The best budgeting advice I've heard

Consider using these tips when you decide how to create your budget. They may help you figure out what to spend and save on.

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As part of my work, I read a lot about financial planning, retirement, and all kinds of related issues. In all of that reading, I came across a tweet from a financial planner, Kate Holmes. She says the following:

"Review your expenses and ask how much happiness each line item brings. You may be surprised by unnecessary spending."

And it hit me. This is probably the best budgeting advice I've ever seen.

Spend on what you love

Of course, the concept of only spending on the things you love isn't exactly new. But the way Holmes puts it really put the whole notion into perspective for me because it forces you to quantify things a bit.

How much happiness does each line item bring?

I can tell you, for example, that the exorbitant rent I pay to live in a place I love brings me a lot of happiness. But if I'm honest with myself, my recently developed smoothie habit doesn't. Don't get me wrong, I like popping out to buy smoothies, but does it bring me happiness? No, not really.

Looking at your spending this way puts a lot of those mindless expenditures into perspective. Smoothies reminded me of my grocery budget: Delicious tropical fruits? Yes please. Not-all-that-great salami? No thanks.

Save for what you love

Asking yourself what brings happiness is also useful when it comes to trying to save money. By focusing your attention (and your spending) on happiness-only items, it's a lot easier to allocate money toward those big expenditures that can get lost in the day-to-day shuffle of outflows.

Back to my smoothie problem: I realized that if I added up all the smoothies I bought last month, which brought lukewarm happiness at best, and annualized the cost, I could probably buy a plane ticket to Istanbul. Istanbul! I've always wanted to visit Turkey.

In other words, saving my smoothie money could bring me extreme happiness.

That, to me, makes avoiding the smoothie place deeply satisfying instead of moderately distressing. And it makes you wonder, where are those other line items that bring that slow-clap level of happiness to your life? What can you eliminate so that you can focus instead on the roaring applause of those items that will really add to your happiness?

Developing new habits

The other real benefit of the exercise is the leeway it affords for creativity.

Thinking about my grocery budget, I realized suddenly that eliminating smoothies in favor of Istanbul doesn't have to mean a lifetime of frozen drink deprivation. I love cooking and I have an awesome blender—why don't I just make smoothies?

That is to say, you can not only replace those slow-clap line items with ones that bring greater joy, but you can also modify them for maximum impact. For me, it's making smoothies instead of buying them. I'm already buying nice fruit anyway, so not only is it cheaper (see you in Turkey!), but it's also more satisfying.

So, what line items in your budget are bringing you actual, honest happiness? Focus on those big winners, and you might find that budgeting is suddenly a whole lot easier—and a whole lot more fun.

Topics:
  • Budgeting
  • Saving and Spending
  • Budgeting
  • Saving and Spending
  • Budgeting
  • Saving and Spending
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This article was written by Anna B. Wroblewska from The Motley Fool and was licensed as an article reprint. Article copyright January 24, 2015 by The Motley Fool.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
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