There are dozens of helpful budgeting websites that can show you exactly where all of your money is going. Many have colorful charts and graphics that pop up and all sorts of cool, fun gadgets associated with them. Some let you customize and categorize to your heart’s content—putting the numbers you’ve entered into a dazzling pie graph with neat little sections labeled. You are lulled into a sense of accomplishment. It is easy to think that you are done.
The reality is that budgeting is just a means to an end. Knowing where your income goes or paying bills is not going to change your financial situation. You need to take some steps and use that budget to put some effective systems into place.
It’s time to do a little soul searching. Decide what is really important to you when it comes to your finances. Set yourself a goal. It doesn’t have to be big, but it does have to be meaningful. Write it down. This is going to be your driving force—the why you are doing what you are doing. If you don’t know the why, you will not be successful when tough choices or sacrifices need to be made.
Let’s move on to using your budget as the first step to get you to that goal you’ve just identified. Most of us have a budget that is awfully tight, or maybe even a little short each month. That won’t change unless you change it.
1) Take a close look at that colorful pie graph and decide which expenses are committed and which ones are discretionary. Committed means absolutely has to be paid—things like rent, utilities, and auto payments usually qualify. Discretionary items are things that we have choices about. They are usually things that we want, but we really don’t have to have.
2) Address the discretionary first. Take small measures. They will add up. Don’t go out and make a drastic change, like moving into a smaller house with a lower monthly payment. That is too much work, has other costs associated with it, and will be emotionally painful. Small steps are what need to be taken—like cutting down on eating out or watching a movie at home instead of heading to the movie theater. These are successes that you can build upon and the money you save will reduce your monthly shortage or increase your surplus.
3) Examine your committed expenses. We often place an item in the committed category when it should be discretionary, or we use the committed label as an excuse not to touch something that can be worked on. For example, do you really need to be on an unlimited minutes cell phone plan? Do you really need all the cable packages you’re paying for? There are a myriad of ways for you to increase your monthly cash flow, but you need to find the right method for you.
4) Constantly ask yourself, “How important is that?” Small sacrifices will feel a lot less painful if you keep answering that question with your goal in mind. Keeping focused on your goals is what will enable you to use your budget as a tool to reach them.
5) Apply your monthly surplus toward reaching your goal. For example, if your goal is to send your child to college, then you could open up an appropriate college savings plan. Be sure to get professional advice—a qualified financial planner can help you find the right tools.
Remember that budgeting is not enough. If you want to improve your finances, you have to take action.
By Karen White, CoFounder & Chief Product Officer of iQuantifi