[MUSIC PLAYING]
Hey, guys.
It's Chelsea from The Financial Diet,
and this series is sponsored by Fidelity Investments.
And today we are going to be talking about budgeting
but more specifically talking about how
to create a budget that you can actually stick to.
Budgeting is a habit that took me quite a bit of time
to become comfortable with.
Frankly, Chelsea of eight years ago
would have been affronted by the idea
that she should even have one.
But now I view budgeting as an essential tool
that allows me to live the kind of life that I want to live.
I find that having a reasonable, clear, easy to stick to budget
is one of the sharpest tools in my toolbox.
But as corny as it might sound, it
is a tool that gets duller if you are not frequently
sharpening it.
And that means regular budgeting.
I would frankly spend all of my money
on very smelly cheeses from the cheese shop
and various cans of paint for my accent walls
if I didn't have something stopping me from doing so.
And I know that for a fact because that's literally
what I used to do.
And to be clear, I do still buy those things.
It's just that by having a budget,
it provides a kind of guard rail around my spending
in which I can spend comfortably.
I no longer have to wonder, can I afford that thing?
Because I've already understood exactly how and why I can.
And a budget is also essential for balancing
your current and future wants because if you make all
of your financial decisions based
on what feels good right in this specific minute,
you are likely to make a lot of really unsustainable ones.
But beyond just balancing your future and current self,
think of how easy it has become to mindlessly spend money.
In addition to the fact that we're constantly
being marketed to from every angle about all the things we
need to have in our lives, it's become
basically frictionless to actually spend
the money itself.
Whether it's the easy swipe of a debit card
or that one-click checkout of your online shopping cart
because you conveniently already have your card info saved
in your browser, it has become way too unmemorable
to spend money, and that's part of what makes it so easy to do.
A budget is a way of setting boundaries
in a world that is constantly trying to separate you
from your money.
And that's why we here at TFD believe
that having the right budget is actually
freeing because you never have to wonder again
about whether or not you can afford something because you
already know that you can.
No more confusion at checkout or feelings of guilt and shame
for buying something you wanted because if it's in the budget,
you know it's all good.
So how do you find the budget that you can actually stick to?
Well, here are five ways that you can
find the right budget for you.
Number one, before you build a budget,
get to know your monthly cash flow.
You cannot build a budget without first understanding how
you actually spend money.
I cannot tell you how many times I have seen people try
to create a budget with these completely aspirational,
detached-from-reality numbers like, oh,
I'll only spend $100 on groceries or clothes shopping
or what have you in a given amount of time when you are
absolutely lying to yourself.
And that is setting yourself up for failure,
which you must avoid at all costs
because the budget that's right for you
is going to be one that you can actually stick to and build on.
If you're constantly going over your spending categories
in a given budget, you are much more likely to just give up
on that budget entirely because you can't
keep to it so why even try.
But in order to set the right amount for each category
to build a sustainable budget, you
have to intimately know how you already spend your money.
So print out your statements for at least the last three months
and get to know them inside and out.
And trust me that if you have not done this recently,
there is going to be at least one thing you find in there
that is going to leave you shaken,
particularly considering how much most of our spending
has changed in the year 2020.
And from there, start breaking that spending down
into categories, things like rent and utilities,
essential spending like groceries, clothes, makeup,
home items, fun money, transport.
And start to get to understand where the patterns are.
Is your spending varying wildly from month to month?
Is it remaining pretty consistent?
And how much are you actually spending
in each of those categories?
And here's a hint--
we are all these days tending to spend more money at stores
like Target that have a little bit of everything
from groceries to home items to clothing,
and if you have places like this that
are frequent areas of shopping but are
hard to put into a specific category,
you can also create a line item in your budget that's
just for a specific store you shop
at a lot like Target or Costco.
There's no one right way to make a budget in terms
of categorizing, it just has to make sense for you.
Number two is, do not assign morality to your purchases.
When looking back through my spending,
I get to observe all of those moments
and appreciate them again--
the money I spent on that awesome coffee
date with a friend or a pair of jeans
that I absolutely love and wear all the time or a solo day trip
to the museum.
I get to feel appreciation and gratitude for the money I spent
and what it allowed me to do, and I
get to really understand where all of those dollars
are going in practice.
Our lives can feel so busy and as if they go by
so quickly that using this time to practice a little gratitude
and to be more present in the moment
can be a way to make sure you are more intentionally
spending.
I cannot tell you how often I see people beating themselves
up for money they chose to spend,
even sometimes on things that they truly did enjoy and feel
fulfilled about in the moment.
But even if a bit of spending was a mistake, ultimately,
it's important to remember that no spending is inherently
good or inherently bad.
It's not a value judgment on your character,
and you don't have to beat yourself up
for making a mistake in how you might
have spent a bit of money.
And trust me that there is nothing
you are doing with your money that
is more or less embarrassing than what the people around you
are doing with their money.
We have all been suckered in by some product being shilled
by an Instagram influencer or tickets to a concert for a band
we didn't even listen to because we wanted
to impress a guy who did.
Life is meant to be lived, and for most of us,
that does necessitate sometimes spending money
and sometimes spending it in a less than perfect way.
And the point of a budget is not to completely eliminate
all frivolity, it's just to make sure
that that is frivolity that you can actually afford and is
sustainable.
If you want to make your budget work,
it is going to have to be something
that you feel good about.
And while it may sound a bit woo-woo,
you have to make sure that your budget is not
being used as a tool to punish you or make you feel bad.
It should ultimately be freeing and part of that freedom
is realizing that there is no inherent morality
in the spending choices you are making.
Number 3 is to test out a few different budgeting strategies
until you find the one that clicks.
So there are about as many ways to budget
as there are to spend.
And while I cannot go over all of them here today,
I want to discuss a few of the ones you might want to try out
because, ultimately, to find the right budget that actually
works for you long term, you are likely to have to experiment
with a few different approaches.
First, there's good old fashioned line item budgeting
that you might be doing in something like an Excel
spreadsheet where, basically, each category or line item
gets a certain amount allocated per month.
And you make sure that within each of those line items,
you don't go over.
Zero-based budgeting is similar but rather
than having each category be given a certain dollar amount
that must not be spent over, you are starting your month
with a certain amount of money, likely something
like your monthly paycheck, and then
giving every single dollar a job until you get down to 0
at the end of the month.
And each dollar could be going to something like groceries,
but it could also be going to something like your retirement
account.
No single dollar is left unaccounted for.
And each of these budgeting methods
can be supplemented with physical cash envelopes, which
can be a great tool to help you manage your spending for things
that don't require online bill pay.
With the cash envelope system, you're
doing just what it probably sounds
like-- putting a specific amount of cash
into an envelope, each one being labeled
with their specific category or spending duty.
And you are allowed to use the money in that envelope
until it's gone.
It might sound extreme but for people
who have a hard time staying within limits
and are also helped by very physical, tangible things,
this can be really helpful.
On the other hand, if you're already
getting very good at hitting your savings targets
and aren't having too much of a problem keeping your spending
in check, you might want to try the pay yourself first method.
You do what you need to automate all
of your savings and various allocations
as soon as your money comes in, and then the rest you're
free to spend as you see fit.
Ultimately, it doesn't really matter how you're budgeting
or even where you're allocating your money as long as it's
helping you reach your goals.
Whether your rent represents 20% or 40% of your budget
or whether you're spending x or y amount
at restaurants every month, what matters
is that this is a budget that you can stick to
and that allows you to reach your goals.
So experimenting with a few different systems
and maybe hoping to eventually get to this more lax, low touch
budgeting system like the pay yourself first method
can be a good way to help you find things that
work for you along the way.
And similarly, try a few different physical means
of tracking your budget like literally with a pen and paper,
using cash envelopes, using manual Excel spreadsheets,
using automated budgeting tools to see
what most helps your brain work in the right terms.
Number 4 is identify your mistakes,
and actually fix them.
To be perfectly honest, it's a little misleading
to say that you are going to "find" the right budgeting
system that works for you as if it were a lost pair of keys.
What's more reasonable to say is that you
are going to create the budgeting system that
works for you along the way.
And inevitably, part of that creating process
is going to be making mistakes-- things
like going over budget in a specific category
or realizing that you allocated things wrong
or not setting up your automated transfers properly.
But what's important is that you understand these mistakes
and fix them along the way rather than taking them
as a sign that budgeting in general doesn't work for you.
Some common mistakes are things like, for example,
constantly overspending in a certain category, which
is not a sign that you are not able to stick to a budget.
It's a sign that you've allocated
that category too low.
It can be very easy to aspire to the best number possible
and really wanting to whittle down a specific spending
category, particularly if it's one
that we deem as generally "unnecessary".
But ultimately, it's about being honest with yourself.
So although that may mean taking a little bit of money
away from a different category, ultimately, you
want to get to a place where you are able to stay within it.
Another common error is not planning for one-off expenses.
Typically, in any given month, there
are going to be at least a few purchases that
are outside of the purview of your preconceived categories.
These are often things that we don't anticipate or didn't
think we would need or just forgot to account for,
but they're almost always going to happen.
So making sure there is a part of your budget
that is represented for everything else
is essential to ensuring that one unexpected expense
or something out of category isn't
going to derail all of your savings goals for that month.
With budgeting, you always need to be
expecting the unexpected--
but there's a category for that.
Another common reason the people will get tripped up
is because their income varies month to month,
whether they have side streams of income
or because they're freelancing.
And it's easy to get tripped up when you cannot reliably
predict exactly how much money is going to be hitting
your account each month, but this is pretty easy
to overcome.
You can either get a month ahead of schedule
and allocate your categories based on last month's spending,
or you can choose to budget based on an averaged
out number that's on the low end of what you're earning.
You obviously never want to assume
that every month is going to be a good month because when
it's not, you might be unable to pay your bills.
None of these mistakes are the end of the world
or even inherently mean you're bad at budgeting.
They just need to be identified and addressed.
Lastly, the fifth and perhaps most important
tip is understanding that budgeting
is an ongoing practice.
Ultimately, the real challenge about budgeting isn't the math.
You can handle the math.
It's not that complicated.
The real challenge is in being able to stick
to a budget on an ongoing basis.
But there are luckily some pretty easy ways to do that.
First, you need to make sure that your budget is being woven
into your life in a real way, and that
means dedicating a specific time to handling your budget that
falls neatly into your daily, weekly, or, at the minimum,
monthly routine.
You can set up a special time for yourself like every week
Thursday I throw myself a little mini pizza party
and go over my budget or whatever helps you stick to it.
You could even make going through your bank statements
part of your routine right before brushing
your teeth at night.
But beyond just putting it into your routine,
you need to make sure that you're budgeting
is something that feels fun.
You should get yourself a cute journal where
you can use colorful little stickies and pens
to make things come to life.
You can find an accountability buddy
where you can set up like monthly managing our finances
date nights.
You can take the time to relive the memories of the things
you spent money on when you're going through your statements.
You can use your budgeting time as a time for gratitude,
presence, and, yes, a little bit of joy.
But of course, you must always be keeping in mind
why you are budgeting.
If you don't have goals that you're tracking along the way
and staying motivated by, it's going
to be very hard to motivate yourself to stay
on budget in the moment.
So making sure to visualize, understand, and keep
close track of those goals and the progress you're making
is of the essence.
I believe that anyone can find the right budget for them.
It's just a question of trial and error and sticking to it.
But at the end of the day, it will be very much worth it.
So good luck.
As I mentioned, this video is sponsored
by Fidelity Investments.
They are here to help you reach your savings goals.
So if you're looking for an easy way
to finally start investing what you save, check out Fidelity.