How to Budget Principle # 4
At the beginning of this “How to Budget like Grandma” series, I shared with you how my Grandma used a simple system of glass jars to manage her finances.
Grandma knew how much she needed to put in each Jar every payday to ensure that she had sufficient money set aside to pay each bill as it turned up.
By virtue of the fact she had physical money in either her jars or her purse, my Grandma always knew exactly how much she had left to spend. If the money in her purse was running low and it was still two days till the next pay day, she knew she needed to be careful.
The tangible spending boundaries provided by glass jars and physical money have unfortunately been lost in this age of internet banking and access to easy credit. It can be really hard to stay on top of our finances when there are so many different ways we can spend our money.
While we may no longer use glass Jars, there are plenty of tools available that enable us to track our spending.
A couple of months ago, I found the paper version of the spending plan that Lianne and I had used for the first 5 years or so of our married life, yep you read it right – paper and pen. No mobile apps, Internet, or spreadsheets back then. It was good old paper, pencil, and calculators. In subsequent years we moved on to spreadsheets which I used with my coaching clients for the best part of 10 years. Now of course we have our Grandma’s Jars online budgeting system and phone apps that control our virtual money with virtual Jars.
Despite the technological evolutions the primary purpose of any budgeting system is exactly the same today as they were 100 years ago. A budget system needs to tell you three things:
1) What we have budgeted for each expense each month.
2) What we have spent against that expense so far this month and most importantly,
3) How much we have left to spend against each expense.
Hopefully these three things make perfect sense but I will embellish upon them a little just to make sure.
What We Have Budgeted for Each Expense Each Month.
The starting point for any spending plan is determining what we want or need to allocate for each expense. We discuss gaining a comprehensive understanding of your expenses in principle one of this series. In identifying how much we are willing to spend on each expense, we are setting ourselves a spending boundary. This is exactly the same as Grandma calculating how much she needed to put in each Jar or allocate to her purse as ‘housekeeping money’.
What We Have Spent Against that Expense so Far This Month
Once we have set ourselves a spending boundary we then need a means for recording what we are actually spending against that boundary. For those of you who have embraced the wonders of technology, keeping track of your spending has never been easier. There is a plethora of budgeting applications and programs to use, and many, like Grandma’s Jars, come with mobile phone apps that ensure your spending plan is never more than an arm’s length away. It is important to note though that regardless which system you are using to record your spending, your budget is only ever as good as your last entry. At Grandma’s Jars, we encourage our clients to develop a “you spend/you record” habit. With mobile phone apps it takes 15-30 seconds to enter your expense into your budget. It’s a simple habit that will ensure your budget is always up to date.
How Much We Have Left to Spend Against Each Expense.
The power of a good spending plan is in its ability to guide your spending. A good budget will tell you at any time what you can afford to spend. As I outlined above, budgeting applications are a wonderful tool for the dedicated budgeter because they allow you to record your spending as it happens. As a consequence, you can always know how much you have left to spend without blowing the budget. This simple fact allows you to truly enjoy your money and spend without guilt.
Budgeting is never easy but nor is it rocket science. Having a system that allows you to track your spending against the boundaries you have set yourself is essential. Regardless of which method you choose it needs to be kept up to date. There are many people who do keep track of their expenses but because they only update it every few weeks, their system really just becomes a reporting service rather than a budget that guides their spending.
A budget will only ever be as good as the last entry. You need to update it every couple of days so that you know exactly how much you can spend before you start spending.