A few years ago, I spent several months in a small mountain town, working with a nonprofit to teach creative writing to children in local schools. When the children werenít derailing my writing activity with improvised songs about cupcakes or their new favorite video game, the work was satisfying. The town was beautiful, and I had plenty of time to focus on my own writing.
Unfortunately, I had moved eight hours from my friends and my girlfriend, and because the town had less than a thousand people, it was difficult to make new friends. In short, I was lonely, and I took it out on my finances. Though I was making more money than Iíd ever made before, I was spending it all so fast on careless purchases that made me feel better in the moment ó comfort foods, new musical equipment, alcohol, and eating out at restaurants. Every month, I was paying my power bill weeks late, paying extra fees as a result, and I let my cellphone bill lapse to the point that I wouldnít have service for several days at a time. Loneliness compounded with the anxiety of running completely out of money every month.
Looking back, Iím surprised I made it through that time without going into debt or damaging my credit. Aside from vowing never to put myself in such an isolating situation again, I learned a lot about how not to spend my money. When I came back from the mountain town and readjusted to my normal social life, I knew I had to make some changes in how I treated my finances. That meant learning to budget. Here are some strategies Iíve learned for finding a balance between smart spending and being happy.
Start with the Basics
First, itís important to assess how much you make, your bills and necessary expenses, and other regular purchases. Writing this down or creating a spreadsheet is the best way to make sense of your money visually. If you have a steady job, it should be easy enough to look at your last few paychecks and calculate how much you make every month. If you are self-employed or work inconsistent hours, this may be more difficult. In this case, add up your earnings from the previous year and divide by 12 in order to come up with an average amount you can expect to make.
Next, list all of your necessary expenses. These could include your rent or house payment, auto insurance, health insurance, regular medications, loan payments, cellphone bill, utilities, gas, and groceries. If these expenses are greater than your income, obviously, youíll need to make some changes. While you might not have a choice in how much you pay for fixed costs like rent, you might look for a cheaper cellphone plan or look for programs to adjust your student loan payments based on your income. Both of these options in particular have made a huge difference in my budget.
Of course, fixed expenses should take priority in how you spend your money, but you should also factor in how much you usually spend on fun things like eating out and going to the movies. If possible, try to recall how often you do these things and how much they cost. Making a lot of non-essential purchases, especially just after youíve been paid, is the easiest way to lose track of where your money is going. Then, when itís time to take care of your bills, you could find yourself in trouble. Depending on your income, your expenses, and your goals for saving money, you might allocate anywhere from $10 to $100 or more a month for fun. Setting this aside at the beginning of the month will help ensure you donít dip into money you need for bills.
Invest in Savings
While you can probably get away with spending your entire income each month, saving money can help you achieve greater financial goals and prepare for emergencies. At first, I started putting just $25 a month in a separate savings account, though over time Iíve been able to raise that amount. I set a specific goal for this as my emergency fund, and after a year, Iíve finally reached that number. Many people recommend saving enough to cover three months worth of expenses.
This is the first time Iíve really committed to saving money instead of spending it as I make it, and I feel much less anxiety than I used to. If my truck breaks down, I know I can pay to have it fixed. If I get hurt or sick, I know I can cover at least a large portion of the medical costs.
Now that Iíve reached the number that makes me feel secure, I can start saving for larger expenses that wouldnít normally fit into my monthly fun money. For example, I want to travel and visit someplace Iíve never been before. Though I havenít decided where Iíll go, itíll take many months before Iíll be able to afford a major flight anywhere. Saving money felt necessary when it was for emergencies, but now Iím even more motivated because I know it will be spent on something I want.
Cut Costs When Possible
Once you have an overall picture of your finances, itís a good idea to look for ways to cut costs. Finding ways to live frugally can help stretch your budget farther, allowing you to put more money toward the things you need and want. Historically, dining out has had one of the greatest impacts on my budget. A simple meal, a few drinks, and a tip for my server can put a major dent in my finances, so Iíve learned to limit myself to two or three outings per month.
Though Iím still tempted by the convenience of fast food, Iíve learned to save dining out for special occasions. Preparing my own meals has also given me the chance to expand the variety of foods I cook and eat, and aside from some recipe blunders, Iíve learned to take pride in the dishes I make. If dining out is a high priority for you, keeping a watch for coupons and promotions at your favorite restaurants is a great way to eat out for less. Avoiding alcohol, sharing a dish with someone else, or ordering from the kidís menu can also allow you to go out more often.
For entertainment, you donít always have to invest in expensive movie tickets or concerts. Choosing a few events that are very important to you is a good idea, but there are a lot of fun things you can do that cost much less. For example, you could host a movie night at your house or plan a game night. You can also look for concerts, open mics, and readings that you can attend for free, though you might have to buy a drink, depending on where the event is held.
Another major area you may be able to have some control over is transportation. By taking advantage of public transportation or ride-sharing services during your regular commute, you can cut down on fuel costs. Walking or biking to work provides the added benefit of a built-in opportunity for regular exercise; plus itís better for the environment.
With more and more purchases happening online or by using bank cards, itís easy to lose track of how much youíve spent from a budgeted amount. One drastic strategy that helps to keep me honest with my money is the envelope system. The main idea of this method is to store cash in different envelopes for certain expenses. Though I pay most of my bills online, this is especially helpful for managing my fun money. I can even divide it into smaller categories like movies, clothes, and dining out. I like this system because I can easily see how much Iíve spent and how much I have left for things I enjoy. Once Iíve emptied an envelope, I wonít buy things in that category until Iím paid again and refill the envelopes. Anything I have left over at the end of the month goes into savings.
Budgeting isnít easy. There are definitely times when I go over the limits Iíve set for myself, though I try not to. Despite the struggle, Iíve been able to train myself to appreciate the security of a well planned budget. By picking my battles with what I invest in, Iíve found I can enjoy plenty of the things I care about most without stressing about the cost.