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In our new series, Investing In Yourself, Chelsea walks you through the basics of getting your money under control so you can reach your long-term goals.

Written by Amanda Holden

The Financial Diet site:

Hey, guys. It's Chelsea from The Financial Diet, and this series is sponsored by Fidelity Investments. And today we are going to be talking about budgeting but more specifically talking about how to create a budget that you can actually stick to.

Budgeting is a habit that took me quite a bit of time to become comfortable with. Frankly, Chelsea of eight years ago would have been affronted by the idea that she should even have one. But now I view budgeting as an essential tool that allows me to live the kind of life that I want to live. I find that having a reasonable, clear, easy to stick to budget is one of the sharpest tools in my toolbox. But as corny as it might sound, it is a tool that gets duller if you are not frequently sharpening it. And that mean regular budgeting.

I would frankly spend all of my money on very smelly cheeses from the cheese shop and various cans of paint for my accent walls if I didn't have something stopping me from doing so. And I know that for a fact because that's literally what I used to do. And to be clear, I do still buy those things. It's just that by having a budget, it provides a kind of guard rail around my spending in which I can spend comfortably. I no longer have to wonder, can I afford that thing? Because I've already understood exactly how and why I can.

And a budget is also essential for balancing your current and future wants because if you make all of your financial decisions based on what feels good right in this specific minute, you are likely to make a lot of really unsustainable ones.  But beyond just balancing your future and current self, think of how easy it has become to mindlessly spend money. In addition to the fact that we're constantly being marketed to from every angle about all the things we need to have in our lives, it's become basically frictionless to actually spend the money itself. Whether it's the easy swipe of a debit card or that one-click checkout of your online shopping cart because you conveniently already have your card info saved in your browser, it has become way too unmemorable to spend money, and that's part of what makes it so easy to do.

 A budget is a way of setting boundaries in a world that is constantly trying to separate you from your money. And that's why we here at TFD believe that having the right budget is actually freeing because you never have to wonder again about whether or not you can afford something because you already know that you can. No more confusion at checkout or feelings of guilt and shame for buying something you wanted because if it's in the budget, you know it's all good. So how do you find the budget that you can actually stick to? Well, here are five ways that you can find the right budget for you.

 Number one, before you build a budget, get to know your monthly cash flow. You cannot build a budget without first understanding how you actually spend money. I cannot tell you how many times I have seen people try to create a budget with these completely aspirational, detached-from-reality numbers like, oh, I'll only spend $100 on groceries or clothes shopping or what have you in a given amount of time when you are absolutely lying to yourself. And that is setting yourself up for failure, which you must avoid at all costs because the budget that's right for you is going to be one that you can actually stick to and build on. If you're constantly going over your spending categories in a given budget, you are much more likely to just give up on that budget entirely because you can't keep to it so why even try. But in order to set the right amount for each category to build a sustainable budget, you have to intimately know how you already spend your money.

So print out your statements for at least the last three months and get to know them inside and out. And trust me that if you have not done this recently, there is going to be at least one thing you find in there that is going to leave you shaken, particularly considering how much most of our spending has changed in the year 2020. And from there, start breaking that spending down into categories, things like rent and utilities, essential spending like groceries, clothes, makeup, home items, fun money, transport. And start to get to understand where the patterns are. Is your spending varying wildly from month to month? Is it remaining pretty consistent? And how much are you actually spending in each of those categories?

And here's a hint-- we are all these days tending to spend more money at stores like Target that have a little bit of everything from groceries to home items to clothing, and if you have places like this that are frequent areas of shopping but are hard to put into a specific category, you can also create a line item in your budget that's just for a specific store you shop at a lot like Target or Costco. There's no one right way to make a budget in terms of categorizing, it just has to make sense for you.

Number two is, do not assign morality to your purchases. When looking back through my spending, I get to observe all of those moments and appreciate them again-- the money I spent on that awesome coffee date with a friend or a pair of jeans that I absolutely love and wear all the time or a solo day trip to the museum. I get to feel appreciation and gratitude for the money I spent and what it allowed me to do, and I get to really understand where all of those dollars are going in practice. Our lives can feel so busy and as if they go by so quickly that using this time to practice a little gratitude and to be more present in the moment can be a way to make sure you are more intentionally spending. I cannot tell you how often I see people beating themselves up for money they chose to spend, even sometimes on things that they truly did enjoy and feel fulfilled about in the moment. But even if a bit of spending was a mistake, ultimately, it's important to remember that no spending is inherently good or inherently bad.

 It's not a value judgment on your character, and you don't have to beat yourself up for making a mistake in how you might have spent a bit of money. And trust me that there is nothing you are doing with your money that is more or less embarrassing than what the people around you are doing with their money. We have all been suckered in by some product being shilled by an Instagram influencer or tickets to a concert for a band we didn't even listen to because we wanted to impress a guy who did. Life is meant to be lived, and for most of us, that does necessitate sometimes spending money and sometimes spending it in a less than perfect way. And the point of a budget is not to completely eliminate all frivolity, it's just to make sure that that is frivolity that you can actually afford and is sustainable. If you want to make your budget work, it is going to have to be something that you feel good about. And while it may sound a bit woo-woo, you have to make sure that your budget is not being used as a tool to punish you or make you feel bad. It should ultimately be freeing and part of that freedom is realizing that there is no inherent morality in the spending choices you are making.

Number 3 is to test out a few different budgeting strategies until you find the one that clicks. So there are about as many ways to budget as there are to spend. And while I cannot go over all of them here today, I want to discuss a few of the ones you might want to try out because, ultimately, to find the right budget that actually works for you long term, you are likely to have to experiment with a few different approaches.

First, there's good old fashioned line item budgeting that you might be doing in something like an Excel spreadsheet where, basically, each category or line item gets a certain amount allocated per month. And you make sure that within each of those line items, you don't go over.

Zero-based budgeting is similar but rather than having each category be given a certain dollar amount that must not be spent over, you are starting your month with a certain amount of money, likely something like your monthly paycheck, and then giving every single dollar a job until you get down to 0 at the end of the month. And each dollar could be going to something like groceries, but it could also be going to something like your retirement account. No single dollar is left unaccounted for. And each of these budgeting methods can be supplemented with physical cash envelopes, which can be a great tool to help you manage your spending for things that don't require online bill pay. With the cash envelope system, you're doing just what it probably sounds like-- putting a specific amount of cash into an envelope, each one being labeled with their specific category or spending duty. And you are allowed to use the money in that envelope until it's gone. It might sound extreme but for people who have a hard time staying within limits and are also helped by very physical, tangible things, this can be really helpful.

On the other hand, if you're already getting very good at hitting your savings targets and aren't having too much of a problem keeping your spending in check, you might want to try the pay yourself first method. You do what you need to automate all of your savings and various allocations as soon as your money comes in, and then the rest you're free to spend as you see fit. Ultimately, it doesn't really matter how you're budgeting or even where you're allocating your money as long as it's helping you reach your goals. Whether your rent represents 20% or 40% of your budget or whether you're spending x or y amount at restaurants every month, what matters is that this is a budget that you can stick to and that allows you to reach your goals.

 So experimenting with a few different systems and maybe hoping to eventually get to this more lax, low touch budgeting system like the pay yourself first method can be a good way to help you find things that work for you along the way. And similarly, try a few different physical means of tracking your budget like literally with a pen and paper, using cash envelopes, using manual Excel spreadsheets, using automated budgeting tools to see what most helps your brain work in the right terms.

Number 4 is identify your mistakes, and actually fix them. To be perfectly honest, it's a little misleading to say that you are going to "find" the right budgeting system that works for you as if it were a lost pair of keys. What's more reasonable to say is that you are going to create the budgeting system that works for you along the way. And inevitably, part of that creating process is going to be making mistakes-- things like going over budget in a specific category or realizing that you allocated things wrong or not setting up your automated transfers properly. But what's important is that you understand these mistakes and fix them along the way rather than taking them as a sign that budgeting in general doesn't work for you.

Some common mistakes are things like, for example, constantly overspending in a certain category, which is not a sign that you are not able to stick to a budget. It's a sign that you've allocated that category too low. It can be very easy to aspire to the best number possible and really wanting to whittle down a specific spending category, particularly if it's one that we deem as generally "unnecessary". But ultimately, it's about being honest with yourself. So although that may mean taking a little bit of money away from a different category, ultimately, you want to get to a place where you are able to stay within it. Another common error is not planning for one-off expenses.

Typically, in any given month, there are going to be at least a few purchases that are outside of the purview of your preconceived categories. These are often things that we don't anticipate or didn't think we would need or just forgot to account for, but they're almost always going to happen. So making sure there is a part of your budget that is represented for everything else is essential to ensuring that one unexpected expense or something out of category isn't going to derail all of your savings goals for that month.

With budgeting, you always need to be expecting the unexpected-- but there's a category for that. Another common reason the people will get tripped up is because their income varies month to month, whether they have side streams of income or because they're freelancing. And it's easy to get tripped up when you cannot reliably predict exactly how much money is going to be hitting your account each month, but this is pretty easy to overcome. You can either get a month ahead of schedule and allocate your categories based on last month's spending, or you can choose to budget based on an averaged out number that's on the low end of what you're earning. You obviously never want to assume that every month is going to be a good month because when it's not, you might be unable to pay your bills. None of these mistakes are the end of the world or even inherently mean you're bad at budgeting. They just need to be identified and addressed.

Lastly, the fifth and perhaps most important tip is understanding that budgeting is an ongoing practice. Ultimately, the real challenge about budgeting isn't the math. You can handle the math. It's not that complicated. The real challenge is in being able to stick to a budget on an ongoing basis. But there are luckily some pretty easy ways to do that.

First, you need to make sure that your budget is being woven into your life in a real way, and that means dedicating a specific time to handling your budget that falls neatly into your daily, weekly, or, at the minimum, monthly routine. You can set up a special time for yourself like every week Thursday I throw myself a little mini pizza party and go over my budget or whatever helps you stick to it. You could even make going through your bank statements part of your routine right before brushing your teeth at night. But beyond just putting it into your routine, you need to make sure that you're budgeting is something that feels fun. You should get yourself a cute journal where you can use colorful little stickies and pens to make things come to life. You can find an accountability buddy where you can set up like monthly managing our finances date nights. You can take the time to relive the memories of the things you spent money on when you're going through your statements. You can use your budgeting time as a time for gratitude, presence, and, yes, a little bit of joy. But of course, you must always be keeping in mind why you are budgeting. If you don't have goals that you're tracking along the way and staying motivated by, it's going to be very hard to motivate yourself to stay on budget in the moment. So making sure to visualize, understand, and keep close track of those goals and the progress you're making is of the essence. I believe that anyone can find the right budget for them. It's just a question of trial and error and sticking to it. But at the end of the day, it will be very much worth it. So good luck.

As I mentioned, this video is sponsored by Fidelity Investments. They are here to help you reach your savings goals. So if you're looking for an easy way to finally start investing what you save, check out Fidelity.