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You’ve made the decision to get your finances on track, but have no idea where to start or maybe you don’t understand what budgeting is. Now is the time to explore what budgeting means and why it is important to you. A budget is the amount of money that is available for, required for, or assigned to a particular purpose. So what is budgeting really? How does it work for me?
In this guide, you’ll find everything you need to know to get started with budgeting, including:
- What a budget is and why it’s important.
- The different types of budgets and how to make them work for you.
- Tips, tools, and best practices to succeed with budgeting.
Everyone’s financial situation is different, so let’s make the most of this guide by focusing on what’s important, and that’s creating a budget that works for you! Not a budget that is work!
What is Budgeting?
A budget is a plan specifying how much money will be issued or spent during a particular period. So budgeting is the process of making a plan for using your income in a way that best meets your needs and wants. It includes recording your income, expenses, and savings.
A good budget helps people set priorities.
Why is Budgeting important?
According to ramseysolutions.com, approximately 77% of Americans are in some kind of debt. Having a budget can be very beneficial to climbing out of debt and into a comfortable place financially. Here are a few positive reasons to budget:
- It helps ensure you don’t spend money you don’t have: Far too many people spend money they don’t have. That’s how we get into credit card debt. In 2021 Experian reported that the average American has over $5,500 in credit card debt. This is a decrease from 2019 when it was reported that the average balance was $6,494. Having a budget and being mindful helps you not overspend with credit cards. You prioritize your purchases. Is saving for a new car more important than purchasing another sweater?
- Help you prepare for emergencies: According to consumer health ratings, an average ER trip in 2019 costs Americans $1,082. Without a budget and having money set aside for emergencies, this emotional/physical crisis also turns into a financial burden. Most professionals agree that you should have 3-6 months’ worth of living expenses set aside for extreme circumstances, but a minimum of a $1,000 emergency fund is a necessity in life.
- Having a budget helps you identify bad spending habits: Watching where your money goes allows you to see if you are using your money wisely. It helps you have the ability to take back financial control of your life. You can identify subscriptions that you do not use, or do not need and cancel them. You can shop around for better prices because you identified the cost of each needed expense.
Consequences of avoiding budgeting.
According to Mint.com, approximately 65% of Americans had no idea how much money they spent last month. That is 3 out of every 5 people. Not having a budget can be very harmful to your financial health. Here are a few of the negative consequences of not budgeting:
- More difficult to achieve financial goals: Without a budget, it is hard to track where the money goes, you cannot identify your expenses easily and plan for them. Without the ability to plan for regular expenses your spending can drift off track and you won’t be able to identify it until it’s too late. Without knowing where your money is going, you cannot save up ample amounts of money for future expenses, such as purchasing a new car or house.
- A lack of savings: As explained previously in “more difficult to achieve financial goals”, not knowing where your money is going makes it impossible to save it. The first step in saving money is identifying your income, setting a savings goal, and then paying for expenses with the remaining money. For example, if you take home $1,900 per month, and you want to save $200 of that, then you assume that you have $1,700 remaining to spend. You then assess what your expenses are and allocate money appropriately. You should always “Save for your future” before spending.
- Too easy to overspend resulting in more debt: Boundaries! These are created with budgets, without boundaries it becomes a lot easier to blow your money on unnecessary items. When you’re blowing your money you tend to overspend and rack up more debt. You may only pay the minimum on your credit card payment which then results in an interest charge that may even be greater than your minimum payment. Resulting in even more debt.
- More Stress due to less financial control: With the debt stacking up around you and sudden expenses rolling in and no emergency fund, you feel stuck, depressed, and stressed out. According to renolon.com, 46% of people in debt have mental health issues. 86% of those people directly linked their mental health issues to their debt. A budget allows for a guideline, and some peace of mind that you are doing all you can do to conquer your financial issues.
Types of Budgets & How they work
There are so many different types of budgets out there, so what is the best one? Are they guidelines or set in stone? Here is what I have learned from my experiences.
The Saving First Budget
This budgeting method believes in paying yourself first. Paying for your future, if you will. This means setting aside all of the money you want to save each month first, then paying for all of your expenses with the remainder. This method works well for those who spend almost as much as they make. It focuses on dollar amounts, not percentages. This is how I started budgeting.
This method of budgeting is for those who HATE budgeting and are simply “not spenders”, but still need to set money aside for their futures. It’s a very simple and straightforward approach to money. You set aside the same percentage of your income each month, the higher the better. Then you spend the rest as you see fit as long as you are paying all of your expenses. This budgeting method, in my opinion, works best for high school students. They do not have a lot of obligations in most cases and therefore can save 60% of their monthly income easily! Imagine the pile of cash we would all have if we would have saved that from our summer jobs in high school!
The 50/30/20 Budget
The 50/30/20 budget may sound confusing, but it just means you spend 50% of your income on needs and necessities. 30% is spent on things you want, such as that latest lip gloss subscription or your Amazon Prime subscription. Then you set aside 20% of your total income each month for savings. This method of budgeting requires a lot more work upfront. Planning your necessary expenses and being strategic about your choices. You may even have to meal prep to maintain a reasonable grocery budget. I am very analytical and enjoy numbers, so this method of budgeting works best for me, personally. Although the 30% for wants normally turns into approximately 20% more for savings. Because these “rules” are guidelines, you have to adapt them to whatever works best for you.
The 70/20/10 Budget
The 70/20/10 budget is just like the 50/30/20 only your percentages are allocated a little bit differently. 70% of your income goes to monthly expenses, 20% goes to your savings, then 10% of your income goes directly to paying extra on debts. This method of budgeting is great for those trying to climb out of debt. You can utilize this extra 10% to start a debt snowball or avalanche. I personally used this method with my husband’s finances to help him reach financial freedom from his student loans.
This means budgeting to 0 every month. Making an assumption that every dollar will go to specific places. This means savings, or spending, maybe even investing. Every dollar has a home and we assume we will have 0 left at the end of each month. Then we factor in an “Actual” amount. Any deviation will then be deducted from or added to your savings.
How to Budget Successfully
To be successful with a budget, I do believe you just have to start it. Lay everything out there! See what’s going on in your finances, be honest with yourself. Once you have everything lined out, then sit down with your favorite budget planner, Excel sheet, Google sheet, or piece of paper. Whatever works for you. (I find that simple budget planners like this one on Amazon are very helpful. )Then map out your next month with the following steps.
Determine your Income:
List all income sources and how much you expect from each one. What is a “normal paycheck” for you? Are you budgeting with just your money or with yours plus your spouses?
Calculate your Expenses:
Make a list of ALL of your expenses. Quicken.com gives a great list of expenses along with some recommended percentages. Expenses include everything from savings, debt payments, investing, personal spending, healthcare, insurance, utilities, food, transportation, and housing.
Calculate the Difference:
Once you have identified all of your expenses, subtract them from your total income. This number should theoretically equal 0.
Determine what to do with your savings:
I lumped savings all together when talking about expenses, but really there are all different types of savings. You have to figure out what you want to do with your savings. Are you saving for a vacation? Do you have $1000 in your emergency fund yet? How about retirement savings, it’s never too early to start saving for that? Do you have long-term living expenses savings? I suggest saving an emergency fund first and then setting money aside for other things. That way you won’t be blindsided by an unexpected expense. They tend to upset the best intentions.
Make it a habit:
A budget is only successful when you stick to it, you have to make it a habit. No matter what budgeting method you are using, you need to stick to it for several months before determining if it is the right method for you. You can tweak it each month to make it perfect for your personal situation. Just remember a budget works for you, it’s not meant to be complicated.
Budgeting Tips & Best Practices
- Budgeting is easier with support, it’s important to have a support system. Someone whos going to tell you “That’s a bad purchase.” or “Aren’t you saving for our vacation?” Find that person in your life. They can help you stay accountable. Plus you can make a night of it too. Have a dinner date with your BFF and help each other map out your financial futures.
- Remember every month is a different situation. You may have to celebrate 7 birthdays in April so you’re going to have to increase your gift spending, while in March the weather was awful so you stayed home and cooked every night which helped you save even more money. Make sure you fully plan each month out on the 1st of each month, to help plan for unexpected expenses.
- Savings should always come first. Next should come necessities, such as food, utilities, shelter, and transportation. Then you can spend the rest of your money on the remaining expenses. Don’t be afraid to cancel your cable subscription if it’s too expensive, there are other options that are a lot less expensive. If you want to cut spending on food, always remember there are budget food stores you can shop at or look at subscription boxes.
- Tracking your progress is beneficial. My students tell me regularly that seeing exactly where everything is going helps them so much! They love seeing that every dollar is spent, and there’s no “random” money just laying around. Many of us just utilize 1 bank account, so when you start budgeting and start “savings” it appears to just be “extra” money in your account when it’s actually already allocated to some really special, super cool vacation of your dreams!
- Ditch the credit cards. I do not subscribe to a no credit card life, because having a credit score is extremely important as you progress through life. I do believe that they aren’t for everyone though. If you want to commit to a credit-card-free life then by all means cut them up, burn them. Otherwise, you can freeze them in a block of ice so they are not easy to access, meaning they cannot tempt you to make impulsive purchases.
Budgeting tools are all over the internet. Everything from using an envelope system for those cash enthusiasts. To YNAB for those well into the digital age. Here are a few that I recommend:
- Monthly Budget Planner– I know this is super basic, but it’s my favorite non-digital product for the process. When you are not around a computer, or just hate working on one when you are at home because you do it all day. This option is a good one. If you are looking for a digital monthly budget planner look here.
- Envelope Systems– This is a system that uses cash only. You place your budgeted cash in an envelope, once the cash is gone…you can’t spend any more! It’s great to keep you accountable.
- Everydollar– founded by Dave Ramsey this app is quick to set up and has a 14-day free trial. After your trial, you do have to pay for it every 3, 6, or 12 months. It is approximately $11 a month, which is cheaper than an Amazon Prime subscription! This app comes armed with all of Dave Ramsey’s knowledge. There are great resources to help you understand budgeting, debt snowballs, and how much you need to save for retirement.
- YNAB– You Need a Budget. YNAB is free for 34 days. Its trial time is much longer than Everydollar’s which is a huge plus! YNAB believes in zero-based budgeting, every dollar has a “job”. The system employed is the same as the envelope system just digitalized. You can link all of your bank accounts, credit cards, and loans so you can visually see everything in one place. YNAB is also approximately $10 a month. So a little cheaper than Everydollar. YNAB also offers free classes and has an “active community who are happy to help new budgeters,”
Get started with your Budget today!
It can be very overwhelming starting this new chapter of your life. But rest assured there is a support group out there that is willing to help you. The bliss of having your finances under control is worth the time and effort you are going to invest now. It does not take any money to start budgeting! Do not be persuaded by gimmicks online. A budget is nothing more than a piece of paper with all your numbers on it. You just have to stick to the process and make it a habit, then once you feel more comfortable, you can invest in an app or a planner to help you along to your next goal. But starting today, I hope you feel more empowered to take control of your finances and find the freedom that goes along with being in control.
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