Budgets can feel like traps.
That's why many of us find it more comforting to turn a blind eye and ignore our finances rather than face them head-on.
But when I interviewed Allison Baggerly, the founder of Inspired Budget and author of the book “Money Made Easy,” on the Erika Taught Me podcast, she explained that instead of limiting your control over your money, budgeting actually gives you control.
By writing out the facts and making a plan, you can find financial freedom.
At first, your budget might feel like punishment for your previous choices. But the truth is a budget can free you from anxiety and give you peace of mind.
Erika & Allison Taught Me
- Budgeting might feel like something you only need to do for a short period, but once you start, it becomes part of you.
- Understanding your spending habits will help you reach your financial goals faster.
- Paying off debt and investing are not mutually exclusive — it's important to do both.
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The Psychology of Spending
Baggerly started using money as a cure for unhappiness when she was in college.
She said that with her newfound independence, everything became a reason to spend.
Aced a test? Time for a manicure. Her boyfriend broke up with her? She’d buy something to feel better. It became her emotional crutch.
A defensive reaction to her boyfriend asking about her spending habits was the red flag she needed to realize those habits didn’t make her feel good.
Allison started to track her money, but she would still spend based on her emotions. Then, when she and her boyfriend got married at 24 and immediately became pregnant, she knew something needed to change.
From punishment to habit
With childcare costs looming, the couple sat down at their battered kitchen table and made their first budget.
The original plan was for Allison and her husband to stick with their budget until they were debt-free, then forget the whole thing once they met their goal.
Why continue to punish themselves once they cleared their debt and could comfortably cover childcare?
However, after six months of writing budgets, it became a habit for her.
The Budgeting Framework: Know What Comes In and What Goes Out
No budget is perfect, but as a veteran budgeter, Allison has some tips.
1. Know when your bills are coming out
Consider budgeting paycheck-to-paycheck instead of month-by-month. Why budget from the 1st to the 1st when your paycheck may not land in your bank account then?
2. Write a budget per paycheck
Know the timeline each month of when your paycheck lands and when your bills come out. Will you need to cover bills for next month out of this month’s paycheck?
Write it down on a calendar so you can see exactly when your cash flows in and out of your account.
3. Be willing to be flexible and change as you go
Don’t throw out the whole budget if you mess it up once.
Allison never sticks to a budget 100% of the time because there are things she can never plan for. If you get off track for the month, don’t give up, toss the budget, and have a spending free-for-all!
Allow yourself flexibility and continue to stick with it as closely as you can to avoid those emotional spending habits.
Writing Your Budget: Fixed Expenses, Variable Expenses, and a Buffer
Your budget = your income – your expenses.
Allison recommends you break your expenses into two separate categories: fixed expenses and variable expenses.
- Fixed expenses are the ones that shouldn’t shock you, like rent, internet, and other consistent bills.
- Variable expenses will change month-to-month and depend on your life. These include electricity, how much you spend on dinners out, groceries, etc.
As you categorize your expenses, Allison cautions against budgeting for the version of yourself you want to be and instead, match your categories to who you actually are and budget for your lifestyle.
For example, when she and her husband wrote the first iteration of their budget, he allotted only $5 for eating out. They planned to eat out once and only use the dollar menu, but after just a few days, this had already blown up!
They had written an unrealistic budget based on who they imagined they could be, not who they really were. Don’t set yourself up for failure by creating a budget you can’t or won’t follow!
Allison also recommends a buffer within your variable expenses. Hers functions as a catch-all for when — not if — she goes over her budget.
The buffer will help you avoid stress and that internal battle of, “Can I really do this?” when a friend invites you out for dinner. Don’t miss out on connecting with your friend — put it in the buffer!
Allison’s Advice for Getting Out of Debt
We hide from our debt because we’re afraid of what it means about us. But focusing on our past choices doesn’t help us at all! Don’t sit in shame when you can move forward. Own it, face your numbers, then make a plan.
Allison likens it to standing at the bottom of a mountain. She has to get to the top, but there’s no path to follow and no ranger station to stop by for equipment.
By making a plan and breaking it down into steps, you can move past what overwhelms you. Focus on one task, complete it, and then move on to your next goal.
I recommend writing down your biggest fears around money… and then ripping them up! You want to acknowledge your feelings, but then a small, symbolic act like that can help you break free of those fears.
1. Debt snowball vs. avalanche vs. whatever works for you
There are a few schools of thought about the best strategy for paying off debt.
The two most common methods are the snowball and the avalanche.
- With the snowball, you list your debts from smallest to largest, without considering interest rates. Then you pay them off in that order. This strategy can be very motivating because you will knock out debts relatively quickly at first.
- With the avalanche, you pay off the loans with the highest interest rates. The goal of the avalanche is to save more money overall.
But you don’t have to stick solely to one method or the other.
Allison adopted a hybrid approach: she paid off her debt with the highest minimum payment first, even though it had the lowest balance.
She and her husband chose this route to free up their cash flow each month. Remember, the clock was ticking with a baby on the way!
2. Paying off debt and investing aren’t mutually exclusive
For a long time, Allison and her husband were singularly focused on becoming debt-free and didn’t place any money into investments to build their wealth.
But paying off loans and investing are not mutually exclusive.
A rule that I follow is that if the interest rate of your loan is over 8%, it’s better to pay that debt first before you begin investing, But if your interest rate is lower than 8%, invest some while you’re still paying off the debt.
The reason is because the average market return is between 8% and 10% annually. So, if the interest rate on your debt is over that, you’ll lose more in interest charges than you would earn in the markets.
Starting to invest while paying off debt feels overwhelming, like taking physics after just passing fifth-grade science! However, it’s in your best interests in the long run.
Now, Allison’s focus has turned to investing, and instead of spending money to manage emotions, she gets that adrenaline rush from putting that money into her future.
READ MORE: Should You Pay Off Debt or Invest? A Guide to Help You Prioritize
3. Understand your spending habits
Understanding your spending habits is one of the quickest ways to minimize any negative impact to your financial goals.
And not just what makes you spend, but when you spend.
Spending seasons are totally a thing, especially around the holidays when you’re already buying for others — it can be so easy to splurge and buy for yourself at the same time.
But once you’ve begun tracking your budget, you will start to see a spending season coming and you can set boundaries. Give yourself back your sense of control by anticipating the spending seasons and being ahead of it.
My rule is that if I see something I want, I wait seven days. If I still want it by the end of one full week, then I consider buying it. More often than not, it was an impulse and I may not even remember what it is I wanted in the first place!
This world is very convenient for us with our credit cards already linked to our Amazon accounts, but by creating a barrier between yourself and impulse buying, you’ll save yourself a lot of money.
Allison says that one way to avoid fixating on something you want to buy is by making a note in your phone. Include the links to the things you’ve started to obsess over. By giving it a place to live, you’ve closed a mental loop so you stop focusing on it.
(If you want, share the note with your partner so they always have a current wishlist for you. *wink*)
4. Include the kids in your money conversations
When Allison was growing up, it was taboo to talk about money in her family. With her kids, Allison is taking a new route.
She and her husband have invited them to their budgeting meetings around the kitchen table, where money is discussed in a healthy way. They present their kids with the facts, and the kids are free to suggest what they want to do that week or month.
This offers Allison the chance to educate them about the give and take of sticking with a budget. When they have an unexpected vet bill that month but the kids want to eat out, she teaches them to see if they can add it to the budget next month.
Another thing Allison has done to educate her kids is give them debit cards. Their small allowance from chores is automatically sorted into savings, spending, and giving categories, then the kids are allowed to make small purchases with the cards.
By giving them spending experiences, her kids have learned about taxes and how to manage money on their own.
READ MORE: How To Teach Your Child Financial Responsibility
5. Consider switching jobs
When you’re budgeting to meet a goal, also evaluate if your current job aligns with your spending and budgeting needs.
Allison and her husband, both teachers, found every way to make a bit more money on the side.
When her husband took his band on trips, he drove the school bus there because he got a stipend. They traded off teaching summer school. And when the opportunity arose, her husband switched to a new school district to make $10,000 more.
If your current employer cannot pay you enough, it’s okay to move jobs!
Change is not always bad. It’s important to have the mindset that there is more waiting for you ahead — don’t stay in a comfortable situation out of fear.
Be willing to take steps to change your life into what you want it to be!
READ MORE: How to Negotiate Salary According to Business and HR Pros
TL;DR: 3 Budgeting Steps for Beginners
Take a moment to pause and evaluate your finances and your budget. Allison didn’t let her numbers define her, but she used them to begin living the life she wanted to live.
Here are her three actionable steps:
- Open up your checking account and write down your numbers. What’s your income? Remember fixed expenses and variable expenses? Write yours down.
- Grab a post-it note and write down three things you want to do in the future. These can be anything — what’s important is that you give yourself a forward-thinking idea.
- Create a plan! It’s okay if it’s small, like learning how to make a budget or a debt pay-off plan. Choose one, commit to it, and learn.
Allison taught me: “Budgets don’t have to be a punishment and they can be fun and give me freedom.”
Check out my full interview with Allison Baggerly, or these other budgeting episodes of the Erika Taught Me podcast:
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