6 Months To A Better Budget
Can you have perfect abs in just six minutes a day? It's hard to say for sure, but you can have a solid budget in six months. One of the challenges with proper budgeting is that it has to become habitual in order to be effective. You can survive without knowing how to budget if you manage to keep more money coming in rather than flowing out or have credit cards to cover the gap, but this won't last forever. People often resort to budgeting after they've already been dealing with expenses and income in a back-of-the-envelope kind of way.
The crux of this six-month plan is the emergency fund. In general, traditional budgeting starts with tracking expenses, eliminating debt and, once the budget is balanced, building an emergency fund. To speed up the process, we are going to start by building a partial emergency fund. Ideally, everyone should have a minimum of a few months' wages sitting in a liquid account for any unpleasant surprises. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations.
You will want to build your emergency fund as quickly as possible. For someone who lives in a rented home and has only a modest amount of debt, an emergency fund of $600 may work fine. If you own a house, a car and other things that can unexpectedly require cash infusions, then your emergency fund will need to be bigger. The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it and, if possible, putting in whatever you can spare on top. This will speed up the process and get you to think about your spending.
What's an Emergency?
Here's where it can get a little trickier. You should only use the emergency money for true emergencies: like when you drive to work but your muffler stays at home, or your water heater starts to hiss and spit green bile like Linda Blair in The Exorcist. Covering regular purchases like clothes and food do not count, even if you used your credit card to buy them. It may help to keep the account at another bank or, better yet, an online savings account, where you can't access the money as easily and where it will get higher interest than a normal savings account.
While it's true that you would save money if you used your emergency fund to eliminate credit card debt, the purpose of the fund is to prevent you from having to use your credit card for paying for ugly things that life throws at you. With a proper emergency fund, you will not need your credit card to float you when something goes wrong.
Downsize and Substitute
Now that you have a buffer between you and more high-interest debt, it is time to start the process of downsizing. It is odd that the natural solution to "not enough money" seems to be increasing income rather than decreasing spending, but this backwards approach is very familiar to debt counselors. The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest.
This can be a process of substitution as much as elimination. For example, if you have a $60 per month gym membership, cancel it and use half of the money you save to invest or pay down debt and save the other half to begin building a home gym in your basement. If you buy coffee from a fancy coffee shop every morning, you could just as easily purchase a coffee maker with a grinder and make your own, saving more money over the long term. Although eliminating expenses entirely is the fastest way to a solid budget, substitution tends to have more lasting effects. People often cut too deep and end up making a budget that they can't keep because it feels like they are giving up everything. Substitution, in contrast, keeps the basics while cutting down the costs.
Focus on Rewards
Another trick that will help your budget come together faster is to focus on the rewards. If you are constantly looking at what you have to cut and give up, the very act of budgeting will become distasteful. A mixture of long- and short-term goals will help keep you motivated. This can be as simple as saving for a small luxury, or even something bigger like buying a car with cash. Some of your long-term rewards may just be benchmarks on the way to your overall goals. For example, you may want to sock away $10,000 in a retirement account before you are 30 or be debt-free in five years. Watching these goals slowly but surely become a reality can be very satisfying and provide further motivation to work harder at your budget.
Find New Sources of Income
Why isn't this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out (along with the buffer of an emergency fund), you can start investing to create more income. It is better to have no debt before you begin investing. If you are young, however, the rewards of investing higher-risk, high return vehicles like stocks can outweigh most low-interest debt over time.
Much like the disclaimers that come with exercise tapes promising to make you look like a body builder in just six minutes a day, it is possible that it will take you more than six months to get your budget balanced out. This all depends on your situation, including how much or what kind of debt you have. On the upside, just like people who begin exercising for the first time tend to see results sooner than regulars, you may find that your improved budget has immediate benefits for you. Even if it does take you longer than six months to get your budget turned around, it is time well spent.