As a general rule of thumb, we’re taught to avoid spending more than we earn. Easier said than done, especially if you don’t have a concrete plan in place.
That’s where a budget comes in. But creating a budget that you will actually stick to can prove to be challenging. So, here’s what to do to ease the headaches and frustrations.
Creating a Budget: Before You Begin
To build a budget that works, you’ll need to accept the right mindset so you won’t be defeated before you start. This means creating a realistic plan and being committed to seeing it through, even in those tough weeks and months.
If you have more bills than you have money, it’s totally understandable to struggle with budgeting. In this case, you’ll need to find ways to supplement your monthly income and possibly start searching for more lucrative opportunities.
Also, keep in mind that the whole point is to cut frivolous spending so you can make your money work for you and achieve your financial goals.
What is a budget?
A budget is a financial plan that allocates money for specific expenses over a specified period of time. It typically includes income, expenses, and savings goals. A budget can help individuals and households plan for their future and meet their financial goals.
Budgeting can help people make smart financial decisions and live within their means. Creating and sticking to a budget can help people achieve their financial objectives and can help prevent financial difficulties.
How to Create a Budget
Being able to track your spending should ultimately move you in the right direction towards meeting your financial goals. And this doesn’t mean penny-pinching or deprivation. A personal budget simply helps you get a more accurate idea of where your money is going and where it should be going instead.
But in order for it to work, your budget should be realistic and you must be committed to seeing it through.
Step 1: Gather Some Financial Information
Now that you’ve adopted the correct mindset about budgets, or spending plans, and gained an understanding of their real purpose, it’s time to build your own. But before you download some fancy software program or start filling out a budget worksheet, you’ll want to gather a detailed list of your net income (take-home pay) and fixed expenses.
Step 2: Select a Budgeting Method
In essence, you want to figure out how you’ll budget your money so you can build up your savings for emergencies and the future. (No, it’s not a one-size-fits-all approach, and your needs could change over time).
Many financial experts recommend the 70:20:10 or 50:30:20 method, but it all just depends on what you’re trying to accomplish. The 70:20:10 method suggests that you allocate 70% of your income to expenses, 20% to savings, and the remaining 10% to debt repayment.
Under the 50:30:20 method, 50% goes to expenses, 30% goes to wants, and 20% goes to a combination of debt and savings.
For example, 70:20:10 may work for someone with a healthy emergency fund and minimal debt repayment. By contrast, an individual with a healthy amount of disposable income but loads of debt could probably benefit more from the 50:30:20 method.
Step 3: Create Your Budget
Run the Numbers
Next, tally up all your expenses and income to see where you stand. As mentioned earlier, if your expenses greatly exceed your monthly income, the first step is to get that total down to a manageable amount.
Have a look at your bank statements, receipts, and credit card statements to see where you are spending. Once you’ve resolved the issue, you’re ready to begin creating a budget.
Depending on the budgeting method you selected in step two, you’ll need to allocate outflows or expenses accordingly. In most instances, the buckets are:
- Fixed expenses: These are your needs. These include rent or mortgage, food, car payments, clothing, insurance, childcare, pet care, student loan payments, and other household-related expenses.
- Monthly debt obligations: These include all types of loans and credit card debt. The more you can pay each month, the better. Prioritize the most expensive debt first to save on interest.
- Savings: This includes funds for your emergency fund and nest egg. You’ll want three to six months of expenses in your emergency fund to avoid incurring more debt should a financial emergency arise. It’s also important to contribute to retirement accounts to secure your future and to take advantage of your employer match (if applicable).
- Variable expenses: These are monthly expenses such as dining out and shopping that vary every month. It doesn’t make sense to deprive yourself. It’s your money, and you deserve to enjoy it!
Consider automating your retirement contributions to ensure you stick to the plan and meet your retirement goals on time. You also want to allow enough time to let your money work for you through the power of compounding interest. So, it’s better to get disciplined with your retirement contributions sooner than later.
You’ll also need a cushion that acts as a buffer to cover any small overages or unexpected expenses that come up. For example, if your utility bill is $25 more than you projected or your child has a field trip fee of $15 that has to be paid, you won’t have to dip into your savings to cover the expense.
Step 4: Execute Your Plan
If you want to go old school, a notebook, or pen and paper will do. You can also dump your figures into a spreadsheet and work your monthly budget from there.
But if you’re always on the go and would prefer to manage your money at the tap of a fingertip, an online budgeting tool or app may be more ideal. Don’t know where to start? Check out this comprehensive list of budgeting software apps to put your spending plan in motion.
Step 5: Reward Yourself
You’ve worked diligently all month long to follow your budget. So, why not reward yourself? This doesn’t mean blowing money at the mall or on a mini-shopping spree or anything of the like. But you can work a small percentage into your budget to treat yourself each month.
Additional Budgeting Tips
Online Scheduling or Online Bill Payment
Scheduling your payments ahead of time using online or through your bank’s online bill pay feature decreases the likelihood of blowing your budget. Why so? Even though funds will be sitting in your account until the withdrawal date, you’ll know the money is off limits for casual spending.
Instead of scrambling to save money each month after the well runs dry, make it a priority by automating your savings. Have the funds transferred to a separate account once your direct deposit is disbursed. That way you don’t have to make an additional transfer. Additionally, you won’t be tempted to spend money sitting in a savings account you don’t use regularly.
If you’re self-employed, you’ll have to be a bit more disciplined. Assuming you don’t pay yourself a salary, make it a priority to transfer funds into your bank account each time funds hit your account. Doing so will ensure you hit your savings targets each month.
Not a big fan of cards and prefer to use cash for everyday expenses? The envelope system may be the perfect fit for you. In a nutshell, you’d transfer the amount you budget for savings to the appropriate account, pay your bills, and place what’s left in envelopes labeled by their intended use. Funds can be moved between envelopes, but once they’re empty, your spending stops until the next budget cycle.
This system can be highly beneficial if you frequently overdraw your account from making everyday purchases. Additionally, it makes it much easier to track where you stand with cash in hand rather than keeping track of account balances that may not reflect your actual spending.
If the idea of having that much cash on hand doesn’t sit well with you, try opening an account solely for your disposable income. Request a debit card and set up account alerts to avoid overspending.
And if you’re really disciplined, you could use a rewards credit cards to earn something in return for your spending. However, you must pay it off each month to avoid interest. The easiest way to make this method work for you is by setting spending limits.
How do I stick to my budget?
Sticking to a budget can be a challenge, but there are a few strategies that can help. First, create a budget spreadsheet that includes all of your income and expenses. Be sure to include fixed expenses (such as rent or mortgage payments) as well as variable expenses (such as groceries or entertainment).
Once you have your budget spreadsheet set up, review it regularly. Make sure you’re staying on track and identify areas where you can save money.
Finally, set up a system of reminders to help you stay on top of your budget. You can use calendar notifications or reminders on your phone to help you remember to stick to your budget.
How do I budget if I have irregular income?
With an irregular income, it can be difficult to budget effectively. To make sure you can cover your monthly expenses, start by creating a budget based on your lowest expected income. This will help you ensure that you have enough money to cover your basic needs and avoid overspending.
When you have a higher income, you can allocate additional funds to savings or other areas you may have neglected. Additionally, you can use budgeting tools such as a budgeting app or software to track your spending and help you stay on top of your finances.
How do I budget if I have a lot of debt?
If you have a lot of debt, it’s important to prioritize paying it off. Make a budget that allocates a significant portion of your income to debt repayment, and use any extra funds to pay it off faster.
You may have to make some short-term sacrifices, such as cutting back on non-essential spending, to free up more money for debt repayment. You should also consider looking into debt consolidation or refinancing options, as they can help reduce interest rates and monthly payments.
Additionally, you should make sure to stick to your budget and pay your bills on time to avoid late fees and additional charges. If you’re struggling to make payments, contact your creditors and see if they can work out a payment plan with you.
How much should I save each month?
The amount you should save each month depends on your financial goals and your income. If you’re saving money for a short-term goal, such as a vacation or a new car, you may be able to save 10-15% of your income each month.
If you’re saving for a longer-term goal, like retirement, you may want to save more, up to 20-25% of your income. Make sure you are able to pay off any debts you may have in a timely manner. Ultimately, the amount you should save each month will depend on your individual financial situation and goals.
Making a budget doesn’t have to be a grueling exercise. By following these budgeting tips, you’ll be on your way to mastering your money. And don’t forget to tweak your numbers as your goals or needs change.