Tips for Maintaining a Spending Budget

A Joyful Way to Look at Budgeting

MANISHA THAKOR: For most people the “B-Word” (budgeting) conjures up feelings of deprivation and self-denial. As such, when it comes to deciding how to allocate your hard-earned cash, I far prefer a concept I call “joy-based spending” to traditional budgeting.

Here’s how it works. Instead of telling yourself all the things you shouldn’t spend money on, you focus on maximizing the amount of joy you get out of each dollar you do spend. Rather than allowing spending restraints to drain your will power and sap your serenity, you focus on deliberately increasing your happiness through targeted, deliberate spending.

To try this approach, commit to jotting down everything on which you spend money during a set period (a week, two weeks, a month). At the end of that period, pull out a highlighter and mark any spending that brought you extreme, authentic joy. Now take a look at what’s left over. That’s where you can start cutting back on your spending, without eliminating any joy from your life.

You may find you are paying for a mortgage on a house you hate to clean or that now feels too big. Perhaps you discover charges for an expensive dinner with people who you don’t even like to be around. I’ve yet to meet anyone who, after completing this exercise, couldn’t find at least one thing to cut back on.

A related tool involves some simple math. Take your annual after-tax income and divide it by 2,000 hours (which supposes you work 40 hours a week for 50 weeks a year). Say your after-tax household take-home income is $80,000 a year. That means your “hourly” wage is $40. Now, if you see a $400 item you absolutely have to have, you now know that’s the equivalent of 10 hours of work. Is it really worth it? Will it make you that happy?

Maybe yes, and maybe no. But now you have a highly personal yardstick—your precious time and energy—against which to measure that purchase. For more about this concept, read the classic book by Joe Dominguez and Vicki Robin, “Your Money or Your Life.”

Last but not least, I recommend combining this mind-set of joy-based spending with a concept I first came across in Sen. Elizabeth Warren’s book, “All Your Worth,” which she wrote with her daughter, Amelia. Called a balanced-spending formula, this rule of thumb says to target 50% of your take-home pay to needs, 30% to wants and 20% to savings. The point of this guideline is to illustrate that your “income pie” can only ever equal 100. Should you choose to spend more in one area, there is by definition less to spend elsewhere.

As a bonus, I’ve observed that people who have a very clear understanding of their household cash flows—by which I mean knowledge of what exactly is coming in and what is going out—often achieve greater levels of financial calm and confidence.

Increasingly, I’m coming to believe that knowing your financial inflows and outflows may be one of the most powerful relievers of financial stress. Across a wide range of income spectrums, I’ve encountered individuals who have no idea what they are really spending and who report that being mindful, conscious and deliberate about changing that behavior has made them feel much more in control of their financial lives.

Bottom line, using the 50/30/20 rule in conjunction with a mindset of joy-based spending can put a positive twist on the “B-word,” resulting in increased happiness and reduced long-term financial stress.

Manisha Thakor ( @ManishaThakor ) is director of wealth strategies for women at Buckingham and The BAM Alliance , a community of independent registered investment advisers.

You’re Never Too Rich for a Budget

STACY FRANCIS: You may be earning $1 million year, but if you’re also spending $1 million a year, you’re still broke. Establishing and maintaining a household budget to ensure that spending remains under control and money is being set aside for savings is critical to accumulating wealth. Astonishingly, according to a 2013 Gallup poll, only 32% of Americans maintain a budget.

Below are some basic guidelines to creating and sticking to a budget.

Getting started: When sitting down to write a budget, keep it simple. Try to only list a handful of spending categories. Things like rent or mortgage, utilities, savings, food and commuting expenses. Anything left over falls into the “other” category, which you can spend as you please. Focusing on only a handful of categories isn’t as onerous as drilling down into each expenditure and you’ll be more likely to stick with it.

How much should you be setting aside into savings? A good rule of thumb is 20% to 30% of your pretax income. Naturally, it may take time to build up to this, especially if student loans or credit-card debt are still in the picture. If this is the case, earmark those funds for long-term savings once those debts are paid. After all, you’re already accustomed to living without that money.

Maintenance: Once you’ve created a budget, make it effortless by putting some basic tools in place. First, automate as much as possible, especially your monthly contributions to savings. To ensure that you aren’t tempted to transfer money back into your checking account, open a savings account at a separate institution. You’ll still be able to automate transfers to the account, but the two- to three-day transfer period will make you think twice before transferring funds from your savings back to your checking.

Statistics show that those who monitor their budget on a regular basis are significantly more likely to stick with it than those who don’t. Easily monitor your budget by downloading a money-tracking app like Mint, Spendee, or Mvelopes to your phone or computer. With numerous fantastic apps out there, you are certain to find one that works for you.

If you are targeting a particular goal (say, getting out of consumer credit-card debt), let your friends and family know your progress. Money has a bad reputation as a taboo topic, but everyone faces many of the same challenges with money. You may be surprised by just how supportive your friends and family are of your goals, and you may even inspire them in the process.

Beware of lifestyle inflation. Finally, don’t let celebrities, glossy magazines and television fool you; most self-made millionaires don’t look like millionaires. Their secret: Living below their means. Take advantage of job promotions and raises to increase your rate of savings. Each time you receive a raise, allocate at least half to savings. You’ll still see a bump in your checking account, and you’ll ensure that increases in lifestyle don’t outpace your nest egg.

One of the tenets of building wealth is living below your means, and the most painless way to do this is by keeping your lifestyle in check.

Stacy Francis is president and CEO of Francis Financial, a fee-only boutique wealth management and financial planning firm.

Why Most Budgets Fail

ELEANOR BLAYNEY: For many people, budgeting belongs in the same category as dieting. Or in the same trash heap. Both make for noble New Year’s resolutions, but few survive beyond February. Once broken by overspending or overeating, it’s hard to get back on track.

So why do budgets go wrong, and how can you make them work as an effective tool of personal financial management?

Generally speaking, budgets fail when there are persistent and large variances between the dollars budgeted for a given category of expense and the dollars actually spent. Less technically, budgets don’t work if they fail to reflect and to direct financial behavior.

Here are some major mistakes that people frequently make when creating a budget:

Failure to observe first, project afterwards. It’s impossible to create a budget without knowing what your expenses have been. Budget makers should go back over several months’ worth of bank records and credit-card statements to get a clear sense of where their money has gone over that period. Most people know what their fixed expenses are—their mortgage payment or car loan—but when it comes to variable or discretionary items such as food or clothing, they are often surprised by the historical numbers. Those numbers should provide a reality check for the budgeted allowance. If you budget $300 on clothes each month, when, in fact, your clothing bills have been running closer to $1,000, something has to give, and likely it will be the budget. A more realistic, but still aspirational amount, such as $600, could make a big difference to your motivation to stick with the budget.

Failure to incorporate “lumpy” expenses into the monthly register. Not all expenses occur with the same frequency as your monthly utility bills. These might include semi-annual insurance premiums, renewals of annual contracts, or an April tax liability. When it’s time to pay these bills, without extra funds on hand, you may find yourself reaching for the credit card or “borrowing” money from other important spending categories. The answer is to include in your monthly budget a prorated “set aside” for the lumpy expense and transfer that amount into a separate savings account.

Failure to incorporate “allowances” into your budget. Businesses use allowance accounts in their accounting process to more accurately reflect the costs of doing business and their profit margins. Consumers need to do the same. If you own a house, for example, it makes sense to include a depreciation allowance that will cover the necessary, but often irregular expenditures for repair and maintenance. Again these allowances should actually be funded by setting the money aside for the eventual expenditure. One of the most important allowances to include in the budget is the “financial goals allowance”—the amount you have determined is needed to get you to the goals you have specified, such as retiring or paying for college.

Assuming cash is a “petty expense.” Have you ever taken cash from the ATM, and a week later, have no idea how the cash was spent? Cash can create a real hemorrhage in your budget, unless you start tracking carefully how and where it is spent. Knowing where it goes, and where it fits into your budget categories, is the first step toward taking control—which after all is what budgeting is all about.

Viewing your budget as a form of deprivation, rather than a tool for empowerment. Putting yourself on a budget is often seen as punishment for bad behavior. It’s only people who overspend, or live up to the limits of their credit cards, who need budgets, not Oprah or Mark Zuckerberg. The reality, however, is that the smartest and wealthiest people live by budgets, which is probably how they got to where they are in the first place.

Eleanor Blayney ( @EleanorBlayney ) is consumer advocate of the Certified Financial Planner Board of Standards.

How to Get Your Spending on Track

GREG MCBRIDE: Whether you call it a ‘budget’ or a ‘spending plan,’ starting and maintaining this habit serves several fundamental financial purposes. It sets boundaries around your spending, calibrates your spending to the income you’re actually bringing in, holds you accountable for how much is spent and how it is spent, and serves as a roadmap to maximizing savings.

Start by establishing a realistic monthly budget. How? Track your spending for a couple of months, revisiting the plan and making revisions as needed. Importantly, plan for worst-case expenses—such as setting your utilities budget by the costliest month of the year, be it the heat of summer or the dead of winter—and unanticipated expenses, like car maintenance and repairs. Don’t forget to budget for the expenses that aren’t incurred on a regular monthly schedule, such as insurance premiums.

Establishing a budget that isn’t grounded in reality isn’t useful. Make sure you have at least the total amount of your budgeted monthly expenses directly deposited from your paycheck into your account each month, and direct-deposit any difference into a savings account.

Track your spending against this budget each month. This is how you hold yourself accountable to your spending plan—seeing where you may have gone overboard, where you’ve been disciplined about your spending, and those areas where unplanned expenses threw you off course. At month-end tally up the total amount spent versus the amount you’d budgeted. If you came in under budget, you give yourself a second bite at the savings apple by then transferring this surplus into your savings account.

As you track your spending patterns on an ongoing basis, look for opportunities where expenses can be trimmed in an effort to further boost savings. For example, brown-bagging lunch a couple extra times per week could free up another $25 or more per paycheck that you can now route directly into savings.

The core tenets of financial success are to pay yourself first and to live within your means. An accurate budget and a disciplined routine of tracking your spending against it, accomplishes both and puts you on the pathway to financial security.

Greg McBride ( @BankrateGreg ) is senior vice president and chief financial analyst for Bankrate.com, providing analysis and advice on personal finance.

Why Budgets Are Like Diets

CHARLES ROTBLUT: Budgets are much like diets: They fail if they are too strict. Setting aside 20% or more of your paycheck, limiting how much you eat out, and only rarely going to Starbucks are all good goals, but they also can be completely unrealistic. A budget—no matter how well thought out—is worthless if you cannot stick to it.

So how do you develop a good budget?

The first step is to simply track your spending. A software program like Quicken (which I use) or an online service like Mint.com can make it easy to do this. There are also various apps for smartphones as well. Once you’ve tracked your spending for a month or two, you can analyze your patterns to determine where it’s easy to cut back and where it’s not.

Then sit down and think about your goals. What are you trying to do with your money? Save for retirement? Have the ability to travel abroad? Pay for your children’s education? Buy a new car? Understanding what they are will help you make better decisions about how your budget should look like.

Then seek to make gradual changes. Pick one thing each week you can target to reduce your spending. Perhaps it’s cutting back on cable-TV expenses, or maybe it’s bringing lunch to work a few times each week. Whatever the change is, start with one step and then move forward from there. It’s much easier to make gradual changes than it is to drastically change your behaviors at once.

Finally, build in automation and flexibility where you can. The more money you can have deposited directly from your paycheck to a 401(k) plan or a savings account, the more you will set aside. At the same time, realize that emergencies and unpredictable events will occur. You should also realize that at times you may simply want to splurge on yourself. So long as you as you are able to stay mindful of how you spend and be disciplined with the vast majority of your decisions, you will make progress toward your financial goals.

Charles Rotblut ( @charlesrotblut ) is a vice president with the American Association of Individual Investors.

Investing Is Easy. Saving, Not So Much

GUS SAUTER: There are thousands of books written to educate investors how to invest. In reality, once you determine your appropriate asset allocation between stocks, bonds and cash, investing can be quite easy. Simply execute your allocation by investing in index funds and you will have an efficient portfolio. Or, invest in a balanced fund that has an allocation aligned with your desired one.

Far more important than investing is establishing a budget and saving. After all, if you don’t save, you certainly don’t have to worry about investing.

Unfortunately, for most people saving is also very difficult. We all have urges to purchase things that we don’t really need. I was in an airport restaurant a couple of weeks ago and I overheard a young woman telling her friend that she had recently gone to Las Vegas. She was complaining that her tax refund came the day after she left and she could have had more fun if she had that money to spend.

The reality is that she still went on the trip and presumably had fun. We can always have a little more fun by spending more, but we must realize that every dollar spent today is some multiple of that dollar that we won’t have to spend in the future. Assuming an investment return of 7% and inflation of 3%, that $1 would be able to buy $3.14, in today’s dollars, 30 years from now.

Ironically, as the woman was leaving the restaurant I noticed that she paid with a credit card. According to The Motley Fool, the reason that people blow their budget is because of credit cards. Research shows that people are more willing to spend if they use a credit card.

As important as saving is, it’s equally important to start saving at an early age. Everyone is familiar with the magic of compounding. A simple example is a person who saves $5,000 per year for 20 years starting at age 21 and stopping at age 40. Assuming a 7% return, she will have $793,000 when she turns 60. Another person who starts saving $15,000 at age 41 for 20 years will have $615,000 when he turns 60.

In some ways it may be easier to establish a budget and start saving when you get your first job. You’ve gone from having no income to drawing a paycheck. The first item in your budget should be savings—as the saying goes, pay yourself first. Then figure out how you can meet your spending needs. It’s not easy. It involves tradeoffs and sacrifices, but it works. I have a friend who never made more than $40,000 but through disciplined saving and investing he is now worth more than $4 million and enjoying his 80s.

If you’re already working and not saving, it’s going to be more difficult because you’ve already established a lifestyle and it’s difficult to cut back. One way to get started is to save your raises. When I first started working at Vanguard Group, I used my raises for several years to get up to the full 401(k) contribution.

Many people have a strong urge to live for today with the idea that tomorrow will take care of itself. That’s not a good strategy. It’s important to budget and save. The sooner, the better.

George U. “Gus” Sauter is a senior consultant to Vanguard Group Inc. From 2003 through 2012, Mr. Sauter served as Vanguard’s chief investment officer.

How to Start Keeping Tabs on Your Money

MICHELLE PERRY HIGGINS: It may sound trite, but the hardest thing about starting a spending budget is…starting! To help get you motivated, consider that a spending budget shows you are financially conscious, like being politically or environmentally conscious. And being conscious is cool and sexy!

Once you have started and gotten a system down, the actual maintenance of the budget becomes much easier. But where to start?

1. Decide what tracking method you want to use for your expenses. These can be an online program like Mint, an Excel spreadsheet or an app. You may also want to carry a small notebook to make sure you write down and capture cash expenses as soon as you spend the money.

2. Track all expenses for at least one month. Be as detailed as you can and try to make sure you include everything.

3. Create categories that make sense to you given your personal situation. Don’t forget to include expenses that are paid less frequently than monthly, such as property taxes if you own a home.

4. Create a spending budget for each category. The category spending should be based on the data you have collected, while at the same time it should be forward looking. It is something that you want to be able to adhere to in the future.

Maintaining the spending budget can be challenging. We all get the feeling that we are being too constrained over time and occasionally we rebel and fall off the bandwagon. This is to be expected and should be taken in stride. The important thing is to get back on track as soon as possible. One tactic that can be used to ameliorate this problem is to have a category labeled “Fun” that you can use for whatever you want without feeling guilty. However, you need to resist the temptation to make it too big!

Michelle Perry Higgins ( @RetirementMPH ) is a financial planner and principal at California Financial Advisors.

How to be the CEO of Your Family’s Finances

TED JENKIN : One of the most important tasks you have as CEO of your family finances is to build out your own personal profit and loss statement. Without a concrete budget for your family, more often than not your cash will end up in black holes that you won’t be able to account for month to month.

Here are five tips to creating a household budget to help you maximize the revenue your family brings in each year.

1. Calculate your family revenue. This include not just your salary, but also any overtime pay, bonuses, raises, commissions, stock options, etc.

2. Build a strategy to minimize income taxes. The more money you are able to keep, the more you have to reach your financial dreams and goals.

3. Pay yourself first. This one is very important since you are really an employee in your company. This means you need to know how much to put away for retirement, children’s college education, down payment for a new home, etc. The number might be $500 a month or 12%, but it will really depend on the goals of the family. If we are looking for rules of thumb, start at 10% and work your way to 20%. Eventually, you won’t miss what you don’t have.

4. Assess your discretionary expenses. This is truly the black hole for most families, largely due to credit and debit cards because families don’t see the money coming out of their wallets. You can change your fixed expenses, but it is the eating out, the travel, and the loose expenditures that soak up cash flow.

5. Look at your debt structure. You may have mortgage, credit-card, car or student-loan debt that is chewing away at your family profit. Examine the interest rates on your debt. Also, see if it’s worth refinancing your non-tax-deductible debt into debt that is tax deductible.

Ted Jenkin ( @tedjenkin ) is the co-CEO and founder of oXYGen Financial , a financial advisory firm focused on the X & Y generations. He also blogs at yoursmartmoneymoves.com .

Two Concepts to Healthy Spending

FRANK HOLMES: As human beings, how hard is it for us to separate our needs from our wants? For those to whom this concept comes naturally, the path to creating and maintaining a healthy spending budget is clear. Of course this notion is easier said than done in many cases, but by addressing and assessing the difference between the two, we all have the capability to be more responsible spenders and savers.

The concept is simple. A need is anything that is necessary to survive in the society we live in: food, clothing, housing, health care and often times a mode of transportation to make it to and from work. A want is anything that is not necessary to survive: designer clothing, a sports car, lavish vacations and night out. When we understand the difference and apply this in our everyday spending, we become mindful and disciplined when faced with tempting purchases; we are able live within our means and more easily stay within our budget. Always ask: Is this something I need to buy? Is this something I want to buy? Can I afford this right now? How will this affect my savings?

Another way to maintain a healthy spending budget is to take advantage of a dollar-cost averaging program. By regularly purchasing a fixed dollar amount of a specific investment, and setting the payments up automatically, what may seem like a small monthly withdrawal from your account, can quickly grow into a meaningful amount. Utilizing this kind of program aside from other monetary obligations provides the opportunity for even an inexperienced investor to watch their money go to work. We all need to save for our future goals, and seeing the results of our investing efforts is a great way to encourage investors to keep separating the needs from the wants.

Frank Holmes is chief executive and chief investment officer of U.S. Global Investors Inc.