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While keeping track of your finances is essentially a record of your previous expenses, the budget implies the planning of your future expenses and…
While keeping track of your finances is essentially a record of your previous expenses, the budget implies the planning of your future expenses and the allocation of funds for their payment in advance. In short, it is not a tool to see where your money went but the plan on how you are going to spend it. Moreover, there is no need to think that it means living in a complete deprivation and giving up all the fun stuff. On the contrary, the budget always provides for money for the desired purchases but allows controlling them and making them more reasonable.
To build a budget, it is necessary to track your expenditures for some weeks first before coming up with any plans. It will help you to learn the reality of your current spending habits. In fact, you might find that such expenses like subscriptions, food deliveries, small purchases, etc., turn out to be much bigger than you could expect. This part of budgeting seems to be very tedious and time-consuming but skipping it means creating the budget based on the guesses, which leads to failure in most cases.
The 50/30/20 approach implies that the post-tax income is divided into two parts, half of which is spent on the needs (rent, utilities, grocery), 30% are used for satisfying the wants (entertainment, eating out) and 20% go for savings and payments of debt (beyond the minimum payment). It is just an idea that can serve as the basis for creating a budget but not an exact formula that you should use strictly. The proportions should be adjusted according to the specific circumstances of each case.
Using the real data, which were collected in the course of tracking, it is possible to determine the place of your current expenditures in the frame of this framework without making any guesses. If one of the parts of the budget is disproportionately big, e.g. "wants", it is a helpful information that should be taken into account during the creation of a budget. The budget based on the real data is much more likely to work than the one created according to someone else's template.
In addition to making a budget, many financial experts suggest creating a small emergency fund first, which can be used for covering the unexpected expenses, such as a medical treatment or car repair, etc. In case you do not have such a fund, the unplanned costs are added to the credit card balance which undoes your budgeting results. Even a small fund may significantly reduce the consequences of the unexpected costs.
Another source of the problems while budgeting are costs that are not incurred on a monthly basis, like car insurance, holidays costs, annual subscription, etc. Such costs can easily break a seemingly perfect budget as they come unexpectedly in one moment. In order to solve this problem, it is necessary to create a "sinking fund" for these irregular costs, setting aside a certain sum from the monthly budget for that purpose. In order to make the calculations of such costs, it is better to look at the history of your previous expenses rather than try to guess.
Budgeting works only when you consistently use this tool. Therefore, the simpler tool that you are able to keep using consistently is better than a more complicated one which you give up after two weeks. Spreadsheet, app, or even notebook may be used for budgeting; the right choice depends only on your personal preferences. It is better to start from a simple tool and increase its complexity later when the habit will be formed.
Overspending in a category at some point is quite a normal thing that does not mean that the budget failed or it is time to give up budgeting. On the contrary, the analysis of this situation allows getting the information about the discrepancy between the budget and reality and adjust the budget accordingly. It is much easier to deal with an overspending in a category than with a budget, which breaks in one moment due to inconsistency.
It is necessary to understand that a budget is not a tool that is created once and forever but a plan that requires revisions regularly. These revisions should be held at least once a month and they imply the analysis of the current financial situation and the adjustment of categories if necessary. People who manage to use budgeting tool regularly treat them as a maintenance that should be done regularly, not as a troublesome activity.