planning out what you are going to spend instead of hitting up the store every day or getting takeout is a helpful way to make the most out of your spending. Categories like clothes or entertainment are also easy as well. Get creative with what you spend and try to think about ways to make your money stretch with free or low cost alternatives. Be a smarter shopper where you can.
Thrown a Curve
As a best practice I would encourage you to have a curveball account. Not an emergency fund, which I believe should be for the big 3, death, disability and job loss, but a little floater account with some extra money to help. You should have an emergency fund as well, I hope you do, but even a couple of bucks might help tide you over should you need to make some quick changes to your budget but you have already spent the money. Another thought would be making a bare-bones budget. This is your worst case scenario budget. Things you can't cut out and keep you whole. It's not a fancy budget and will likely not have any retirement contributions or savings but still have rent/mortgage and other absolutely necessary expenses.
Changes Will Happen
It is unlikely you will have the same amount of income coming in every month for the rest of your life so at some point you will have to change your budget. Knowing where you can increase or decrease your budget makes you more flexible when things come up. It's important to keep a mix of future and current needs and don't sacrifice one completely for the other. Balance is important and especially when you need to reduce your spending keeping some of the little luxuries in your budget can make some of the big sacrifices easier to handle.
The most important thing to remember is that you are in control over your budget. You get to call the shots and make the decisions. It's not always going to be fun especially if you have to make cuts but when you make cuts that will help you hone in on your priorities and make you re-think spending money you would have spent if you had it. Your budget will help you map out the life you want and changing it as your situation changes makes it easy to keep on the path even if you have to take some detours on your journey.
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