Financial Poise

Money Basics Series #2: Painless Budgeting

Let’s assume you’ve already read Installment #1 of the Money Basics Series. You checked your credit score and chose your bank. Now you can better identify areas where you need to improve your finances and avenues for saving and depositing money. 

You need a system of budgeting. It’s time for the next crucial financial planning steps: tracking expenses and savings with a simple system of budgeting that only requires some paper, a pen, and maybe a helpful app.

Budgeting Tools Worth Considering

My method for success starts with your money journal – a notebook dedicated to your money. It can be a spiral notebook. Nothing fancy or expensive. A private journal, it provides insights that otherwise might fly under your radar.

Where does your money go? How many expenditures qualify as planned or predictable? When do you most frequently spend impulsively? Do you often overspend in a specific category?

Every time you write in your journal, note the date. This helps you identify patterns, but it also shows far you have come once you start taking proactive budgeting steps.

Technology-Assisted Budget Visibility

People often rely on web or phone banking applications to track their expenditures. While these may detail many of your purchases, they are not always easy to parse due to naming conventions or app construction. They also do not directly track cash purposes.

Other apps and services enable you to track where your money goes more carefully and productively. A few of the best expense tracker apps include:

  • Mint
  • YNAB
  • GoodBudget
  • Personal Capital
  • Quickbooks
  • Simplify
  • Expensify

Which app best suits your needs depends on where you’re at and where you’re trying to go. The tool selected matters less than using something to get a more granular perspective on your spending.

Designing a Winning System of Budgeting

You may find getting down to budgeting brass tacks in the first month difficult or even awkward. Do not let that deter you from continuing on your path. I am a firm advocate of baby steps. Just take action, don’t wait until next month, tomorrow, or Monday. Just do it. Do it today.

If you don’t know where to start, try this three-week challenge.

Week One

Jot down your financial goals and your current financial standing. Don’t judge yourself too hard. You are, after all, taking the most important steps to financial security.

Remember your credit score from Installment #1? Write that down. In many cases, improving your credit score opens the door to other financial wellness avenues.

Write down where you want your financial health to be in the next month, year, or five years. Do you want to save for a home? Do you want to invest? It’s all up to you. Having a prize to eye, however, makes identifying necessary changes simpler.

Don’t rush this step. Take time to thoughtfully consider your priorities in a reasonable fashion. It makes consistent adherence to the steps outlined in future weeks much more manageable.

Week Two

On a fresh page, write down all of your net income. This includes money taken home after paying taxes and other payroll deductions earned since your last entry.

In Week One, you looked at general spending trends and behaviors. Now you need to nail down specifics. Spending trackers make this process easier.

Analyzing your numbers will show you exactly where your money went and how you are progressing toward reaching your goals. This doesn’t mean you should expect to have improved your credit score by 300 points or that you’ll have accumulated 30% of your target savings for a year from now. The idea is to identify how the concept of “death by a thousand cuts” could be hindering you from making real progress.

You may realize you spend more money than you thought on something like food, for instance. You may see you’ve opted more often than expected for convenience transportation (like Uber) over less expensive options. This is another time for reflection, allowing yourself room for adjustments and improvements.

It’s About More Than What You Spent Last Week

Hold this information relative to some of the previously identified planned and predictable expenditures. These could include things like semi-annual insurance payments or anticipated vacations. 

While we know these expenses are coming, many of us do not plan for them and wind up “caught by surprise” when the bills come. This often forces us to use credit and/or pay a premium for costs that should have been anticipated and planned for.

There is no judgment here and no room for recriminations. This involves identifying opportunities for fresh perspectives on what you have been doing and what actions you can take for improvement over the next period.

Week Three

During the third week of your journey, analyze your savings. If you have not done so yet, now is the time to start your savings plan. 

Set a specific amount you plan to “pay yourself first” from any take-home pay. We often define this as a percentage of that income that gets deposited into a savings account. The easiest way to adhere to this plan is to have the determined amount automatically deducted from your paycheck and diverted to savings.

You should divide your savings across your goals. But it must also include an emergency fund for the expected unexpected. Should you doubt the relevance of this step, ask yourself: could I cover a $400 emergency expense today? If you answered no, join the club. Almost half of Americans would fall short, too.

Saving for a More Distant Future

It’s also essential to start saving for retirement as early as possible. Research from Vanguard reveals that a dollar saved at age 20 ends up being worth almost four times as much as the dollar saved at 55 by the time you hit the average age of retirement.

A chart showing the amount accrued in savings depending on when you start - a key consideration in budgeting.

Data Source: Vanguard. Assumes annual 4% return after inflation. Numbers may change over time as the value of the Dollar fluctuates.

Consider signing up for your employer’s retirement plan, at least to the extent of the “match.” This refers to the amount your employer is willing to contribute to your retirement savings. We’ll discuss more on this topic in a later installment.

The Interest in Compound Interest

Simple interest pertains to the money made on initial savings over a specific period of time. Compound interest deals with the money made on the initial savings and the amount added over time. It’s the difference between making money on a set amount and making it on everything you’ve gained.

For example, imagine you put $100 in a savings account that accrues 1% in interest each year. With simple interest, you would remove what you make each year. With compound interest, you would leave that initial $100 in your account along with anything you made in the previous year. After ten years, you would have made 2.3 times as much by keeping your money put and earning compound interest.

A chart showing the amount accrued in savings using simple or compound savings - a key consideration in budgeting.

The effects of compound interest and routine saving add up quickly. At the same time, compound interest happens elsewhere in personal finance, too. Exercise caution, for instance, regarding the amounts you borrow and the credit you access. You want compound interest to work in your favor – not against you. 

Keeping Things in Perspective

Once you have your savings plan in effect, use this third week of the month to look at your progress and pat yourself on the back. The euphoria of savings and growth will give you added incentive to complete each financial planning step.

Use your journal to congratulate yourself on your accomplishments, make a note of your successes and discover wholesome incentives to keep your commitments to personal financial planning.

What Next?

Budgeting is ultimately a personal and introspective journey. Some may argue that there’s only one right way to approach it. But the only truly right method is one that works for you. 

The most important thing is to start. As the Chinese proverb goes, “A journey of a thousand miles begins with a single step.”

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This is an updated version of an article from 2020. ©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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About Michelle Gershfeld

Michelle Gershfeld is a bankruptcy attorney, debt negotiator, and personal financial life coach who advises people in debt or building wealth, by identifying and overcoming obstacles that lie in their path to securing worry-free, financial wellness. Michelle’s private practice, Law Offices of Michelle Gershfeld, provides services to clients on financial distress, workshops with clients individually…

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