Lessons From Being Broke: How to Create a Budget

By Angela Epley

At some point in our lives (like our 20s), many of us have struggled to make ends meet, let alone find financial success. But just as the strongest steel is forged in the hottest flame, our most challenging experiences can yield the most inspiring life lessons. Sometimes, being strapped for cash forces you to learn how to manage money, set (and meet) financial goals, and gain a new perspective on how you value the things and experiences in your life.

Here are some of the most common lessons learned from those who’ve come back from the financial edge.

1. Know Your Priorities

Some financial decisions are easy: Paying your rent instead of buying a big-screen TV, for example. Other decisions are tougher, like what to do if you get an unexpected infusion of cash in the form of a $500 tax refund. It might be FUN to go on a weekend trip, but it’s FUNCTIONAL to repair your broken A/C window unit so you’re not paying hundreds more in energy costs next summer. Knowing what you really value will help you avoid spending money mindlessly. A big piece of advice: Make sure your spending decisions align with your priorities (needs versus wants) and values.

2. Develop Spending Discipline

Just as it’s easy to overeat if you’re not watching your portions, it’s easy to overspend if you’re not watching your spending. The best way to develop discipline is to set spending goals for the immediate future (with a budget), then regularly track actual spending to see how it measures up.

  • Determine Your Budget. Using paper or a digital device, list out major spending categories by essential expenses (“needs” like utilities, food, rent, insurance) and discretionary expenses (“wants” like eating out with friends and “fun stuff”). For fixed and predictable (like rent), note the assigned monthly spending total next to each category. For expenses that vary (like groceries or entertainment), take a guess, set a goal, then adjust after a month or two based on how your real spending habits shake out.
  •  Record Your Expenses. As you move through the day, record what you spend per category so you can keep a running total to compare against your budget. Don’t just pay attention when you hand over cash or plastic — record it so you can see whether your daily actions are helping you build financial security or keeping you close to the edge.

The goal here is to actually see where you point your hard-earned dollars. And have patience — it’ll take some time for this to become a new habit. Experiment with a few different methods to find a routine you’ll actually stick with. There are lots of online financial planning tools to help you, like this one from USAA.

3. Create an Emergency Fund. 

A stash of cash reserved for emergencies only will protect you against the unforeseen expenses that might make you go broke in the future. It’ll also keep you from reaching for high-interest (credit card) debt to cover must-pay expenses. If you’re just starting out, aim to save $1,000, but if you can save more, use the 3-6-9 rule to figure out your emergency fund size.

  • More on 3-6-9. Three, six and nine months’ worth of essential (“needs”) expenses is usually recommended as a target amount for an emergency fund, but the difference between three and nine is quite large. Finding the right number for you depends on a few factors, like:
    • If you’re single, rent a home, have a steady paycheck and have a safety net (like family members to live with in case of emergency, three months’ take-home might be right for you. (You have lower expenses and help if you need it.)
    • If you’re married with kids, own a home and have two steady paychecks, six months’ take-home might could be your sweet spot. (Saving money is harder with higher expenses, but you still want more security to cover others.)
    • If you’re self-employed, a freelancer or have a less-predictable income, nine months’ take home is likely more up your alley. (When work is “feast or famine,” a heavier emergency fund can see you through extended dry spells.)

4. Ignore the Joneses

Setting financial goals (and paying off debt) means doing what’s in your best interest, determined by you, not anyone else. While the people around you might seem like they’re rolling in it, many (if not most) are actually in serious debt. In fact, according to a Federal Reserve Board study, 15% of American families report that they spend more than they earn, and 31% report that spending was equal to income. It’s likely that your neighbors are spending more than they earn, or are living paycheck-to-paycheck and buying more than they need with borrowed funds.

Learning to live happily within your means can help you tune out the white noise of the constant reminder to consume that’s all around us. Besides, comparison is already the thief of joy: don’t make it the thief of your financial security or future, too.

No matter your financial situation or how far you’re in (or out) of debt, it always makes sense to track your finances. Check out these online tools from USAA to help keep an eye on your spending habits and on the prize (financial readiness).  

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