How Over Budgeting Led Me Down a Path of Anxiety and Guilt
When I first started managing my money, I meticulously poured over each cent to make sure I had enough to feed myself, save for the future, and have a little bit of fun. Despite my careful watch, I had a problem.
I had so much anxiety when it came to money that I could never have fun if I was spending money. I was racked with guilt whenever I went out to eat, took a trip to the grocery store, heck, even at the gas pump. I felt guilty buying the things that were necessary for me to live life. I was managing my money too much, and it led to unnecessary anxiety and guilt.
Today, I am thankful for that guilt and anxiety because it drove me to ask why I was having such a difficult time, and why I was feeling so uncomfortable with my finances. After doing some soul searching, reading a lot of books (like Ramit Sethi’s I Will Teach You to be Rich.) I figured out that I was over-managing my personal finances. That’s right, you can put yourself in an unhealthy situation if you try to hold onto your money too tightly.
If you’re just starting out and developing your first budget, I hope this article helps you avoid the guilt and anxiety that I dealt with for so long. If you are in a similar situation to the one I was in, don’t worry, there is light at the end of the tunnel. Below I go over the following things that have helped me live guilt free and manage my finances in a healthy way:
- Problems with conventional budgeting
- Helpful tools to track your spending
- How to calculate monthly expenses
- The importance of short and long term savings
- Putting all of this together into a guilt free budget
The Problem With The Zero Sum Budget
The conventional method of budgeting has long been known as the zero sum budget. A zero sum budget is essentially making the difference between your income and your expenses equal to zero. In other words every single dollar must be allocated to something at the start of each month.
This old method of budgeting is what I used to use. The issue with this method is that life can’t be planned out to the T on a monthly basis. We have all had car trouble, needed more money for groceries one month, and other unexpected expenses. The reality is that you cannot perfectly predict how your month is going to go, and if you can, your life is probably a little bit boring. Zero-sum budgeting makes it difficult to live life outside of a predetermined box.
You need a budget that is easy, simple, and quick to set up and manage. Lucky for all of us, there are so many tools that make tracking expenses super easy, even automated in many cases. You can use these tools, along with a bit of planning to create a budget you can manage with little effort, and feel confident about.
Basic Personal Finance Concepts
First, let’s get some basic personal finance concepts out of the way. You have your income (money coming in), specifically your net income, which is your take home pay. Net income is your money after taxes and other deductions are withheld. Next, you have expenses. These are things you spend money on like rent, transportation, and food. Lastly, you have investments, which can seem intimidating but are really simple. Investments, for our purposes, is any money you save. Money you put into short term savings accounts, retirement funds, and other savings accounts are investments. Those are the only three components you need to pay attention to to create an easy to follow personal budget. The goal of budgeting is to make sure that your income and investments are greater than your expenses.
3 Steps For Creating an Easy Budget
Step 1: Monitoring Your Cash Flow
You need to pick your tool. There are many free tools that you can use to track your spending. Most of them generally function the same. I personally would avoid paying for one of these tools because there are so many free options available. Here are some of the ones that I recommend.
Mint.com
Mint is great! If you have heard of TurboTax or Quickbooks this comes from the same people at Intuit. They are a very reputable company in the finance/accounting industry. It is the tool I personally use.
Mint does take a little bit to get used to. It is not the most intuitive tool in my opinion, and it has its quirks, but it is still very powerful. You can easily tie all of your financial accounts to it. I have all of my investment accounts, banking, credit cards, and mortgage tied to it. This means that Mint can keep track of all of my accounts and I can see them all live, right in one place. It is also great for tracking spending. If you have multiple debit and credit cards like I do this is a great option to make sure you have a clear picture of your spending across all of your accounts.
You can set your spending limits in various categories and it will notify when you are close to those limits. It’s not perfect (it loves to categorize my trips to the bike shop as “fast food”), but it is fairly spot on. For those transactions that Mint miscatagorizes, you can edit them to make sure they are accurate.
Another great thing you can do is track your bills. I have all of my bills with their due dates and amounts set in Mint. I get an email about a week before the bill is due, as well as a notification in the app. If you don’t have automatic payments set up for your bills this is a great way to never miss a payment!
The third feature I love is the savings goals. You can set goals and Mint will tell you how much you need to save to meet them by a certain date, or what date you will meet them based on your contribution.
The final feature that is worth mentioning is the tips that are built into Mint. Sometimes I like these and they actually provide useful information. Most of the time though they are advertisements and are one of the reasons this app lacks a clean and intuitive interface.
Clarity
I used Clarity Money for a limited time last year. It wins for user interface and design. I think it’s one of the most beautiful budgeting apps out there. The UI is simple and all your financial information is presented to you in clean, easy to read graphs. I recommend this app if you are just looking for a spending tracker as its simplicity lends well to that.
Clarity’s features are not quite as extensive as Mint’s, but they cover all the basics. You can link your accounts, track spending, and they even display your subscriptions so you can cancel the ones you don’t want.
One thing to note is that there is no budgeting feature, it is simply just a transaction tracker. Clarity is simple and easy to navigate, which is why I recommend it to people who are just starting to look at their spending.
One Card Method
This method is the easiest, and does not require any app. If you only have a single debit card (or typically only use one of your cards) this method will work well for you. All you have to do is look at your bank statement! Each transaction will be listed there and you can go through and categorize them. Some banks will even categorize your spending for you. In my experience their categorization is about as good as any other personal finance app’s. This method is great if you want the simplest form of budgeting.
Step 2: Figure out your baseline
Although you don’t need to worry about making your expenses and income equal zero, you do need to know the amount of money you require to cover your expenses each month. Knowing your expenses takes just a few simple steps.
The amount of cash you need to live each month is your baseline. Ideally, you have enough cash to cover your nut each month and some extra to spend for fun. Figuring out what your baseline is is simple.
Start by listing out all of your expenses. This should include things like housing, transportation, groceries, subscriptions (like Netflix and Spotify), and bills/utilities. Then, list all of your investments. These are things like your emergency fund, retirement, and include anything you are saving up for short term (a new couch, car, a sweet vacation to Australia). It should look something like the image below.
Once you have that number you can compare it to your income. And, hopefully, you have some left over. If not, don’t panic! Take another look at those expenses and see where you can cut back. If you can’t work them down at all take a look at your savings. It’s important to save money, but you also need to let yourself have a little bit of fun, and guilt free spending makes that happen. If you find that money is really tight, consider refinancing (if you own a home interest rates are crazy low at the time of writing this article), earning some more money (this can be done online nowadays through multiple means), or, if none of those are an option, hunker down for a bit until you figure out how to balance out the checkbook.
Step 3: Sticking to your guilt free number
The difference between your nut and your monthly income is your guilt free spending money (a term coined by Ramit Sethi). You can spend that money on going out to eat, clothes, fun stuff, whatever you want really. You know that your necessities are covered and this is your money to treat yourself. As long as you have a healthy savings built up for emergencies, your expenses and investments covered, and you keep your spending equal to or below your guilt free number, you should have nothing to worry about.
The Key to Security is Saving
The plan I have outlined above relies heavily on short and long term saving. I am not advocating you tuck away the bare minimum for living expenses and then go blow the rest on beers with the gang. You need to create a habit of saving for the irregular things that come up, car repairs, doctors appointments, birthday gifts, holiday shopping.
Personally, I save up for all of these things using separate savings accounts. I have roughly a dozen savings accounts all allocated to various savings goals. For example, giving is very important to me. I save a set amount each month that is only to be used on other people. The money in that account is for something specific and I know exactly how much I have. Another example is my emergency fund. It has its own account that I don’t touch. If something were to happen, like a big car repair, or emergency home repair, this money would cover that. Having separate accounts works well for me because I can see what the money’s for and how much of it there is.
My Biggest Mistake: Something You Should Avoid
Remember, have grace for yourself in this process. I didn’t when I first started. Budgeting and personal finance, like everything else, are going to take practice. You will probably make some mistakes and that is okay. I have made many mistakes throughout the years, but you learn from your mistakes and get better. You deserve to live guilt free when it comes to your personal finances. If you have questions about starting this process, be sure to send us an email! We would love to help you on your path to financial wellness.
Topics Covered:
- The issues with using a zero sum budgeting model
- Helpful tools to track your spending
- How to calculate your “nut”
- Your income-nut=guilt free spending money
- Spend freely within your guilt free number
- Saving is important for this model, unexpected things will come up and you need to prepare for them
- Be patient with yourself, you will be great at this in no time!
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Originally published at www.20somethingsuccess.com.