I have tried to make budgets work multiple times with varying degrees of success. And through the multiple attempts at making budgeting stick, I've noticed a few key learnings on what works or doesn't work for me.
Now, I do like personal finance, but the idea of logging every single purchase and the necessity of checking my bank apps multiple times a week (or day) is a horrifying prospect for me. This is something I did not know when beginning, but now is clear as crystal. After many attempts I believe I have settled on a way of budgeting that works best for my preferences.
|There is no 1 way to budget, and the method should be tweaked to best suit one's personality|
1. Automation makes it easy to follow through
I started off with an iPhone app called "Buddy" that needed me to key in every single expense to the nearest cent. As the initial enthusiasm of sticking to a budget waned off, I realized that remembering to log every expense was simply not habitual for me, and that I did not enjoy the activity of remembering to add my expenses after every payment.
Personally, apps that can consolidate my expenses automatically and allow me to periodically review them work better. Not only is the required effort reduced significantly, I find it easier to stick to my budget (since a glance is all it takes to know my current status).
I've explored several methods of automating my budget, and some of these include:
- Apps that connect with bank accounts directly or use notifications to log expenses in relevant categories:
- Mint and YNAB (in the US), ABN Amro Grip (the Netherlands) can connect directly to bank accounts. However, I do not like the idea of a 3rd party app accessing my bank details
- Financial providers like Revolut and Bunq can make it even easier to budget, when used as the primary means of spending. Revolut automatically categorizes spends and has great budgeting tools.
- Multiple "pots" to enforce an "envelope-style budget"
- The idea here is to create a pot (an account) for individual expense categories and load them with the budgeted amount of money. This can work great to enforce a budget, since over-drawing a pot is impossible (without moving money between them)
- I prefer this approach since my bank, allows me to create multiple accounts and I set them up for different expense categories. This way my budget is automatically managed, since I always pay with the account relevant to the expense category. If needed, I can transfer money between pots too!
- Moneyou Go is another free bank in the Netherlands that has similar features (and also offers a higher savings interest rate than most banks)
2. Flexibility is key to make budgeting work
I believe that rigidity in staying within the budget was the biggest reason for me to lose interest in budgeting altogether. Previously, I tried to restrict my spends to the allocated amounts, not accounting for unexpected expenses or for the occassional "pamper-myself-bill". This was a disaster!
These days, I am open to moving money between my allocated budget categories (or pots). So, if I allocate €250 to groceries and €300 to "fun-money", I am okay spending €275 on groceries, since I can move the additional €25 from my fun money account into the groceries account. That way, I just spend lesser on fun activities like eating out, and I am still within budget :)
On another note, there are some months where I spend more than I earn, in which case I reduce the money to spend for next month. For instance, if I usually allocate €2000 to spend every month, and end up spending €2200 this month, I'd try and take the extra money spent out from the next month's budget. This would give me only €1800 to spend next month.
3. Planning ahead is key, but being very conservative is a trap
The points above talk about the ability to execute a budget, but that is only possible if the budget is planned and thought about meticulously. I try and analyze my spends every month, and tweak my next month's budget accordingly (while also taking into account any new upcoming expenses).
That being said, I always budget 5-10% more money than expected, for every category (while ensuring that my spending is still lower than my earnings). This allows me to be prepared for any bill that may have missed my mind, and removes any "ambitiousness" bias which may have led me to allocate less money than I need for some categories.
4. Communication with my partner can keep me accountableBeing in a relationship is never a one-man (or one-woman) game. My girlfriend and me are a team and I recognize that she can help me stay accountable to the budget I have planned for myself. Also, it is worth noting that my spending (or lack thereof) affects her life too, so being on the same page is absolutely imperative.
I regularly try and communicate my planned expenses to her, while allowing her to hold me accountable to staying on track. I also realized that regular conversations on these topics can lead to productive brainstorming, where she can help me see a problem from a viewpoint I may have missed. An example of this is a recent suggestion to try an online grocery shopping service - Picnic. While I prefer grocery shopping in a store, an online store allows us to select our groceries and plan varied meals together, all while ensuring that we remain within budget. Another benefit is that online stores are generally cheaper than their brick and mortar counterparts, since they don't have any rents to pay.
What do you think? I'd be more than happy to share my planned budgets every month.