A Better Way to Budget?

By Paul Williams

Budget. It’s a four-letter word to many people. We hate the
restriction, the deprivation, and tracking all the little details.
But personal finance experts continue to tell us we need a budget.
Don’t get me wrong. Budgets are very useful tools. I think everyone
should try to use one (or something like it) if they really want to
have control over their finances. But I wonder if we don’t go about
it the wrong way when we try to implement budgets.

For someone who’s never had a budget, the whole process can seem
daunting and mysterious. What’s the right way to budget? Why should
I even do it? How do I track all my expenses? While budgets are
quite simple (a list of income and expenses with goals), there are a
number of questions that can come up for the uninitiated. They find
some answers from people who seem confident and knowledgeable and away
they go. They make up their first budget and set high goals. Maybe
it looks like this:

That’s not a bad start. It’s probably missing some categories, but
they covered the major areas. The problem is this person’s been used
to spending $200 a month eating out, goes to a couple movies every
month with their friends, and buys every new Apple gadget the comes
out. Their actual spending is nowhere near their “ideal” budget, but
they don’t think about that.

They try to stick to this new budget, but amazingly they fail. After
going two weeks without a movie or eating out, they cave in and
splurge. They can’t resist the new iPad and buy it even though they
didn’t budget for it. Then they wonder why they didn’t save anything
at the end of the month.

A Better Way?

I think the problem with shooting for your “ideal” budget all at once
is that it requires major changes immediately. It feels like
deprivation. It feels painful. And we don’t like pain. So we give
up on the budget, declare it doesn’t work, and go back to our old
ways.

But maybe there’s a better way. What if we didn’t try to fix our
spending in one fell swoop? What if we simply focused on one or two
areas at a time – making small, incremental improvements every month?
It might take longer, but your chances of successfully reaching your
goal are likely increased. Here’s what this process might look like.

First, track your spending. Without knowing where your money is
going, how will you know where you need to focus? I suggest using
something like Mint or Quicken for this. It takes a little bit of
time to set up, but it can be fairly automatic after that. Do this
for a month and you’ll see where most of your money is going. (It
won’t capture everything because some expenses are irregular or
semi-annual.)

Next, take a look at your spending. Pick one or two areas you’d like
to cut back on. (Or choose to focus on increasing your income.) Set
a reasonable goal for yourself. If you’ve been spending $200 a month
eating out, it’ll be hard to drop down to $50 a month right away.
Instead, start smaller and grow from there. Maybe a goal of $150 or
$175 would be better. Give the money you’ll save a job (like
increasing your savings or paying off debt). Spend the next month
focused on your efforts in these one or two areas. Keep tracking your
spending.

Rinse, lather, repeat. As you continue going through this process,
you’ll make small changes that are noticeable but not drastic. It
might take a year or two to get where you really want to be, but
that’s better than setting ridiculous goals and giving up right away.

This Won’t Work for Everyone

This method probably isn’t ideal for someone who needs to make a big
change fast. If you’re drowning in debt or having a major spending
problem, you’ll have to make a few drastic choices right away. But
once you’re in a sustainable mode, you can start using this strategy.

And I’m not going to pretend this is something new. I’m sure someone
else has suggested it before. I just think it could be a better
alternative for those who have struggled with budgeting in the past.
What do you think? Is this a reasonable process for achieving a goal?
All it really amounts to is breaking a big goal down into bite-size
pieces. Share your thoughts and tips in the comments, and let’s see
if we can improve this idea.

This guest post was written by Paul Williams, a Christian
financial planner in Pennsylvania. Paul regularly writes about personal
finance from a Christian perspective on his website,
Provident Planning.

Have you ever tried building a budget a few expenses at a time? Do you
think going “cold turkey” on spending would be a better way to develop a budget?
Do you have any other ideas on how to implement a budget for someone who’s
never had one?