Most people wrestle with a conflict between the present and the future — how do they meet immediate financial needs and still set aside money for retirement? Learning how to use budgets can be a way of bridging this gap between present and future.
When you are getting started, budgeting can seem a little intimidating. It’s like any time you are faced with a blank sheet of paper (or in this case, a blank spreadsheet) where do you start? And how do you know when you are finished?
To help you along, here are six stages that will help you start from scratch to develop a detailed budget discipline that will guide you into the future.
- Getting started. Perhaps the easiest way to start budgeting is to track your expenses, and then use those expenses as the basis of a budget for the upcoming period. The only problem with this is that existing expenses take on a momentum of their own, when possibly they represent opportunities to save money. If you aren’t afraid of the tyranny of the blank page, another approach is zero-based budgeting. Corporations pursue zero-based budgeting when they are intent on cutting costs. Rather than automatically using last year’s expenses as the basis for this year’s budget, they start from the assumption of a zero budget for each line item, and then decide on the extent to which adding expenses is justified, line by line. In either case, whether you take a zero-based approach or base your budget on prior expenses, start by budgeting for a short period of time, perhaps even from one paycheck to the next. As you get better at budgeting, you can start stretching out the time period.
- Filling in the details. Don’t expect to be able to anticipate everything at once. If you get too caught up in trying to create a perfect budget, you might never get started. Start with the items you can think of, and steadily fill in the details as they come up. You will have to think ahead to anticipate expenses that don’t come up regularly, but the majority of budget items will probably come up often enough that the details will start to fill in pretty quickly.
- Holding yourself accountable. A budget isn’t just something you set and forget — you have to regularly check how your actual expenses are tracking to the budget. In part, this is to keep yourself honest — answering to a budget will help keep you from spending everything in your pocket, or worse, spending up to every credit limit.
- Fine tuning. Besides keeping yourself honest, reconciling actual to planned expenses is a way of fine tuning your subsequent budgets. By doing this, you’ll not only get a sense of where you were off target to begin with, but you’ll also start to understand the dynamics of how certain expenses change over time. These adjustments will help make your budgeting more accurate in the future. With this kind of follow-up, your budget can evolve from a blunt instrument to a precision tool.
- Factoring in raises. Budgets aren’t just about expenses. There is that top line to think about too. How much money will be coming in? It may seem reasonable for someone early in his or her career to assume steadily increasing paychecks over time, but being cautious about those assumptions can lead to a stronger savings discipline. If you assume only modest pay growth, you’ll avoid taking on onerous financial obligations. Too many people get into debt trouble on the assumption that they’ll be better able to afford those debts in the future, and then it never happens. Plus, if pay raises prove to be better than you assumed, more of your income can be directed toward retirement saving.
- Planning for the future. From the start, retirement saving should be part of your budget; but as time goes on, you should become more and more targeted about how much you’ll need to save. Project your expenses into the future with an inflation adjustment. Historically, inflation has averaged 3.21 percent a year, which means prices double roughly every 22 years. Use that projection as a starting point for a retirement budget and you’ll start to get an idea of how much money you’ll need to retire. Saving toward that amount should become one of the top priorities in your current budget, which is how you start to bridge the gap from the present to the future.
Of course, there is no way of knowing exactly what your expenses will be in 30 or 40 years. However, by projecting your current expenses into the future, you can start to get a concrete sense of what your retirement needs will be. Seeing the future in terms of real needs instead of vague retirement goals should help motivate savings, which depends on making room in this year’s budget for some of those future needs.