‘The dreaded B-word’: how to start budgeting

For some, making a personal budget sounds about as appealing as licking a subway floor.

“They think of it as the dreaded ‘B-word’,” says Robin Snell, a certified financial planner and founder of Nested Financial and Tax Planning. Money is emotional – it determines where we live, what we eat, the education and healthcare we can access, how we socialize, what hobbies we can take up and how much we can travel. And like many emotional topics, a lot of people would rather avoid thinking about it.

But avoiding a budget is often more of a headache than making one. Budgets ensure that we are “not overspending, and that your money is going where you need it to go”, Snell says. “When you start a budget, you are able to assign every dollar a job, and by doing that, you can start to pinpoint where money is going for your own happiness.”

How does one begin? we asked experts.

Take stock

Before you can begin to move forward financially, you have to figure out where you stand. To start, experts recommend keeping track of all your incoming and outgoing money for 30 to 90 days.

“[Budgets] can be helpful as a diagnostic tool,” says Katie Gatti Tassin, founder of the personal finance podcast and education company Money With Katie. By retroactively looking at what you’ve spent, you can begin to reflect on whether your spending behaviors are aligned with your financial goals.

Keep track of your budget by using a budgeting app, tracking on a spreadsheet, or charging everything to one bank card so you can review your statements at the end of the experiment and see where all your money went.

Figure out where your energy is best spent

Once you have a grasp on where your money is going, you can figure out the most efficient way to redirect it. Generally, people who struggle with money fall into one of three buckets, says Tassin.

The first are those whose costs and spending are reasonable, but who aren’t currently earning enough to save any money. For people in this bucket, small lifestyle and budget tweaks are unlikely to make much of a difference. “There’s no amount of budgeting that’s going to make an insufficient income feel sufficient,” Tassin says. She suggests that individuals in this position would be better served by seeking higher-paying work, “in whatever way that [works] for them”.

In the second bucket are those who have a decent income, but spend too much on large, fixed expenses, like rent or car payments. Ideally, Tassin says, housing costs should not exceed 30% of net income. This can be difficult in expensive cities, she concedes, saying: “This is why roommates are really valuable.” Similar to individuals in the first bucket, people in this bucket will not be helped by small budgeting tweaks. Rather, they would best be served by finding ways to reduce their biggest expenses, perhaps by downsizing where they live, splitting rent with a roommate or getting a cheaper car.

The last group is the target of most mainstream budgeting advice: people whose income and structural costs are reasonable, but who spend a lot of money without meaning to. “If you find yourself in this position, congratulations!” Tassin says. “This is the easiest thing to adjust because it’s entirely behavioral.”

For these people, money often goes to eating out, food delivery, streaming subscriptions and impulse purchases. Tassin says she found herself in the third bucket a few years ago. After tracking her spending, she found a lot of her money was going to food delivery orders, especially when she was busy at work. To address this, she decided to take a genuine interest in cooking: “I thought cooking could be a way for me to get myself away from the computer at the end of the day.”

Pay off any high-interest debt

If you have high-interest debt – like credit card debt, or any debt with an interest rate of more than 7% – paying it off should be the first financial priority, experts say. This way, you can “get more intentional with other funds as opposed to paying the credit card company”, Snell says.

Set financial goals

One of the most helpful ways to build a budget is setting specific goals, says Winnie Sun, managing partner at Sun Group Wealth Partners.

“What are the goals you want to achieve in the short term, the medium term and the long term?” Sun asks. A short-term goal might be saving for a vacation. A medium-term goal might be saving for a car or a house. And a long-term goal might be saving for retirement.

While everyone’s financial goals and priorities will be different, experts agree there are some benchmarks of financial stability to aim for.

The first is an emergency fund with enough money to cover all of your household’s living expenses for three to six months. This way, if you are laid off or have an unexpected emergency, you have a financial safety cushion and don’t have to take on credit card debt.

Tassin also recommends aiming to save and invest 10% to 20% of your net income, inclusive of any contributions to retirement accounts.

Make a plan – and be realistic

Often, people tend to think of budgets as a way to set strict limits on one’s spending – $300 a month on groceries, $50 a month on gas, etc.

Not only is this restrictive and unpleasant, but experts say it’s not particularly effective. “Typically, this type of spending is driven by something that is not rational,” Tassin says, adding that this is especially true if one falls into the third bucket of spenders.

Additionally, strict spending limits don’t allow for much flexibility. Consider the holiday season, says Snell: expenses tend to explode during that time because of gifts, hosting and travel. By allowing for more flexibility in our budget, we can better adapt to changing needs throughout the year.

To make life easier, experts suggest automating as much of the process as possible. Set up different bank accounts for different needs like vacation savings and emergency funds, suggests Sun. Then, set up monthly automatic payments into those accounts so you’re not tempted to spend the money. Anything left over can be for flexible spending, Snell says.

Stick to the plan

Often, the biggest mistake people make when it comes to budgeting is not sticking to it.

Perfectionism is the most common stumbling block, Snell says. People who set unrealistically restrictive budgets, then blow them, may abandon the budget altogether rather than adjusting it to be more realistic.

Realism is important, says Tassin. “If we are saying, I’m going to cut my restaurant spending from $1,000 a month to $100 a month, that’s not going to work,” she says – biting off more than you can chew sets you up for failure. Instead, successfully cutting spending in small ways – ordering out three nights a week instead of five, for example, or bringing a water bottle to work instead of buying sodas from the store – can provide motivation for bigger cuts in the future.