I know what you're thinking: "Budgeting?? Let me drop everything I'm doing and read about this riveting topic!!". In reality, budgeting has bad connotations of being boring, scary, and/or unnecessary. I'll give you boring (unless you love Excel formulas like me), but it doesn't have to be scary and it is definitely necessary! If you are a young professional wanting to do more with your money now that you have a real paycheck or wondering where your money goes every month, keep reading!
Upon graduating, my sister Maggie gave me Dave Ramsey's book The Total Money Makeover. Many of the principles and systems I use come from this book, although I've added my own twists. Read on for my view on the basics of budgeting for young professionals (and if you make it to the end, some good resources)!
Budgeting Basic #1- Budgeting is telling your money where to go
This is the main purpose of budgeting. Many people (including my past self) see a budget as restricting, but it is actually the opposite! When you tell your money what to do, you have the freedom to spend without guilt or worry. I used to feel guilty every time I bought a piece of clothing or went out to eat. Now that I set aside a certain amount each month to do these things, I don't have to worry about whether or not I have the money to do it. I've already made that decision ahead of time! Budgeting gives you complete control of what your money is doing. And that's a great feeling!
Budgeting Basic #2- The Envelope System
The envelope system requires that you use cash whenever possible to make purchases. The idea is that handing over cash makes a purchase more real than swiping a piece of plastic. I think this is generally true for most people. I know I always feel like I want to hoard my cash! I try to use this system for things like groceries, toiletries, clothing, and eating out. I also find it limits my spending in another way- if I don't have my envelope with me, I can't spend the money! I have to plan ahead if I want to eat out for lunch or buy some clothes from TJ Maxx on my way home from work. So at the beginning of the month, I take out whatever amount I've allotted for each category from the ATM and that's my limit. Once the cash is gone, I can no longer spend in that category. Using cash vs. credit cards certainly makes you more aware of where your money is actually going.
Budgeting Basic #3- Debt Snowball
Hopefully you don't have a lot of debt (which makes budgeting a heck of a lot easier)! Personally, I have quite a bit of student loan debt that I'm working aggressively to pay off. The idea of the debt snowball is that you pay the minimum amount on all of your debts each month, except the smallest one. You put as much extra as you possibly can towards that debt until it's paid off. Then you take the minimum payment you were putting toward that debt (plus whatever else you're able to muster), and put it toward the next smallest debt you have. You can imagine that after awhile, the amount you are able to pay snowballs, so you can pay off your debt faster and faster!
Budgeting Basic #4- Making time to budget
The difficult part about budgeting is that it takes time. It takes time to research and it takes time to carry it out. I try to sit down once a week to record every payment and purchase I make. Not everyone will want to do that, but I find it useful to see where each cent is going to make adjustments for future budgets. At the very least, you should sit down at the end of every month to balance your budget and plan the next month out. I love going into a month knowing exactly where my money will go and budgeting every month helps me to be flexible. For example, one month I may know that I'll be going out to eat more if a friend or family member is in town, so I can allocate more money to my eating out budget. Or I might need a new winter jacket before the weather turns colder, so I'll add more to my clothing budget for the month. As long as I take money out of another category, I have the freedom of flexibility. I've been using Google Sheets to track my budget, but just started using EveryDollar (link below) and I love it so far!
I'd love to know your strategies, tips, and systems for budgeting! Leave a comment and let me know if you budget or not, and if so, how you do it. Or feel free to leave any questions you have for me on how I budget!
The Total Money Makeover by Dave Ramsey
Love Your Life, Not Theirs by Rachel Cruze
www.everydollar.com for tracking your budget