How To Budget Your Money
The budgeting jury is in. According to a recent LendingTree survey, 67% of Americans said they anticipate that their finances will improve this year. But while we’re feeling most optimistic about paying down our debt, of those who plan to consolidate that debt, 60% haven’t thought about how to go about it. That’s where a budget comes in. Creating a budget can help provide the order, organization, and accountability you need to achieve your financial goals this year.
In this post, we’ll explore the basics of budgeting, including how to budget, popular budgeting options and tips and tricks to keep you on task.
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What is budgeting and why is it important?
Budgeting is a process to help keep track of the funds you have coming in and going out and to plan for the future. It allows you to gauge how much you can spend in a given period, and what you can afford beyond that.
Creating and maintaining a budget may seem tedious, especially at first, but thankfully there are many types of budgets and budgeting tools, ranging from basic to complex, to suit your needs and help you reach your short- and long-term goals.
How to create a budget
Know your numbers.
There are many budgeting formats, but no matter which one you choose, you’ll need a firm understanding of what you earn and what you spend. To get started, gather the following information:
- Your monthly income: Pay stubs and statements for all sources of income coming in each month.
- Monthly bill payments: Utility bills like heat, water, phone, internet, cable, etc; also bills for other needs, like health care or insurance.
- Monthly housing payment: Rent or mortgage.
- Monthly subscriptions: For example, streaming services like Netflix or Hulu, and a meal delivery kit.
- Monthly credit card bills: List out your monthly required payments for all credit cards.
- Other monthly debt bills: List out your monthly required payments for other debts, like student loans and auto loans.
- Bank statements: Gather statements for the last year, or use an app like Mint to organize them for you. This will make it easy to see where you are spending the most. You want to get a good idea of what you’re spending on extras like restaurants, entertainment, shopping for yourself and others, taxis, donations, dry cleaning, salon services, car washes, etc.
- Donation receipts and a tally of tithing.
- Annual fees: Such as magazine subscriptions, Amazon Prime, gym membership, etc.
Choosing the best budgeting plan that fits your needs
There are many to choose from. Find one that fits your needs and sensibilities. Here are several options to get you started.
The classic line-item budget
This traditional form of budgeting requires that you list your expenses and then subtract them from your take-home pay. Organize your expenses by creating categories for housing, food, transportation, education, child care, debt, etc.
Alternately, you can organize thematically:
- Fixed expenses: includes all expenses that don’t typically change, such as rent, utilities, and insurance.
- Flexible or variable expenses include things that can change from month to months, such as food, donations gas, and pet supplies.
- Planned expenses include one-off items, such as trips or gifts.
Tally your expenses and subtract them from your income to determine what‘s left for savings, additional credit card or loan payments, a special purchase, etc.
The 50/30/20 budget
This is a good method for someone who is new to budgeting, or who finds traditional budgeting too complicated. The formula: 50% of your monthly income should go to major living expenses, such as housing, utilities, food, transportation; 30% should go to extras, such as entertainment, travel, and shopping; and 20% should go to financial goals, such as paying down debt, investments, and saving.
You could easily start with the line item budget and then apply the 50/30/20 rule to see where you are spending too much or too little in a given category.
The 60% solution
Like the 50/30/20 plan, the 60% solution is a good starter budget because it’s simple. The aim is to limit expenses — everything from rent to insurance — to 60% of your income. The remaining 40% is used for the future: ideally, 10% each for retirement, long-term savings, an emergency fund and the best one, fun.
This is a good budgeting plan for people who struggle with needless spending. Every dollar is given a destination — even money you have left over — so that you reach zero every month.
Once you subtract your expenses from your income, any remaining funds are given a place to go, like an emergency fund or retirement savings.
Envelope budget/cash only budget
This is another budgeting tool for people who want to gain more control over their discretionary spending. The Envelope Budget, popularized by Dave Ramsey, uses envelopes — literally — to separate spending categories.
Begin by creating a budget to determine your income and expenses (The line-item budget would be helpful here). First, subtract all non-cash expenses, such as rent, insurance, utilities and other bills. The envelopes are used for categories that you could pay in cash, like clothing, entertainment, and food.
Create an envelope and cash allowance for each category and fill each envelope with that amount every month. If you prefer to use a debit card rather than cash, write each transaction on the envelope. Once you’ve spent the allotted amount, that category is cut off until the next month. If you have money left over, save it.
The pay-yourself-first system
This method is known as a “top-down” method, meaning that you first remove your savings from your monthly net income, then you live on what is left. This way, saving becomes the priority. You will need to create a general budget first to determine how much you’ll need for fixed and variable expenses. A good way to make sure that deposits are being made toward your savings: set up auto withdrawals so that you don’t have access to those funds.
Revisit and tweak your budget if needed.
Once you’ve chosen a budget plan that appeals to you, adhere to it for a month. At the end of that month, tweak as necessary. For instance, if you fell short on funds in your food budget using the Envelope plan but had money left over in entertainment, rebalance those categories. If your financial situation changes due to a new job, a new apartment or a new phone plan or vehicle, revisit your budget to account for the added or reduced expense.
Tips and tricks for sticking to your budget and saving more
Once you’ve chosen a budgeting plan, tricks like budgeting apps, automating payments and shopping smart can help you stay on track for success.
Budgeting apps or software
Rather than documenting all of your transactions on paper or on an Excel spreadsheet, programs and apps like Mint and Personal Capital can help you track your finances digitally.
Mint is a free app and site that securely links to your financial institutions and displays everything you need to know about your finances in one place. You can pay bills right from the platform, and, based on your spending, Mint will suggest ways to save. It will also display your credit score and even the current value of your home. The cons: Reviewers report that Mint can be a bit glitchy, has a lot of ads and can be difficult to get a customer service rep on the phone.
Like Mint, Personal Capital is free, linking with your financial accounts and offering personal finance tracking and guidance. It also has a fee-based wealth-management service. It’s easy to set up and use, alerts you to upcoming bills, and it helps you budget, plan for the future and check on your investments.
Other popular platforms are Prism, PocketGuard, HomeBudget, and Wally.
Set your bills to autopay
If you have a tendency to miss payments, autopay is an easy way to make sure your bills are always paid on time, directly from your bank account. It will also prevent late charges, and therefore, help you maintain a high credit score.
One caveat: If you forget that the funds will be withdrawn, you could end up with an overdraft. To avoid this, set calendar alerts or arrange to have the withdrawal made from a credit card account – better yet, one with rewards – but commit to paying off that card every month so that you don’t accrue finance charges.
“Automatic saving” services
If you’re having trouble meeting your savings goal, you might want to try Acorns, Chime or Digit. These services invest the change from your credit and debit card transactions, or, based on your spending habits, automatically invest small amounts in your bank account or paycheck. Saving automatically like this is a great way to save without really feeling a pinch.
Even if you’re committed to following a budget, you might be tempted to cheat every now and again. For some people, sharing progress with another person can help keep you honest. So whether you are accountable to your partner, a financial planner or a friend, schedule regular check-ins. You might think twice about cheating.
You know what you’ve budgeted for groceries and other shopping, but make that money go further by looking for ways to save each time you transact. Discounted gift cards, coupon apps and browser extensions that allow you to earn cash back as you shop will save you money as you go.
Whether you decide that you’re an envelope budgeter or a 60-percenter, committing to a budget can help you live a more organized financial life and reach your goals sooner than you thought possible. It may seem daunting, but once you get up and running, the peace of mind will easily make the effort worthwhile.