If you’re struggling to manage your finances, you’re not alone. Consumer debt hovers at around $14 trillion, according to most estimates. With only about one-third of Americans maintaining a personal budget, it’s no wonder so many of us are in debt. Of course a good first step toward getting a better handle on your finances is to make a budget.
Budgeting is actually a very basic personal finance skill that’s not too hard to learn. After reading this article, you will understand the information you need to start the practice of healthy budgeting habits. This article covers budgeting 101—the basics and practical tips to help you budget more effectively.
What is a budget and why should you have one?
A budget is a financial plan for balancing your income and spending. The most common form of a budget is a monthly plan. When you use a monthly budget, you’ll determine how much money you expect to make and how much you want to spend at the beginning of each month.
By knowing what’s coming in and going out, you can more effectively plan for the future. This means you’ll be more inclined to spend and save with purpose, which can lead to greater financial freedom. Budgeting can help you achieve your financial goals by providing clarity; and after you learn how to manage your money effectively, you could end up spending less frivolously and saving more for long-term and more important goals, like building up an emergency fund, saving for college, or having funds to invest.
Budgeting 101: getting started
It’s easy to get overwhelmed by the prospect of creating a budget, but the key is to begin with the fundamentals and then provide more complexity once you get started. Budgeting is a process and you will get better at it as you go. The key to success is proper organization, which will be a little different for everyone.
The most basic elements of your budget are your income, regular expenses, and “variable” expenses (which vary by month), so you’ll want to get a handle on those first.
1. Monthly income
The first step to creating a budget is figuring out your monthly income. You might want to look at what you made in previous months in order to be as accurate as possible. Eventually, if you budget correctly, you should have money saved from previous months to help you pay off next month’s expenses, which means your budget should get increasingly easy to manage.
2. Monthly expenses
After you’ve totaled your income, calculate your monthly expenses. Write down those expenses and their associated likely totals. You can begin by making a list of all the typical things you spend money on every month, such as: mortgage or rent, insurance premiums, and internet service. These are called “fixed expenses,” since they’re usually the same amount each month.
One strategy for tracking your expenses is to use cash and employ the “envelope system.” This simply involves putting the money you need for budgeted expenditures (such as groceries, gas, clothing, etc.) into labeled envelopes. If you regularly use a debit card for expenditures but don’t save receipts, you may consider using an online service or app designed for tracking expenditures.
3. Variable expenses
Next, you’ll include expected variable expenses, which change from month to month. These might include groceries, utilities, entertainment, and other miscellaneous expenses. It’s sometimes hard to be precise when figuring out the totals for variable expenses because they are, after all, variable. But you want to try to be as accurate as possible.
If you know that you’ll need to pay for annual or periodic services, then go ahead and add these to their respective months ahead of time. For expenses that fluctuate by month, search your records and come up with averages for your monthly budget.
Once you get started budgeting, you can often refer back to the previous month’s expenses in order to get a better idea about what to expect. It’s also not a bad idea to give yourself a little buffer room for unexpected expenses during the month.
Budgeting strategies: the best approaches
You want to set realistic goals for yourself, which is best done by organizing and managing your finances through developed budgeting approaches. The next lesson of Budgeting 101 is a review or the 50/30/20 rule and zero-based budgeting (although there are other strategies as well).
Budgeting with the 50/30/20 rule
The 50/30/20 Rule was first coined by U.S. Senator and prominent lawyer Elizabeth Warren in 2005, and is now one of the most well-known strategies for budgeting. The 50/30/20 rule separates your budget into needs, wants, and savings:
- Needs include necessities like housing, utilities, groceries (50%).
- Wants are things such as shopping, entertainment, and dining out (30%)
- Savings consists of the remaining 20%
If the 50/30/20 percentage totals don’t make sense with your budget, you can always alter it to something like 80/20, where 20 percent of your income goes toward your savings and 80 percent is used for everything else.
Zero-based budgeting, in some ways, is a simpler method. Originally intended as a strategy for companies to maximize financial efficiency, zero-based budgeting is great for managing personal finances as well.
This strategy just means that your monthly income minus your expenses should amount to zero. So, if you earn $5,000 a month, you want to make sure that every dollar of that goes toward paying for needs, wants, and savings. With this method, you have to make sure you know where every dollar is going in order to spend as wisely as possible.
Budgeting tools to help you stay on track
There are plenty of tools available that can help you keep your budget on track, including spreadsheets (for Google Sheets, Microsoft Excel, etc.), and many are free. Freedom Debt Relief offers a free and easy-to-use budgeting worksheet that’s compatible with both Excel and Sheets. Other online tools and apps are also helpful for managing your finances, and are usually easy to use.
Tips for sticking with your budget
Now you should feel like you have a basic understanding of how to budget. With these ten additional budgeting tips, you’ll be even closer to acing How to Budget 101 and starting to master your financial future.
- Quit spending on your credit card. Rely more on debit cards or cash. Interest is money down the drain.
- Use an event calendar. Keep track of any upcoming events like birthdays or concerts that may cause you to spend more than usual.
- Plan meals. When you plan your meals ahead of time, you won’t be tempted to just buy what looks good at the grocery store.
- Make a weekly budget. Life is unpredictable, but it may be easier to predict your financial needs (and income) a week out.
- Give yourself a buffer. Leave some wiggle room. For your income, err on the lower end; and for expenses, plan to spend a little more than you think.
- Stay organized. Try to organize your budgeting information—including receipts, utility bills, and pay stubs—in a single place.
- Resist temptation. Wait before you buy. If you still want it weeks later, it will more likely be a purchase you will appreciate for a long time to come.
- Make your own goals. Your budget is a way to help you accomplish the goals that are unique to your life.
- Use teamwork. If you’re budgeting with your partner or spouse, communicate openly with each other.
- Give yourself grace. Don’t worry too much if things aren’t perfect the first or even the second time around. The more you practice, the better you’ll get.
How to get back on track if you overspend
If you end up spending beyond your budget, it doesn’t mean you’ve failed Budgeting 101. Everyone mismanages their money at one time or another. Whether you’ve overspent on groceries, forgot about a bill, or had an unexpected expense, refocus on your financial goals. With a little effort, you should be able to get back on track.
It’s also a great time to reexamine your budget to see if you can amend it to balance out the overspending. For example, are there any categories in your “wants,” or other nonessentials, that could be reduced or eliminated? You may also want to adjust next month’s spending to account for your overspending this month. Again, focus on reducing your spending on the least important items first.
Budgeting 101: it’s that simple
You’re already started on the path to a healthier relationship with money just by learning how to budget. If your budget reveals that your monthly debt expenses are greater than your income and you think you won’t be able to keep your debt from getting bigger and bigger each month, it may be time to get debt help.
Learning how to deal with debt, money, and planning for your future doesn’t need to be hard. We have developed a simple to follow guide to help you find the tools you need to move to a better financial future. Get started by downloading our free guide right now.