You know that I’ve always felt ambivalent towards budgeting.
On the one hand, I really don’t find budgeting sexy. (Yes, I know that one of my best buddies in the personal finance blogging world, J Money, find them sexy but…). The other week, I told you how to never see a budget again.
Am I contradicting myself?
Well, maybe a little bit. But, what I’d like to say in my defence, and as a justification for my slightly disjointed argument, is that budgeting is like any other instrument in the toolbox of personal finance: it is all about how you apply it. You can use it to suffocate your life and make it as uncomfortable as a tight, high heeled shoe. Or, you can use it to ensure that your money is nourishing your life.
Here, I share 13 rules of effective budgeting that may, or may not, help you spend less but these will certainly help you figure our whether you are ‘putting your money where your mouth is’. On top of that, these rules of effective budgeting will help you look at the long term rather than make money decisions based on the current month.
Here are the 13 rules of effective budgeting.
#1. Focus on your cash flow not your spending. Most people, when thinking about budgeting, think about their spending. Look, there is nothing wrong long term with spending if you make sure that it is below, far below, your income.
#2. Figure out your life before tackling your money. Yep, you heard this one right – money is not about money, it is about nourishing your life. Does figuring your life before you figure out your money make sense now?
#3. Automate your savings. Remember the positive cash flow I mentioned above? This should go into a savings account and fast. At least faster than temptation takes you and you are the only one who knows how long this takes.
#4. Automate your investments. See rule #3. Also, you can see your savings and investments as a system of reservoirs. You can set a minimum amount you keep in your savings account (I go below £15,000 in my savings account only if we’ve spotted an opportunity we cannot refuse, or a major calamity has happened). Everything above this goes in investments.
#5. Never, and I mean never, touch your investments before the planned draw down. I bet you thought I’m being silly to keep so much cash in my savings account. How I know? When I was rather green in all matters money, I remember asking a blogger friend why he keeps so much cash instead of paying off his mortgage (he replied that he likes cash). Now I know that this is so that he doesn’t need to dip in investments were other opportunities to arise.
#6. Live and spend mindfully. People often think that what gets them in trouble is spending. Wrong! What gets you in trouble is spending without thinking, compulsive spending. You know, this is a bit like scoffing a chocolate when on a diet because if you eat it fast enough your brain doesn’t register it. Spend as much as you wish but spend mindfully. Since you can have anything, but you cannot have everything be carefully how you decide.
#7. Budget according to your wants not according to your needs. Most budgeting gurus will tell you to focus on your needs. I belong to a contrarian camp of thought on this one and believe that we should focus on our wants. Want an example? You probably need to get around. What transport you’d chose? Yes, I know you want a Ferrari and this is exactly what I’m talking about. Learn to control your want for a mighty, self-worth affirming beast and you’d be fine.
#8. When presented with a choice to increase earning or cut spending choose earning anytime. There are many reasons for that and one is that cutting spending has a clear limit and earning doesn’t. You want more?
#9. Learn basic skills of survival. I’ve come to realise that this is very important irrespective of whether you ever need to use these skills or not. You may never need to skin a rabbit or kill a chicken; still, being able to do it gives you the kind of confidence that keeps money worries away and enables you to take calculated, reasonable risks. Also, who knows? The way this world is going we may need to use basic survival skills at some point.
#10. Thing is you never know whether, or when, ‘the sh*t will hit the fan’ so be prepared. I don’t need to say more about this one, do I?
#11. Inventory your money regularly. Okay. You don’t need to budget every minute of every day if you develop good money habits. You still need to take stock of your money at regular intervals – just so you know.
#12. Batch it up. Yes, I do find budgeting more palatable and do it properly when I batch it up. (I do it on the first Saturday of the month every two months.)
#13. Minimise your ‘God Knows What’ budget line. Feeling puzzled? We all have this budget line which is the money you have spent but cannot account for. My experience is that there is a correlation between the size of the GNW budget like and financial health. When we were in financial trouble our GNW budget line was rather large.
These are the 13 rules of effective budgeting. Follow them and budgeting will stop being a chore that you avoid and a practice that you find restrictive.
Budgeting may not be sexy, but it can still be fun.