Archives for June 2013

You’ve heard about budgets. You’ve seen budgets. You’ve been told to make a monthly budget. It’s a tragic irony, but after all that, most can’t. Despite the ease of conceptualizing a budget, complying tests a different skillset: self–control.

Mint.com is an incredible development in money management, but it’s just the start. These services aid in the monitoring of spending, but don’t manufacture self-control. To create and follow a monthly budget, behavioral restructuring must take place. Over the course of this article, I’ll help you create a budget and then change your decision-making to follow that new plan.

How to Create a Monthly Budget

Creating a monthly budget goes back to basic accounting skills. It’s a simple equation: What you spend must be less than you take in. But despite the brevity, it’s the most important foundation to revolutionizing your bottom line. In 5 short steps, you’ll have your budget ready.

1. Where is your money going?

This can be the most time-consuming part. Track your expenses and write down the totals. For me, my tracking is all online, which makes the process relatively effortless.

A couple months ago, before I started this site, I was eating out far too much. The realization and behavioral restructuring to pack lunches saved me about $300 a month. Just looking at where your money is flowing is the first step to success.

2. Pick your poison program

Whether you choose to use Excel or Google Drive/Docs for spreadsheets, it won’t matter that much. My recommendation is to store it with Google because the portability and accessibility allows me to check how I’m doing on the go.

Get comfortable with the basic functions of spreadsheet apps. Most offer powerful mathematical tools that few know how to use. Totaling numbers and columns can make your budget update automatically and respond instantly to changes each month. Again, this is why a strong budget is essential to balancing the spending. (Here’s what formulas look like: =(B21+B22-B19))

3. List the monthly essentials

By examining your monthly spending, some basic categories should emerge. Follow these and remember what your regular bills are. For me, this includes rent, food, car loan, debt repayment (student loans), utilities, car insurance, health insurance, dental insurance, tuition (graduate school), and gas. To better understand how my money flows, I include tax withholding at the state and federal levels, but this is hardly necessary if you know your total take-home pay.

4. Input values from last month

Now that you’ve created the basic categories and totaled the dollar amounts for each, just input them into the spreadsheet. Create a spreadsheet function that totals this new column of costs.

5. Input expected income and subtract costs to establish budget

Like I said, I put total income here (before tax withholding). Whatever you choose, this number should be subtracted by the associated costs from step 4. Now you have the basic surplus or deficit. The questions about cutting costs or becoming more frugal in some parts of your life are up to you. The key to abolishing your debt is not only balancing the budget, but creating conditions for a surplus.

How to Follow a Monthly Budget

If you made it this far, you’re well on your way to saving more. The key now is to change your traditional spending patterns. Unfortunately, this is where most people falter.

There’s a form of therapy called CBT (Cognitive Behavioral Therapy). Essentially, this enables thought and action changes in direction. That’s what will be doing. Following any sort of behavioral change requires significant preparation and work. These are 3 important tips for following that new budget.

1. Where do you splurge, slip up, etc.?

Be honest: Where are the holes in your budget? When you actually ask what’s necessary versus desired, there’s usually a gap. Closing this gap is key to living the frugal life. Maybe you can’t change your apartment rent, but you likely can eat out less. By the end of this search, you should have identified at least one action you want to accomplish.

2. What positive action can replace this?

When I want to eat out for lunch, I must find a positive alternative. This is key to modifying behavior. What can I do that allays the desire to eat out? This action will differ for everyone, but the common root is preparation. The times that I wanted to eat out, I was hungry. By suppressing my hunger, I can effectively reduce the urge to splurge. The solution? Now I carry energy bars nearly everywhere I go.

3. What positive punishments can be established to prevent future spending?

Preparative accountability is also important. Who will hold you accountable for the actions you make? As social creatures, this should encourage healthier behavior and spending prevention when the right people are requested for your help. Ask a trusted friend to become a benefactor to your bad behavior. For instance, I could ask a friend to hold me accountable for eating out. Their reward? If I slip up, I owe them $10 (about the cost of another lunch). This punishment and social accountability is key to changing behaviors.

In case you want to learn more about the research and support behind this, watch Professor Dan Ariely explain behavioral modification for better self-control: