10 Smart Personal Budgeting Tips

Budgeting doesn’t have to be such a hassle if you know how to do it correctly.

Budgeting has a pretty bad reputation for being tremendous hassle, but it’s also the easiest way to ensure you accomplish your financial goals. These tips can help you use a budget to your best advantage.

#1: Budgeting for the income you receive, not what you’re supposed to get

If you budget for the income you’re supposed to get, what happens when you come up short? This happens often when it comes to things like child support and alimony payments. Don’t budget for what your court documents say you should be getting. Instead, use the income that you actually receive each month. This will help you avoid overspending caused by a “short month.”

#2: Separate savings from free cash flow

Savings should not be left for whatever you have at the end of the month. That money is known as free cash flow and you can use it to cover unexpected expenses and other things that come up throughout the month. But savings should be separate. Decide how much you can save and set that as a fixed expense in your budget. But even with that savings expense included, you should be budgeted down to the last penny.

A good rule of thumb is that you should spend about 75% of what you bring in each month. That other 25% of free cash flow gives you ample breathing room for all those emergencies that inevitably pop up each month.

#3: Split your Direct Deposit to match your goals

You can direct your HR department to split your Direct Deposit between two accounts (or more if you want). So, think about splitting your Direct Deposit to put the money you want to save directly into your savings account. This will make savings automatic, so you don’t need to remember to transfer the funds each month.

#4: Include cash transactions and small incidentals in your budget

People often forget to include small cash transactions in a budget. This is especially easy to do if you’re using a budgeting tool that categorizes all your electronic transactions. What it doesn’t account for is the few dollars you spend at the vending machine each day. So, you need to make sure you include all these small cash transactions in your budget because they really add up. For example, if you spend $2.50 at the vending machine each workday, that totals up to at least $625 per year.

#5: Divide food costs into two categories

Food is a necessity but eating out is a luxury (and it’s also expensive). This means you should divide food costs into two categories – groceries and dining out. You should have a set amount of money that you spend on eating out with the family and going out to lunch at work. If you hit your target spending limit, it’s time to hit the grocery store and get cooking.

#6: Set practical targets for flexible expenses

Cutting back on some flexible expenses isn’t practical. You can’t just decide to live by candlelight because it’s been an expensive month! So, for flexible expenses like utility bills, electronic bills and fuel for your car, set the target based on your most expensive month last year. Most months, you should fall below that, giving you more free cash flow to use or save. But at your most expensive months (which are usually summer), you won’t be scrambling because your bills are too high to afford.

With all other flexible expenses, use the three-month average rule. Take an average of your past three months of spending and set that as your target spend for each month. If you are consistently spending more than that, then you may need to adjust the target.

#7: Making seasonal adjustments can help keep your budget balanced

Another way to handle expenses that fluctuate seasonally is to make seasonal adjustments to your budget. You basically review your budget twice per year – spring and fall – to adjust for varying costs in summer and winter.

  • Home energy (heating and cooling) costs that can be higher in summer or winter, depending on where you live
  • Higher water bills in the summer for watering your lawn and filling a pool
  • Higher fuel prices in the summer
  • More discretionary spending in the summer if you have kids that are out of school

You can also allocate savings for seasonal events. For instance, if you have kids, you’ll need extra cash at the end of summer to cover back-to-school costs. And almost everyone needs to save money in the fall to cover costs for the winter holidays.

By reviewing your budget in the spring and fall, you can make sure your spending is on track and adjust for these seasonal expenses.

#8: Get everyone involved in budgeting

In order for a budget to be truly effective, everyone in your household needs to be on board. Budgeting needs to be a group effort. That means that you and your partner need to be on the same page. If one of you is saving, but the other is spending, you can’t make progress. So, make sure to sit down and set a budget with your spouse or partner.

You also need to get the kids involved. Teach them about budgeting and why they need to budget. Show them how the household budget is set up and talk about things like putting limits on holiday spending. This will help curb a constant string of “buy me” from your kids that can bust your budget.

#9: Use credit cards strategically to earn rewards on recurring expenses

Once you have a balanced budget, it’s easier to start using credit cards strategically. One strategy is to use credit cards that offer rewards on necessary, recurring expenses that are already in your budget. For example, some credit cards offer cash-back rewards on grocery purchases, while others have offer rewards for fuel purchases. There are even cards that have reward programs if you use the card to pay your utilities.

If you use these cards to cover a budgeted flexible expense, then you simply use the income that you would pay to cover those costs throughout the month to pay off the credit card bill at the end of each month. You use the credit card to pay your utilities, then you use the cash you save on utilities to pay off that bill in full at the end of the month.

This allows you to rack up credit card rewards without increasing your debt load.

#10: Know when fixed expenses may adjust

Fixed expenses don’t change month to month, but that doesn’t mean that they necessarily stay the same forever. Your rent payments can go up each year. Mortgage payments can change anytime there is an increase in your property taxes. Insurance payments can increase or decrease annually, based on what happens through the previous year.

It’s good to know when fixed payments can change, so you can plan to revisit your budget and adjust accordingly.