Do you want to create the perfect budget that is easy to follow and helps you achieve your financial and lifestyle goals? If you implement these five actionable budget tips, your budget this year will be better than ever. By perfecting my budget, I managed to pay off over $70,000 of student loans and save a $10,000 emergency fund in only two years. And most importantly, I still had fun and enjoyed my twenties while making a huge dent in my student loan debt. One of the keys to my success was shifting from a “budget” to a “spending plan”.

 

Spending Plan Background

A Spending Plan gives you a framework for how and where to spend your money in order to achieve your goals and live your life in alignment with your values.

Want some background on how to create a Spending Plan and how it’s different from a budget? Read the Spending Plan 101 post, which discusses:

• The top 2 reasons to create and follow a spending plan (one is definitely not what you think!);
• A step-by-step guide on how to make a personalized spending plan;
• Questions to ask yourself as you create your spending plan; and
• Tips and tricks for making a spending plan work for you.

 

Five Budget Tips

First, you need to simplify and streamline. This is an ongoing process, and you’ll probably be making small tweaks each year. It’s important to keep in mind that the simpler something is, the more likely you are to stick to it.

Also, you need to build in flexibility. This is also a mindset you need to cultivate. Flexibility works both ways – you should be prepared for things to go wrong, like having a huge unexpected bill, or for things to go well, like having extra income you didn’t expect. Then give yourself space to figure things out. You need time to learn how your spending plan works as a tool within your life to help you live the way you want and create your ideal lifestyle. And you need to build in freedom to change your mind, make adjustments, and shift your spending plan along with your priorities, which will change over time.

Finally, be honest with yourself. No one is judging you. Your spending should represent your values. After all, every dollar spent is a vote towards who you want to be. So get clear on where you are spending, and where that may be out of alignment with your values. Then, forgive yourself, and correct course. Honesty is so important in this process, and regular check-ins will make this process easier.

 

1. Don’t make your plan too complicated

Simplicity is the key to creating systems that stick.

Having a simple and straightforward spending plan that is as easy as possible to track will help you stick with it. When I looked back at my previous year’s spending plan, I realized a few places where I had over-complicated things for no apparent (or useful) reason. With that in mind, I made some changes.

To make tracking easier on myself, I separated “Shared Expenses” into their own category, instead of making a “Shared – Dining” and “Shared – Experiential” category within each overall Dining and Experiential category. I know my personal spending will be 50% of the allocated amount, so the math remains easy. This is a test, of course, and I will see at the end of the year if this actually made my tracking of these shared expenses easier.

I also got rid of the ambiguous “Take it as it comes” (TIAIC) categories. For some reason, I thought this would make it easier for me to have freedom in my spending plan (see #4), but it honestly just made everything harder. So, I defined hard numbers for each of these categories, and I believe this has streamlined and simplified my spending plan. See more in my  2018 Spending Plan Post.

Action Step

When you’re reviewing your spending plan for the month or the quarter, notice the things that make the review process unnecessarily complicated. Then, think of a few ways to eliminate that complication and simplify your plan. Make one of those changes and see if it works. If not, you can switch to another strategy next month or next year. You can always comment below if you see an area that needs to be simplified, but you can’t figure out how to simplify it. I am happy to help!

Don’t be hard on yourself if you have made your plan too complicated in the past. Your spending plan is a tool to help you, and you can always make changes when you learn lessons about how it works best for you. Simplicity is the key to sticking to your plan, so know that any simplifying changes you make to your budget are going to have significant positive impacts on your finances as a whole!

 

2. Plan for the bad

Your Spending Plan needs to be flexible, to allow you to roll with the punches when life doesn’t go the way you expected it to.

Sometimes, maybe even oftentimes, you will overspend in some category or another (or many).

Let me tell you a secret: I overspend in multiple categories of my Spending Plan every month. 

And that’s OK because I roll with the punches. This means when you overspend in one category, you can compensate by lowering your monthly budget for that category the next month, or determine if you can compensate based on a category that you underspent in during that month. Again, a Spending Plan is not supposed to be the source of immense stress. It is supposed to act as a guideline that helps you spend your money in accordance with your values.

For example, I spent two weeks in the hospital in late 2016, and you know what that means – massive medical bills! I paid thousands for medical costs that were billed up to a year after they were actually incurred. I was able to roll with it because I anticipated these extra expenses and could tweak a little here and there to make my spending plan accommodate this unusually high spending in the Health category.

Action Step

Take a few minutes to imagine what you’d do if a massive, unexpected bill comes your way. Imagine you need expensive mechanical work done on your car. Figure out where you would shuffle money around in your budget. Which categories could you spend less in for a few months to pay for this unexpected expense? For example, you could pull money from one category like Dining Out or Fun/Experiential and put it towards Automotive. This flexibility might mean you’re cooking at home more this month or doing free activities instead of paying for tickets to events, but it also means you’re getting things done and covering unexpected expenses without totally wrecking your budget.

 

3. AND plan for the good

Not everything unexpected is bad. Put a plan in place for happy surprises like extra income or cash windfalls.

Do you have a plan for when good things happen out of the blue? What if you get a raise, or win the lottery? Having a clear vision of where that money will go (i.e. not an impromptu trip to Las Vegas – but if that is in your overall plan go for it!) is going to take some pressure off you as well.

I realized the importance of this when something even BIGGER than the hospital visit happened that I didn’t plan for: I made more money than I expected! I’ve realized that an important part of a spending plan (in combination with an overall financial plan) is to decide the purpose of extra income before it comes in. I did a poor job of setting savings goals at the beginning of the year, mostly because I wasn’t planning on paying my loans off so quickly or having time to save my emergency fund that year.

That year, I had already decided that I would divert all extra income to student loans. However, after the high-interest loans were paid off, I had to plan on the fly. I decided, based on my overall financial plan, that I would save my $10,000 emergency fund before starting to invest. Now, in the case of more emergency medical expenses, I have the peace of mind provided by my emergency fund.

Action Step

Take a few minutes to imagine what you’d like to do with any extra money that comes your way. Do a mental exercise where your boss calls you into her office to offer you an unexpected raise. All of a sudden, you have an extra $500 each month. You want to make sure you’re putting that towards something that will help you achieve your ideal life, rather than frittering it away on clothes or a big celebratory dinner (unless you’ve consciously decided that those activities are in alignment with your values).

Then, think about ways that your budget could become more flexible to accommodate additional income. Basically, create a backup plan for the good things that happen unexpectedly. Since I achieved my high interest student loan payoff and saving my emergency fund in one year, I did this mental exercise and decided that all extra income (regardless of the amount) will go towards investing. That way, when I get a tax return or bonus, I know exactly where it’s going to go – directly into my investment account.

 

4. Give yourself time + freedom

Give yourself some time to shuffle things out, some freedom to try new combinations of budget allocations, and in general some flexibility to tweak your Spending Plan when it needs it.

Remember, you are giving yourself permission to spend money on the things that matter most to you.

These things can shift, morph and eventually change. Be flexible – sometimes things just need to get moved around a bit until they click into place.

It took me about two years to iron out my Spending Plan, with monthly tweaks, until it really fit my goals, values, and lifestyle. And still, I’m changing it all the time. Be gentle with yourself, because this is a long-term game and an ever-evolving process. Your spending plan is not going to be perfect overnight.

Also, give yourself the grace to change. Having the freedom to adjust your spending plan to support new goals or interests is an incredible gift to yourself. This is how you move towards living a life you love.

Action Step

Your mindset is essential when it comes to this. Accept that your budget won’t become perfectly suited to your lifestyle and goals overnight. And be willing to change it when necessary. It’s important to remember that you are in control of your spending plan, and you should use it as a roadmap. Your budget doesn’t determine how you live your life, rather how you want to live your life should determine your budget. That is freedom.

 

5. Be honest with yourself

It’s important to be honest with yourself when you compare your spending to your Spending Plan at the end of each month. Sometimes, it’s not all good news (see the steps above on how to handle that). As you’ll see by my quarterly reviews – not all spending goes according to plan. And that’s OK.

Being honest with yourself doesn’t mean being hard on yourself (see #4). This spending plan is supposed to be a guideline for how to spend your money in alignment with your goals and dreams. By being honest, you can course-correct and start moving in the right direction with your spending again.

It’s also perfectly OK (and perfectly necessary) to be honest when what you want in life changes. When what you want changes, how you spend your money will also change. You aren’t locked into the way things were last year or last month. As you grow, so should your budget. Remember, it is a tool, not a prison. Your spending plan should give you freedom, not lock you down and keep you from doing the things you really want to do.

Action Step

Be honest, but be kind to yourself. When you’re reviewing your spending plan for the month and you see some overspending, acknowledge it and adjust for it. All you can do is do better next month. Keeping yourself in the dark or staying in denial won’t help here.

Frequently consider your goals and desires in life, and recognize when they’ve changed or evolved. This is OK, and it’s a natural part of life. You don’t have to stay the same just because your Spending Plan is designed a certain way. When you decide you want something different, accept that, and change your budget to reflect that decision. Then smile, because your plan is working exactly like it is supposed to – it’s helping you live in alignment with your values and goals 🙂

 

Bottom Line

The more simple and more flexible your spending plan is, the better. Simplicity in your budget will ensure that you will stick to it, and flexibility gives you peace of mind when the unexpected – good or bad – happens. Remember, the whole point of a spending plan is to make life easier. That means making it easy to track and understand your finances, easy to live (and spend) in alignment with your values and goals, and easy to adapt to changing situations in a stress-free way.

Sometimes bad things happen, and we often think about or plan for those in our budgets. Remember that you can always shuffle money around in times of need. At the same time, we rarely consider that things could go way better than expected. So take a minute to consider how you would spend extra income to support the achievement of your goals and move you closer to living your ideal life. This type of best-case scenario planning is essential and will make an unexpected windfall exciting rather than stressful or wasted.

Also, remember that your perfect budget isn’t going to materialize overnight. Give yourself the time and freedom to see how it naturally evolves with your life and your personal growth. Your spending plan may take many forms over the years, and that’s OK. The primary purpose of having it is to have the freedom to spend your money in a way that aligns with your values and goals.

Finally, be honest with yourself. And by honest, I don’t mean brutal. This means that you need to be realistic when you overspend, or if your budget categories are no longer reflecting your priorities. Don’t recoil from this honesty. It will help you craft an even better spending plan that will help you achieve your financial goals and live your ideal life.

 

Your Turn:

How are you going to make this year’s spending plan simpler and more flexible?

 

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