One of the most common questions I’m asked about travel is “How can I afford it?”
You can certainly look for the cheapest plane or cruise tix and the best values in tours, hotels or restaurants. But you can also try setting up a budget geared toward your finances so that your overall expenses don’t swamp your ability to experience those trips you’ve always wanted to take.
Financial blogger Eric Rosenberg, who writes for the website Earnin, where a modified version of this article originally appeared, takes you through the steps you’ll need to set up the kind of budget that’s right for you.
Yes, it can sound like a bit of a drag, but today’s software makes budgeting easier — and you may find yourself in some exotic land (or wherever your desires take you) sooner than you think.
By Eric Rosenberg
Love it or hate it, budgeting is one of the most important parts of managing your finances.
While earning more is the only way to get rich for most of us, understanding, managing, and controlling your spending will keep you on track to reach your financial goals — and allow room for travel.
Whether you are a veteran budgeter or brand new to managing your finances, read on to learn best practices to create, track, and manage your budget — which can be especially crucial for retirees with fixed incomes, when earning more is no longer an option.
How a Budget Works
A budget is a tool to help you understand and control your spending.
Typically, people create a budget with spending categories, like food, entertainment, housing, and, we hope, travel. Your categories can be very broad if you are a disciplined spender, or you may prefer or need to be very specific.
For example, some people might have a generic “food and dining” category in their budget that captures groceries, restaurants, and fast food. Other people might opt to have specific budgets for the grocery store, dining out, and Chipotle.
Whatever you choose, each category should have a budgeted spending limit. This can be a monthly limit, or a different period that makes sense for you. Monthly budgeting is most common, but I have also seen people budget by pay period, quarterly, or even annually.
I suggest starting with monthly if you are new to budgeting. You can always tweak later on if you find it is not working for you.
As you spend money, it is important to categorize and track each transaction as it relates to your budget.
Every dollar (or euro, pound, etc.) you spend — such as for rent, gas, clothing, food, plane tickets, or doctor visits, should be assigned to a budget category. When you hit the limit you chose for that category, you stop spending there. It is that simple.
I use Personal Capital, a free online financial tracking site, to help me manage my budget each month.
There are other options, though, which I will discuss later on. Whatever method you choose for your budget, make sure your total spending is less than you earn.
If you spend more than you earn, you will be in a perpetual debt cycle or have to draw down on your savings. Instead, use your budget to help you invest and add to your savings.
How to Budget for Specific Spending Categories
So now that you have picked your categories, it is time to decide how much to budget for each specific category. Like most parts of personal finance, this decision is personal. There is no right or wrong answer, just what makes the most sense to you.
When I set my first budget, I used my average spending in each category as a baseline. To find your average, you can use Personal Capital or a similar tool.
When you look at your averages for each category, you might be shocked by what you find. I know I was the first time I created a budget. (The first time I saw how much I’ve spent on burritos, it might have made sense to track them individually – let’s just say I’m in the four-figure range.)
Once you have a baseline and understand your current spending, you can better plan and control. I have known many people who believe that ignorance is bliss when facing a spending decision.
If you want to work until the day you die, that strategy might work just fine. However, if you’re retired or want to retire someday, budgeting is important.
Budget for Fun Spending
Living on a budget sounds painful and icky, but it doesn’t have to be. In fact, it should be the total opposite.
Budgeting can help liberate you from debt, uncertainty, and financial stress. If you create a budget and follow it, you can confidently spend each dollar that you have budgeted without worry of debt at the end of the day.
And just because you are following a budget does not mean you can’t spend on fun — including, of course, travel.
When you create or update your budget, you are going to see “have to” spending and “want to” spending.
You can’t live without food, shelter, clothing, and basic transportation. You can live without cruises, cable TV, hobbies, designer clothing, Starbucks, and other wants. But that does not mean you have to live without them.
Part of building a budget requires assessing what you truly value. Where do you want your money to go? If you have limited resources, where do you choose to spend?
What if you have to pick between cable TV and saving up for a trip? Which gives you more value? Add that to your budget.
Create an “Everything Else” Catch All
Your spending will never be 100 percent in the categories you budget for all the time. On occasion, you might have some one-off purchase that is completely unrelated to any of your budget categories. For this situation, we use an “everything else” spending category.
Depending on your own habits and comfort level, you may have a really big everything else budget, or a very small one. I prefer budgeting at a fairly high level, so my everything else budget is a significant part of my monthly spending.
For my family, irregular expenses like doctor visits, home improvement, and clothing go into the everything else bucket. I have a separate budget for all entertainment, as I want to (and can) control that more than things like doctor visits and home improvement.
I make every single purchase possible with a credit card. I don’t care if it is a $1,000 purchase or a 50-cent pack of gum. I want to get every mile and point possible for free travel.
However, many people who use credit cards struggle to stay out of debt.
If you can’t control your spending by mentally keeping tabs on your budget, you might do better with envelope budgeting. Envelope budgets are a method to use cash and envelopes to ensure you do not overspend.
To give envelope budgeting a try, start by pulling out a stack of envelopes and labeling them for each category in your budget. You might have one for groceries, restaurants, movies, nights out, travel or anything else you are specifically budgeting. Don’t forget an “everything else” envelope for the unexpected expenses.
At the start of each month, put cash in the envelopes equal to the maximum you want to spend on each category. Each time you spend, take cash from the envelope labeled for the category you are spending.
Once the money is gone, so is the budget. You are then forced to stop spending in that category for the rest of the month.
Of course, don’t force yourself into starvation or homelessness, but try to really plan your spending ahead of time so you don’t end up in a difficult situation. If you do, you know what you need to work on for next month.
Budget for Savings and Investments
Just as you budget for purchases and spending, you should budget for savings and investments. No one gets rich budgeting, as you can only save so much each month; you have to increase your income to really grow your wealth. However, there is a budgeting trick you can use to make it easier.
Finance bloggers often say to “pay yourself first.” The concept might be hard to grasp, but this is what it really means.
Budget for savings and investments, and put that money away before budgeting for other expenses. If you do that, you force yourself to spend less because you paid your future self first.
Make sure to include savings and investments in your budget so you can do things like retire, travel, and save up for large planned purchases and emergencies.
Focus on What You Value
A while ago I cut the cord with cable TV. At the time, my cable bill was about $70 per month, or $840 per year. For a serious sports fan, $840 per year might be worthwhile to catch every game for your favorite team. For me, not worth it at all.
Think of all of the things you can do with $840 per year. If you invest that $70 per month and get a 5 percent return, you will have nearly $11,000 in 10 years. Over 30 years, you are approaching $60,000. That is more than many families make in my city per year!
Maybe you are already comfortably saving and don’t want an extra $60,000 in 30 years. That’s okay, too. Do not feel guilty spending (reasonably) on your hobbies and passions. However, make sure you only spend on what you value. Do not mindfully waste money. You’ve worked too hard for it.
Trim the Fat
When deciding how to allocate your income to different budget categories, really think about each line item. Don’t just fill in your average spending, but consciously decide how much you want to spend.
Gasoline is a great example. If you have a commute every day, you are locked in to spending a certain amount each month. But think about extra driving you do.
Can you consolidate trips to the grocery store with other stops? Can you skip a trip to the mall and buy online? Can you take the train downtown rather than driving and paying for both gas and parking?
Just because you have always spent on something does not mean you have to keep doing it. And just because it might take some work to trim excess spending does not mean it is not worthwhile. Give some serious thought to how you spend each dollar.
I try to think of each purchase in terms of how much I have to work to pay for them. A stop at the gas station might be 1-2 hours of work. A fancy sushi dinner might be 2-3 hours of work. A taxi ride to the airport might be one freelance blog post, while public transportation only costs me 15 minutes at work.
If I can’t justify the expense, or I can find a way to reasonably cut it out, I will. I also take the value of my time, convenience, and other factors into account, something you should do as well.
Whatever you do, do not spend blindly. Each time you hand over cash, swipe your card, or click the purchase button should be a conscious purchase.
Budgeting for Income
So far, we have only discussed budgeting for expenses. However, if you treat your own finances like a business, you have to set income goals as well.
If you only work a regular salaried job or rely primarily on Social Security payments, for example, you know what you will earn each month. But even retirees and semi-retirees are finding work as freelancers, contractors, consultants and such, so planning for income deserves time and thought as well.
I know that I will bring home $X each month from my day job, and that I will earn some amount above that online working on evenings and weekends. I have a goal of making, say, a certain average income each year, but it fluctuates from month to month.
I set an income budget for myself in between what I make from the day job (nearly guaranteed income) and what I make online (variable income). If I’m tracking below where I want to be for a month, it is motivation to get to work and make enough to reach my budget at minimum.
Budget Software That Makes it Easy
All this budgeting can be a lot of work. If you use a pen and paper, budgeting can take hours each month. Using spreadsheets like Excel or Google Docs will save you some time, but you’ll still have to do a lot of work by hand.
Lucky for us, we live in an age where our spending can be automatically assigned to our budgets. For free!
My two favorite budgeting tools are Personal Capital and Mint.
Personal Capital is focused primarily on investments, with budgeting a secondary feature. With Mint, your budget is front and center.
Don’t Complain, Don’t Delay, Just Budget
I admit that I would rather watch old episodes of The Gilmore Girls on Netflix than spend time setting up a budget. But once you’ve done it, the hard work is behind you.
Setting up a budget with tools like Mint or Personal Capital takes minutes, not hours. After you have your budget setup, check in every week or so to see how you’re doing. You are in control, and can always increase or lower specific items, or add or remove them.
Just remember, a budget only works as well as you allow it. The more thought and effort you put into it, the more you will get out of it.
Budgeting can teach you a lot about yourself. Your spending habits are indicative of what you most value, and if they are not in line with your values, it is time to make a change.
Remember that I am not an advocate of living an uber frugal life. Frugality often goes too far.
Live a sensible financial life. Be thrifty, cut where you can, and spend on what you value. If you do that, and use a budget as a tool in your personal finance arsenal, you will be on track for long-term financial success — and, if all goes well, able to afford that dream trip sooner rather than later.
Eric Rosenberg is part of the Earnin Community Contributor program. This article first appeared on his blog Personal Profitability.