One of the hosts on one of the podcasts that I listened to once upon a time said that, before starting a budget, people should track their expenses for a month or two to see what they are spending. If I remember correctly, the host of that podcast repeated that piece of advice a few times over the course of several episodes. I don’t necessarily disagree with this advice, but I would personally prefer to be more productive with my time. I would rather create a budget first and then track expenses while utilizing the new budget. This way, I am implementing the budget and likely being stricter with my spending habits at the same time as tracking my spending habits. Two birds!
Don’t get me wrong, I understand why it might be appealing to track expenses and spending habits first. It would give me an idea of how much to allocate to each fund before I actually make the budget. In my opinion, it is more productive to create a budget based on financial goals and adjust spending habits accordingly. One of the purposes of having a budget is to assist in achieving financial goals by restricting unnecessary or frivolous spending. If I were to start with tracking my expenses and spending habits first, it would be mighty tempting to create a budget that supports those expenses and spending habits instead of one that supports financial goals.
For example, if I were to track my expenses and see that I spend about $6 a day on Scooters coffee Monday through Friday (don’t judge), I might give myself an extra $120 a month for personal spending money than I would have if I just started the budget from scratch. That’s a lot of money to support a coffee habit! If I were to start the budget from scratch, I might only give myself $200 a month of personal spending money. Which is plenty to support a $120-a-month coffee habit, but only gives me $80 for other personal purchases, so I might reconsider the $6 cup of coffee (even though it’s soooo good).
That’s not to say that I couldn’t adjust my budget as I track my expenses, though. I might have over-estimated or under-estimated the amount that I spend on certain expenses. Maybe I guestimated that I spend $500 a month on groceries, but actually only spend $350. Whoop! Now I have an extra $150 a month to save (hello new car) or spend (give me all the coffee). On the other hand, maybe I guestimated that I only spend $150 on gas a month, but the actual number is closer to $200. Now I have to make cuts somewhere else (preferably in the “Have Fun” funds) to pay for my gas (which is a “Survive Today” fund and should be prioritized higher than both the “Have Fun” and “Prepare for Tomorrow” funds).
If I really wanted to get fancy, I could pull up bank and credit card statements from previous months and look at my spending habits. This way, I know about how much I spend and can build my budget accordingly. A few funds, like rent or mortgage payments, should be known without having to look it up. When creating a budget, I also want to take in to consideration what financial goals I have. Do I want to buy a new car or house soon? Retire early? Many times, in order to achieve these financial goals, I have to make cuts in the “Have Fun” funds in order to set aside savings in the “Prepare for Tomorrow” fund. But that’s another topic for another day.
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I have not taken into consideration anybody’s unique and specific situation. This post is based solely on how I personally do my budget and on my personal opinions regarding budgeting. If you would like one-on-one personal budgeting advice, please click the Budget Coaching button below or contact me to set up a free consultation call. Also, if you haven’t already, sign up for my monthly newsletter! I will be sending out exclusive content each month and you will get a free budget guide as a thank you for signing up!
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