There are numerous ways to budget. NCN over at www.ncnblog.com has numerous budgeting techniques with step by step instructions and nice pictures ;). Here, I will just mention what worked for us.
I have been married for over 15 years. My wife and I both came from different cultures and different upbringing. When we first got started, we agreed that we did not want to spend more than we earned and we did not want to argue about personal finance decisions. We also had more than $10,000 in credit card debt. Remember, this was before mint.com. Folks were using Quicken or Microsoft Money to track spending. We just did not have the personality to track every penny of our spending, which is the first thing people would suggest if you want to start budgeting.
Our budgeting technique was easy.
- We stopped using credit cards completely.
- We also agreed on a cash budget of $250 per week. This would include everything except bills. i.e. it would include all shopping and food related costs and emergencies, if any. To keep in perspective, my take home pay was approx. $1600 every 2 weeks.
- We would not question on how we spend the money. If we are done, we eat rice and beans for the rest of the week.
It helps that we both were reasonable spenders. None of us were attracted to $500 jeans! We did this for 3 years and it worked perfectly for us. It kind of became second nature to keep our spending in check. We paid off our credit cards and started building emergency fund. We did not care that we were not earning points on credit cards.
Nowadays, we use mint.com to track our spending. We check it once every couple of months or whenever we remember.
Conclusion is budgeting does not have to be complex or take up a lot of your time. Focus on key goals, pay yourself first(401-k), pay all the bills (including credit card bills) then figure out how much you have left to spend.
This is probably the first thing you must do at any point in your life. It is also possible that you are already doing it in your head without realizing it.
A public company can lose money every year but can still be worth billions (http://finance.yahoo.com/quote/W?p=W) .Unfortunately, our personal net worth is not valued like a company’s net worth. You need a budget to ensure your net worth does not go negative. That is a general wisdom of budgeting. But I also believe it serves another purpose. It is also important to make sure two people with different outlooks in life can still have a good personal finance life without getting into arguments. You agree on budget and stick to it. Don’t question other on how that budget is spent.
I do not believe in latte factor as popularized by David Bach. The basic premise is that small amounts of money compounded over decades grows into a large amount of money. That is just baloney. By that premise you should just be homeless and and not eat and you will die a billionaire. He was using Starbucks latte as an example. If going to Starbucks makes you happy, do it. But stick to the budget. For some people, a $100 pair of jeans makes them happy. If that’s the case, brown bag your lunch and eat rice and beans for dinner. But stick to your budget. There is no need to question or argue if that was the right purchase decision.
At the end of the day, there is a fixed amount to spend and once you spend it, you are done. Easy.
Finally decided to start documenting my personal finance journey. I am hoping that along with documenting the journey, I will get good at writing and documenting my thoughts. Currently, I am planning to blog about personal finance. While I have been managing my finances for years, there is always something new to learn. I will document things I learn in easy to understand language. If you have any specific questions, feel free to email me.