It’s not always easy to make ends meet, but it is possible. Your budget can be your best friend or your worst enemy. It all depends on how you approach it. The key to a successful budget is to take the time and make the effort for yourself- nobody else will do it for you!
How to budget money
There is a simple method for budgeting your money that can help you stay on track and make the most of your income.
There are two main ways to approach budgeting- the percentage method and the envelope system. With the percentage method, you break down your expenses into three categories.
The simple breakdown is this…
Calculate your monthly income, choose a budgeting approach, and track your progress.
As a basic budgeting structure, use the 50/30/20 rule. Allow up to 50% of your money for necessities.
30% of your money should be set aside for wants.
20% of your money should go toward savings and debt repayment. We will go into this further down in this post.
How do I start a budget?
Begin by gathering your bills and pay stubs. Consider how you spend money other than on your bills. Do you purchase a cup of coffee every day, for example? After a month, that daily café expenditure might translate to an itemized expense that you may record.
When you have your bills and pay stubs:
- write down your expenses. An expense is the money you spend
- write down how much money you make. This is called income
- subtract your expenses from how much money you make
If the number is less than zero, you are spending more money than you make. You should seek ways to cut back on your expenses. Perhaps something that you don’t need or a way to save money
1. Create a List of Monthly Expenses
Make a list of all the money you anticipate spending throughout a month. This might include things like:
- Mortgage payments or rent
- Car payments
- Insurance
- Groceries
- Utilities
- Entertainment
- Personal care
- Eating out
- Child care
- Transportation costs
- Travel
- Student loans
- Savings
To find out all of your expenditures, examine your bank statements, receipts, and credit card bills from the previous three months.
2. Determine Fixed and Variable Expenses
Set-fee internet service and trash collection have fixed costs. These are fees that you pay the same amount every time. Include items like a mortgage or rental payments, automobile loans, set-fee internet services with set fees, garbage removal, and regular child care expenses. If you use a preapproved credit card to make your payment each month, include the
If you want to allocate a specific amount of money or debt each month, include it as a fixed expense.
Variable expenses are the sort that varies month to month, such as:
- Groceries
- Gasoline
- Entertainment
- Eating out
- Gifts
If you don’t have an emergency fund, create a category for “unexpected expenditures” to track any unexpected costs that may arise throughout the month and throw your budget off track.
Determine a spending value for each category, beginning with your fixed costs. Then estimate how much you’ll spend on variable expenditures each month.
If you’re not sure how much you spend in each category, look at your last two or three months of credit card and bank debits to get an approximate value.
3: Set your goals
Make a list of all the financial goals you want to achieve in the short and long terms before diving into the data. Goals that are appropriate for the short term should be completed in less than a year. Long-term objectives, such as saving for retirement or your child’s education, might take years to achieve.
Remember, your objectives don’t have to be set in stone, but before you start creating a budget, make a note of your priorities. It may be simpler to cut spending if you know your short-term objective is to pay off credit card debt.
Understand the budgeting process
Determine your after-tax income: If you get a regular wage, the amount you receive is likely to be the same, but if you have automatic deductions for a 401(k), savings, and health and life insurance, include them back in to give yourself an accurate picture of your savings and expenses. Perhaps you make money from side projects remove.
Choose a budgeting strategy: Any budget must meet all of your demands, some of your wants, and future savings.
The envelope method is one of the most popular budgeting models because it’s simple to understand and implement. Budget tracking with a zero-based approach: Keep track of your expenditures using a spreadsheet or online budgeting tools. Automate your savings as much as possible so that you don’t have to worry about whether or not you’re spending your money wisely.
Try a simple budgeting plan
Remember we talked about the 50/30/20?
We recommend this budget system to maximize your money. That is, after accounting for all taxes and fees. The point is that you should never trade total quality of life for a quicker return on your money.
We adore this approach’s straightforwardness. Someone who follows these guidelines will have manageable debt, room to indulge on occasion, and funds set aside to cover unanticipated or irregular expenditures and retire comfortably over the long run.
Include your take-home pay, plus any payroll deductions for health insurance, 401(k) contributions, and other automated savings.
Your 50/30/20 numbers:
Necessities, Wants, Savings, and debt repayment. Do you know your “want” categories?
Track your monthly spending trends to break down your needs and wants.
Let’s dive in.
What is the 50/30/20 rule?
The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, simply, and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings or paying off debt.
By regularly keeping your expenses balanced across these main spending areas, you can put your money to work more efficiently. And with only three major categories to track, you can save yourself the time and stress of digging into the details every time you spend.
One question we hear a lot when it comes to budgeting is, “Why can’t I save more?” The 50/30/20 rule is a great way to solve that age-old riddle and build more structure into your spending habits. It can make it easier to reach your financial goals, whether you’re saving up for a rainy day or working to pay off debt.
Allow up to 50% of your income for needs
Your needs about 50% of your after-tax income should include:
- Groceries.
- Housing.
- Basic utilities.
- Transportation.
- Insurance.
Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
Child care or other expenses you need so you can work.
If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending.
Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage less expensive car insurance. That leaves you more to work with elsewhere.
Leave 30% of your income for wants
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel, and entertainment.
It’s not always easy to decide. Are restorative spa visits (including tips for a massage ) a want or a need? How about organic groceries? Decisions vary from person to person.
If you’re eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.
the budget needs both wiggle room maybe you forgot about an expense or one was bigger than you anticipated and some money you’re entitled to spend as you wish.
Your budget is a tool to help you, not a straitjacket to keep you from enjoying life, ever. If there’s no money for fun, you’ll be less likely to stick with your budget and a good budget is one you’ll stick with.
Commit 20% of your income to savings and debt repayment
Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.
Priority No. 1 is a starter emergency fund.
Many experts recommend you try to build up several months of bare-bones living expenses. We suggest you start with an emergency fund of at least $500 enough to cover small emergencies and repairs and build from there.
You can’t get out of debt without a way to avoid more debt every time something unexpected happens. And you’ll sleep better knowing you have a financial cushion.
Priority No. 2 is getting the employer match on your 401(k).
Get the easy money first. For most people, that means tax-advantaged accounts such as a 401(k). If your employer offers a match, contribute at least enough to grab the maximum. It’s free money.
Why do we make capturing an employer match a higher priority than debts? Because you won’t get another chance this big at free money, tax breaks, and compound interest. Ultimately, you have a better shot at building wealth by getting in the habit of regular long-term savings.
You don’t get a second chance at capturing the power of compound interest. Every $1,000 you don’t put away when you’re in your 20s could be $20,000 less you have at retirement Priority No. 3 is toxic debt.
Once you’ve snagged a match on a 401(k), if available, go after the toxic debt in your life: high-interest credit card debt, personal and payday loans, title loans, and rent-to-own payments. All carry interest rates so high that you end up repaying two or three times what you borrowed.
If either of the following situations applies to you, investigate options for debt relief, which can include bankruptcy or debt management plans You can’t repay your unsecured debt credit cards, medical bills, personal loans within five years, even with drastic spending cuts.
Your unpaid unsecured debt, in total, equals half or more of your gross income.
Priority No. 4 is, again, saving for retirement.
Once you’ve knocked off any toxic debt, the next task is to get yourself on track for retirement. Aim to save 15% of your gross income; that includes your company match if there is one. If you’re young, consider funding a Roth individual retirement account after you capture the company match. Once you hit the contribution limit on the IRA, return to your 401(k) and maximize your contribution there.
Priority No. 5 is, again, your emergency fund.
Regular contributions can help you build up to three to six months’ worth of living expenses. You shouldn’t expect steady progress because emergencies happen, but at least you’ll be able to manage them.
Priority No. 6 is debt repayment.
These are payments beyond the minimum required to pay off your remaining debt If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, often tax-deductible debt (such as your mortgage). You should tackle these only after you’ve gotten your other financial ducks in a row.
Any wiggle room you have here comes from the money available for wants or from saving on your necessities, not your emergency fund and retirement savings.
Priority No. 7 is you.
Congratulations! You’re in a great position a really great position if you’ve built an emergency fund, paid off toxic debt, and are socking away 15% toward a retirement nest egg. You’ve built a habit of saving that gives you immense financial flexibility. Don’t give up now.
If you’ve reached this happy point, consider saving for irregular expenses that aren’t emergencies, such as a new roof or your next car. Those expenses will come no matter what, and it’s better to save for them than borrow.
How else can I save money?
You can try these ways to help save money:
For one month, write down everything you spend. Small expenses, like a cup of coffee, can add up to a lot of money. When you know where you are spending your money, you can decide what you might not want to buy.
Pay with your credit card only if you can pay the full amount when the bill comes. That way, you do not pay interest on what you owe.
Pay your bills when they are due. That way, you will not owe late fees or other charges.
Keep the money you are saving separate from the money you spend.
Consider opening a savings account in a bank or credit union. Read more about opening a bank account.
If you keep cash at home, keep the money you are saving separate from your spending money. Keep all your cash someplace safe.
The envelope system
Now, this is another VERY popular system for budgeting. It is very simple to follow.
Visualizing your money can help you be more aware of how you spend it. That’s how the envelope system works. Take three to five envelopes and write what each one is for on the outside. The cash you put in these envelopes will need to cover both real-life purchases and online spending.
Let’s say you mark each of them “Groceries & Dining”, “Monthly Bills”, “Clothing & Misc. Shopping”. You are only allowed to spend what’s in the envelope for each of those categories every month.
Round up each purchase to the nearest dollar to help keep your envelopes from becoming messy change pockets. Instead, add that change to separate savings accounts each month.
However, the simplicity of this method can also be its downside. Having large amounts of cash lying around at home or on the go may not be the safest way to keep your money. It’s also easy to cheat by taking money from one envelope and spending it in a different category.
The 80-20 plan Where the 50-20-30 rule and the envelope system get complicated, the 80-20 plan gets simple. Instead of having to categorize every single expense into what is essential and what is not, you simply take 20% of your paycheck and deposit it directly into your savings account. The rest is yours to spend however you want.
The trick for this plan is to set up automatic withdrawals that take 20% of each paycheck as soon as it hits your bank account. Because that money is immediately placed into a separate savings account, it’s like you never had it to spend in the first place. Better yet, set up a direct deposit. This means your employer will deposit 20% of your paycheck directly into a separate savings account and the rest into your checking account.
Creating your own Budgeting needs are different for everyone. That’s why sometimes it’s better to create your own. Start by calculating your monthly expenses. Check your bank statements to make sure you’re jotting everything down. Mortgage or rent expenses are easy to remember, but we live in the age of subscriptions, and those streaming or gym expenses may filter through unnoticed.
Once you know how much you spend, determine your monthly income after taxes. This is easy when you have a regular salary but maybe a little harder to determine if you have a freelance job or get extra funds via side gigs, rental income or interests.
Conclusion
The budgeting process is a commitment. It requires you to create lists, set goals, and rethink your financial behaviors. But the benefits are worth it! By following this guide, you’ll know how to start creating a budget that will allow for more savings in 2022. If you need help along the way or want to learn more about staying on track with your finances, join our live richer academy where we provide weekly content focused on teaching people how they can change their mindsets around money so they can get ahead financially and enjoy life at the same time.
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