2 Life-Changing Budget Hacks

Date posted: Feb. 17, 2017
2 Life-Changing Budget Hacks

Photo Credit: Dan Edwards
 

Any financial expert will tell you that budgeting is the key to financial success. Learning to budget is like learning to walk before you can run, or learning to spell before you can read. Budgeting lets you parse out where your money is going and allows you to maximize it so that you can reach your financial goals.

But a budget isn’t a one-size-fits-all tool. Everyone’s budget will look different, and there are several things you can do to hack your budget and supercharge it, making it work for you even more.

Here are my top tips.

Spending vs. Saving

Most budgeters will divide their budget up into some version of the following categories:

  • Housing
  • Transportation
  • Groceries
  • Entertainment
  • Household Spending
  • Debt
  • Savings

While this is a great starting point for a budget, dividing your money up into this many categories can make your budget appear balanced, when it isn’t. Instead, try setting your budget up with just two categories: spending and saving. By categorizing all of your transactions as either saving or spending, you will automatically try to minimize your spending and get the percentage of your budget allocated to savings up a bit.

For example, let’s say you have the following budget:

Item

Amount

% Of Budget

Mortgage and Utilities

$1,500

43%

Car Payment, Gas and Insurance

$500

14%

Groceries

$500

14%

Entertainment

$200

6%

Household Spending (Cell Phone, Netflix, Etc)

$200

6%

Debt (Student Loans)

$400

11%

Saving for Retirement

$200

6%

Total

$3,500

100%

This budget is a little heavy on the housing side, and a little light on the savings side, but overall doesn’t look too bad. But, if you reclassify all of these items as either saving or spending, you end up with an entirely different angle:

Item

Amount

Percentage

Spending

 

 

Mortgage and Utilities

$1,500

 

Car Payment, Gas and Insurance

$500

 

Groceries

$500

 

Entertainment

$200

 

Household Spending

$200

 

Debt

$400

 

Total Spending

$3,300

94%

Savings

 

 

Retirement

$200

6%

Total

$3,500

100%

By dividing up your budget into either spending or saving, you can see that you are spending 94% of your income every single month and saving just six per cent. Six per cent is way too low for a healthy budgeter, but this information wasn’t obvious because of the way the budget was laid out

By orienting your budget into spending versus saving categories, you will automatically be inclined to get that savings amount higher. You’ll always be working towards ways to increase the amount that goes towards your savings and decreasing the amount you’re spending. By just looking at this budget I can see a few easy ways to send a lot more money towards savings. First, if you pay off your car loan, you’ll free up $300 per month to send towards savings. Second, by paying off your student loans, you’ll free up another $400 per month.

Just these two simple actions could take your savings rate from a mere 6% every month to a much more healthy 26%.

Crash Test Your Budget

You might be living on a budget now, and feel like you are making great progress with your finances. But what would happen if something went wrong in your life? What if you lost your job, or got injured at work? How would you make ends meet? Can your budget withstand such a shock?

These questions can be answered by crash testing your budget. Crash testing your budget is the exercise of taking your current budget and making an emergency budget from it. Your emergency budget is the budget you would use if you lost your job or got injured at work. Let’s use the budget above to make an emergency budget that assumes you lost your job and are on unemployment insurance earning about 55% of your net income, or $1,925 per month.

Right off the bat, you can probably expect a decrease in gas costs because you won’t be commuting, we’ll say that category decreases by $50.

You can also expect to switch to a rice and beans diet and decrease your grocery costs down to about 50%, or $250. Entertainment is out the window completely, you’ve lost your job after all! You can also expect to put your retirement contributions on hold for a few months while you look for a new job. With those changes, here is your new budget:

Item

Amount

Mortgage and Utilities

$1,500

Car Payment, Gas, and Insurance

$450

Groceries

$250

Entertainment

$0

Household Spending (Cell Phone, Netflix, Etc)

$200

Debt (Student Loans)

$400

Saving for Retirement

$0

Total

$2,800

 

With your budget reduced, you’ll spend about $2,800 per month. That’s $700 more than you’ll have coming in each month from employment assistance. This crash tested budget gives you some very valuable information. First, it shows you that an emergency fund is very important. An emergency fund is meant to be a bridge in these situations. If you lost your job and had an emergency fund, you could draw $700 from it every month while you look for a job. Assuming you had the recommended three months of minimum living expenses saved already ($2,800 x 3 = $8,400) you could live for 12 months without using debt to make ends meet.

Without an emergency fund, the only option is to use debt, which can get very expensive very quickly.

Second, this crash tested budget shows you that your expenses are quite high and if you had to cut your budget, you wouldn’t be able to cut it by very much. In contrast, if you had your debt paid off, you’ll be able to cut your budget down to $1,950 per month. A budget of $1,950 would allow you to live almost entirely off your unemployment insurance income, and if you drew from your emergency fund, you could live off it for 336 months before you found a job. Not days, months.

Budgeting is important, but how you frame your budget is equally important. It can get easy to become complacent and think that just because you are budgeting, that is enough and you don’t need to push yourself. That isn’t true, and by looking at your budget through a different lens, that becomes more clear.

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