I'm going to write about the "B" word today. No, not that "B" word -- I'm talking about budgeting.
The word alone can give people fits. You might feel you don't need to budget because you already know where you're money's going (you don't). You may simply be afraid to find out where all your money goes (you shouldn't be). Or maybe you simply don't love calculating household expenses as much as I do. As Phil Knight might say, just do it!
The problem many people have with budgeting is that they do things backwards. They try to predict how much money they'll spend on certain things before they actually spend it. Then they're dismayed when their actual spending doesn't line up with their expectations.
If you flip the script -- that is, track expenses first and then set a budget -- it will be easier to identify your priorities, adjust your behavior as needed, and set a budget you can stick to. As an added bonus, the government might even pay you to track your spending!
The first step to making a budget
Before you can set a monthly budget for your expenses, you have to know how you spend your money. The only way to do this is by tracking everything.
When I say everything, I mean literally everything. Anytime cash leaves your pocket, someone swipes your credit card, or you autopay your utility bill, make a note of it, and get a receipt if you can. It doesn't matter how big or small -- that $2 coffee, that $80 grocery bill, that $1 you gave to a homeless man, that $120 insurance payment, that $0.46 tip you gave the barista -- track them all.
Some of the most important expenses to track are the irregular purchases. Most people don't budget for one-off expenses like car repairs, birthday presents, and special treats you buy for yourself. Tracking those kinds of expenses, even for just a few months, can make you more aware of how these one-time expenses add up and ought to fit into your budget.
Manually tracking beats automation
I love automating things, but nothing beats manual entry when it comes to tracking expenses. The goal, after all, is to see exactly where your money goes. Automation, by its nature, ensures you don't have to think about it. Manually tracking things forces you to be more aware of your spending.
The method you use doesn't matter. You can carry around a small notebook, make an Excel spreadsheet, use a mobile app, or anything else you want. The important part is that you spend some time regularly inputting your expenses.
Personally, I set up a simple spreadsheet with a few columns: Date, Amount Spent, Sales Tax (more on this later), Category, and Subcategory (for getting more specific). For example, my mortgage expense on the first of the month totals $1,145.80 and goes in the Home category and the Mortgage subcategory. (Even though I pay it automatically out of my bank account, I still record it.)
I'm able to use Google Sheets' SUMIF function to quickly add up the values of each category for me, so I don't have to do it at the end of the month. But adding up expenses in each category manually can be useful, as it could even make you more aware of your spending.
For those of you who worry that it takes too much time to track spending manually, it takes about a minute for me to update my spreadsheet at the end of every day. It's not necessarily the most enjoyable minute of the day, but it's certainly worth the time. There's a loophole, too: You don't have to track anything if you don't spend anything!
Evaluate your spending
Once you're fully aware of how you're spending your money, you can evaluate whether things need to change, or if you're happy with how things are going.
Some cost-cutting opportunities will be obvious. If you spent $200 at bars last month, but you don't particularly enjoy drinking, then suggest other activities to your friends. If you're spending $50 a month on produce that ends up in the trash, then it's time to cut back or get cooking, because otherwise that money might as well go in the trash, too.
Some may not be as obvious. Personally, I've challenged myself to lower my utility bills. Even with a warm November in the Midwest, the utilities bills I paid in December (for my November usage) were somewhat higher than the year before. I wouldn't have noticed had I not been tracking my spending.
You may want to completely cut some costs -- or at least cut back on them. I used to spend about $25 on coffee from various cafes near my house every month, which is a lot for me. Now, I spend about $10 and make more coffee at home.
At the same time, you may want to spend more on things you say you value but don't spend much money on. That $15 I save on coffee every month could be better used toward dinner with my girlfriend. This is the payoff of tracking your expenses. You can create a budget you'll actually stick to without guilt.
Get paid to track your expenses
Remember when I told you to always get a receipt if you can? That'll come in handy come tax time.
The IRS gives you an option to deduct the larger of your state income tax or your cumulative sales tax. It even provides a calculator to estimate how much you paid in sales tax for the year based on your adjusted gross income, which is perfectly acceptable to use on your return, but you may find that you actually spent more than the IRS estimates.
While the extra savings will depend on your individual tax bracket and how much sales tax you paid, it can provide a nice boost to your tax refund -- especially if you live in a state with no income tax.
I keep track of my receipts with an app called Evernote, which quickly scans them and removes all the background noise. I also make a note of any sales tax paid in my spending tracker spreadsheet and add it all up at the end of each month.
So the next time you think tracking all of your spending isn't worth the time, remember that the government might pay you to do it! Not to mention the benefits of being more aware of where your money's going.