Episode 3 of the FrugalPod podcast is online and ready for download. You can also subscribe to the podcast via its RSS feed or through iTunes. As always, we encourage you to post your comments, questions, and suggestions for future episodes in the comments section on the blog. Thanks for listening and we hope you enjoy the show.
Episode 3 Show Notes
Budgeting is what we all know we should do but many of us don’t.
Your budget breaks down into two categories: fixed costs and discretionary spending. It’s more important to track your discretionary spending because that’s where most of us have a breakdown in our budget. It’s a lot easier to go overboard in dining out or buying clothes than it is on your rent.
How sophisticated does your budgeting solution need to be?
It’s most important to do it. Doing it is more important than what you use. Pen and paper can be easier than learning a new software program.
Why is Categorizing Important?
Categorizing brings cohesion to your budget. When you put things in categories you begin to get a better picture of what’s going on. If you wrote down where you spent every dollar and listed each gas station separately you’re going to end up with a list of gas stations, not something that’s helpful.
By categorizing you can see how things change over the months. Simply looking at one month’s worth of spending isn’t all that helpful. It’s when you start to compare the same category over different time periods that it becomes more helpful.
How Granular Should Your Budget Be?
It’s more important to be granular in discretionary spending because that’s where we make excuses and our budgets often fall apart. It’s not until you begin digging into the actual service or product you’re purchasing that the record of your spending becomes valuable.
Saving money in structural stuff (such as your cable or telephone bill) gives some people the excuse to spend somewhere else. If you spend $80 a month on your cable bill and save 10%, that’s about $100 a year. Are you going to take that $8 per month and truly save or invest it or are you going to spend it on something else.
When you start to save money across several structural areas, you can get into saving $1,000 or more per year. At that point, you have to start asking what you’re going to do with the money.
The software programs such as Quicken, Mint.com, and Wesabe.com have a few things going for them, primarily automation, categorization, and automatic tracking of finances. David’s used Quicken for years, but has also tried Mint.com and liked the interface. If he was starting from scratch today, he’d use an online system.
Sticking With Your Budget
Turn spending into a game.If you have a significant other, competition can be a good thing. Try to have no-spend days…days when you don’t spend money. Brown bag your lunch, eat at home, and celebrate not spending.
Simply saying, “I’m not going to go to Starbucks today and I’m going to miss it,” places a lot of power on the trip to Starbucks. Do you really care about your latte that much? Yeah, they’re tasty, but the latte represents more than a drink to you.
Busyness can cause you to spend too much, especially in your dining habits.
Coming back to your budget, once you know where you’re spending your money you start to see where your priorities are. You can then ask yourself, “Do I really want to make eating out or vacations a priority, or do I want to make debt repayment a priority?”
Financial planners will often put clients on the envelope system – a system that is old, but it still works for some.
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