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Avoiding Budget-Busters in the New Year

With every new year, I see a huge number of people committing to live a better financial life. If that sounds like you – there’s one clear place to start: with a budget.

There are thousands of different ways to budget effectively, and the truth is that they all work to some extent. Different budgeting habits work better for different people, but at Deerfield, we typically like to stick with a “simple is better” motto.

The more you over-complicate your budget, the less likely you are to stick with it.

Start With a Conversation

Your first budgeting step is to have a conversation with your partner or spouse. In every relationship, there’s a spender and a saver. If you don’t talk through your finances with your partner, you’re setting yourself up for long-term failure. Couples need to talk through every aspect of their financial situation, but the following are a solid starting point:

  • How much are each of you allowed to spend with “fun money” without clearing it with the other person?
  • What are your savings goals – and how do you plan to reach them together?
  • What’s your strategy for paying off debt?
  • What’s more important – paying down debt or saving?
  • What do you value, and how is that reflected in your budget or your charitable giving?

You’ll be building your financial life together, so setting up goals, values, and a budget together is key. Once you have an honest conversation about your financial goals, you’ll be able to get started setting up a budget.

Know Where You Are

Taking a baseline might seem overwhelming, but it can be much easier if you take a step back and approach the process without judgment. Too often, when people start a budget, they begin by painting their past spending (or saving) decisions with judgment. They get so worried about whether or not they’ve might the right calls in the past, that they overcorrect with their new budget – trying to make it right. This often looks like too-strict spending rules, overzealous saving or debt repayment goals, or even depriving themselves of some necessary expenses to save a dollar here and there.

Rather than starting down the path of overcorrection, I like to help clients by starting with a judgment-free baseline. The process is very straightforward: we take 2-3 months and track their spending. That’s it. We don’t make any adjustments to their spending or their saving/debt repayment goals or patterns right now. There are several tools you can use to track your spending – YNAB or Mint are two great places to start.

Once you have tracked your spending for a while, you’ll be able to spot patterns or trends. Maybe you and your spouse will be able to figure out which one of you is the spender, or which of you is the saver. Maybe you’ll realize that you’re spending over $50 each week on breakfast and a coffee from the local cafe, but simultaneously feel frustrated about not being able to repay your loans quickly enough. Don’t judge the trends you see. Instead, get started categorizing all of your spending to start adjusting your habits.

Separate Spending Into Three Buckets

The easiest way to set up a budget is to break your spending into three buckets:

  1. Fixed expenses.
  2. Long-term savings goals and debt repayment.
  3. Variable expenses.

Your weekly or bi-weekly fixed expenses could be rent or a mortgage payment, utility bills, insurance premiums, or even predictable medical expenses. Long-term savings goals and debt repayment are also relatively easy to figure out.

Your variable expenses, on the other hand, can be tougher to organize or stay consistent with. These might be how much you spend at the grocery store, or on dinners out. It could be an unexpected vet bill or expenses connected to holiday shopping. As a note, over the years I’ve seen a lot of budgeting advice that recommended including food in a “fixed” category since it is an essential item. However, in my experience, this is actually an area that is extremely variable and may present substantial opportunities for intentional changes. You’re going to come across other variable expenses that, similarly, will change month-to-month. Make sure you’re taking those fluctuating expenses into account!

Once you see your spending as being categorized into three buckets, you can make smarter decisions about how you spend your money, or where you can “trim” some of your spending to make room in the budget for other goals or values. For example, if your fixed expenses are through the roof, it might be time to look at downsizing or shopping around for cheaper insurance. If you notice your long-term savings goals or debt repayment aren’t going exactly as planned, you can interrogate why that might be, and what you can do to change your strategy.

As always, the toughest part of adjusting your spending is addressing your variable expenses. One way to get a handle on these expenses is to go through the process of aligning your spending with your values.

What Do You Value?

Fixed expenses, as well as debt repayment and savings goals, are relatively straightforward. You know you’ll have to pay rent each month, just like you know you need to pay a certain amount toward your student loans every month in order to get them knocked out in a timely manner. Even if you dramatically adjust these fixed costs, they’re still predictable because they’re recurring.

However, variable expenses are less predictable. Often they depend on the season, our current hobbies and interests, or even how we’re feeling emotionally in a given month. It can be frustrating to look back on the last several months of expenses you’ve tracked and notice that what you’re choosing to spend money on isn’t actually moving you toward your goals. Following the $50/week coffee and breakfast expense I referenced earlier – you might notice that you have small but consistent expenses that aren’t really making you happy.

I’m not passing judgment here. In some cases, grabbing a coffee and a bagel each morning is actively fulfilling you in some way. Maybe it buys you a few extra minutes with your kids each morning before heading off to work, or maybe you stop at the cafe with your spouse after hopping off the train together and it’s the only one-on-one time you get during your crazy week.

Still, if you’re noticing that you’re spending money in areas that don’t move you toward your goals, or leave you feeling emotionally fulfilled, it’s time to reevaluate. Budgeting isn’t about restricting your spending or judging your lack of willpower. It’s about making sure that the wealth you accumulate is spent in a way that leaves you feeling like you’re living your best life – and that’s going to look unique to you. Nobody else’s spending is going to exactly match how you should budget your own spending.

As you go through this process, it can be helpful to actively think about each variable expense you’ve tracked when putting together your baseline. Which of those expenses made you happy, or moved you toward the life you want to live? Which of them added no value to your day, but were an easy choice? Moving forward, ask yourself those same questions about every purchase you’re about to make: Is this going to leave me feeling fulfilled? Will it move me toward living my best life? If the answer’s no, think twice before pulling out your wallet.

Budgeting isn’t always easy, per se, but it doesn’t have to be as complicated as many people make it. And remember: this process doesn’t end after you create a budget for the first time! The conversation with your spouse or partner about priorities and spending is ongoing. Consider setting aside time for a quick check-in regularly to keep you in sync.

If you’re looking for help budgeting as we kick off the new year, contact me today. I’d love to help you build a cash flow system, track spending, and build a budget that lines up with your unique values.