Budget. The six letter “naughty” word that strikes fear among those who want to be better with managing their money, but will come up with every excuse to avoid it. Sound familiar? What the chose of creating a budget is daunting, I want to share some great tips and tricks to help get you started as well as keep up with a budget… and it won’t take much time at all.
What is a Budget?
Simply put, a budget is a plan you make for your money (preferably before the money is earned or at the very least, before it is received).
By making a budget, you make decisions up front about how you will use your money. This helps eliminate the need to make decisions when temptation strikes.
When you know how much you can afford to put towards your goals after your basic needs are met, you can make the debt payments or transfer money to savings as soon as you are paid (and before you spend any money). This is called paying yourself first and can be automated so you aren’t tempted to skip paying yourself before going shopping or going out to eat.
But paying yourself first isn’t the only good reason to budget:
- Gives you a sense of control over your money and financial situation
- Allows you to enjoy your splurges without worry
- Keeps you focused on your money goals
- Helps you get on the same page as your partner when it comes to money
- Creates a sense of accomplishment
- Develops discipline and planning skills
So how do you make a budget?
How to Budget
Typically the first step to making a budget is to track your spending, but I suck at this so I’m going to show you a different way to get an idea of how you currently spend your money.
For starters, stop using cash. Cash is hard to track.
If you already use a debit/credit card for all of your purchases, you can go through a couple months worth of statements to see how much you spend on things like eating out, gas, clothes, etc.
Don’t exclusively use your card for purchase? Do it for a few months to get the data you need.
Otherwise, you can track your spending via apps or a receipt trail if you are disciplined enough.
Once you have the data you need, make a monthly (yes it needs to be monthly because your spending needs change month to month) outline of where you typically spend money and any upcoming expenses that may be different (medical bills, car maintenance, etc). You should also include money to save and/or pay down debt.
Now for the moment of truth. Do all of these things equal your paycheck (or less)? If not, you need to decide which items you can cut or reduce.
Once you determine how much you can spend in each category, you can set up alerts through your bank, use cash for things that are hard to control (shopping, gas, eating out, whatever you have a hard time staying in bounds), or any other methods to stick to your budget.
I find implementing scheduled spending helps me stay on track without feeling like I’m missing out. For example, I have
- 1 girls night per month
- 1 mastermind outing per month
- Buy lunch 1 time per paycheck
- Buy food for the week and take it to work on Monday so I’m not tempted to buy lunch when I forget to bring it
If you are one part of a couple, it is imperative you find a system and budget that works for both of you.
Have items that are paid quarterly or yearly (like insurance)? Break the amount into monthly payments and put the cash in an envelope (with the name of the bill) or in its own savings account (nickname of bill). This keeps you from forgetting about the bill and ensures the money will be there when it is needed.
I have envelopes for things like car maintenance (tires and oil changes are predictable, save the money upfront). This keeps the cash on hand for short term needs and my mechanic gives a cash discount (you should ask yours).
However, I use savings accounts (that pay interest) for longer term savings like my emergency fund.
What Should be in Your Budget?
While every person is different, below are some things to consider to help you get started on your budget:
- Housing (rent/mortgage)
- Insurance (health, car, life, renters/homeowners)
- Car/Transportation (gas, bus fare)
- Food (groceries, eating out)
- Utilities (phone, electric, gas, water)
- Debt payments
- Savings goals
- Taxes (especially if you usually owe, are self employed, or pay someone to do your taxes)
- Fund activities/splurges
No two people are going to come up with the same budget. However, there are some basic rules to help.
- Make sure your mandatory bills are paid (rent, minimum payment on debt, insurance)
- Food and clothing are a must – but not necessarily eating out and new clothes. Know the difference between what you have to have and what you want.
- Pay yourself first (extra debt payments, savings, investing)
- Have some fun (if you can afford it that month)
Just to clarify, new tires aren’t an emergency. You have notice that they are starting to wear out and you should save for them. Coming out of work to find your car has a flat tire is an emergency and can’t be budgeted for (but your emergency fund to help cover these things should be in your budget if you don’t have savings to cover the unexpected).
I have an app for everything… except my budget. Part of that is because I was taught to use pen and paper (and envelopes to save for short term goals). Think of they way your grandparents did it.
This way works for me because it’s what I’m comfortable with, but if you can’t get a handle on your budget this way, there are apps to help. While this isn’t an exhaustive list by any means, these are some of the more popular apps to help you budget your money:
Mint is a free tool that syncs with your accounts (checking, saving, investing) and allows you to make a budget and track how much you spent in each category. It is a pretty easy to use tool (available online and as an app). Just beware of the advertising (a lot of credit card ads from my experience)!
Banking App (i.e. PNC Wallet) is a service provided by your bank (not all of them have it). The features very, but it is a good starting place to make a budget and your bank likely has someone to answer any questions you have about the tool they provide.
You Need a Budget is a paid service ($6.99/month) that has similar features to mint. It syncs to your accounts, allows you to make a budget, and tracks your spending.
EveryDollar is Dave Ramsey’s version of mint. The free section allows you to make a budget, but if you want to sync your accounts you need to upgrade to the paid service ($99/year – which is actually not much more than a years worth of monthly charges for You Need a Budget).
No matter how you decide to budget, you should aim to “spend” every dollar before you receive it.
What is a Zero Sum Budget
Simply put, a zero sum budget means that your income equals your expenses.
Don’t get too caught up on the terminology though. In this case, expenses means any money that is leaving your checking account (and if you don’t earn interest on your checking account, you shouldn’t keep much in there other than to pay your bills). That would mean the contribution to your emergency fund would be considered an expense.
The goal of a zero sum budget is to make sure that you know where every dollar should go. This keeps you from making impulse purchases. I find that once the budget it set, transferring my money to savings or paying my bills (often before they are due) as soon as the money hits my account keeps me from “forgetting” my lunch because there is no money in the account to buy one.
What if you have an Irregular Income?
You’re probably thinking: What if my income isn’t predicable?
I feel you. While part of my income is predictable, some of it is not. To combat this problem, I make 2 budgets.
The first budget is what must be paid. Things like my car payment, daycare expenses, etc. go in the first budget.
The second budget includes everything I want to do with my money, if I have it, in the order that I will spend it.
Right now, my second budget looks like this (since I already saved for vacation over the winter):
- House fund
- Education fund
- Extra car payments
- Extra IRA contributions
Things like going out to eat, a purchase that you want to make but isn’t necessary, and saving for things like vacation can all go on the second budget along with how much you want to save for each item.
This method also helps when you get a large amount of money unexpectedly (like a bonus or tax refund). Where that money should go is already determined by your second budget and will help keep you from splurging (at least more than a little) with the windfall.
What is a 50/20/30 budget?
Senator Elizabeth Warren introduced the 50/20/30 budget in her book “All Your Worth: The Ultimate Lifetime Money Plan.” The concept is simple:
- 50% of your money goes towards needs,
- 20% of your money goes towards savings, and
- 30% of your money goes towards wants.
If you are trying to get your finances in order, this approach probably isn’t practical. But it is a good goal and can help you make sure your expenses are under control.
With this guideline, if you can’t save/invest at least 20% every month, you should work to lower your expenses or increase your income… or both.
I’m still catching up to where I want to be financially, so I save and invest more than 20% of my income. For me, having money in the bank is important because I went through some very lean times. If you are in a comfortable financial situation, saving 20% will likely be a good target.