Budgeting 101: First Steps to Building a Budget that Works for You
Setting up a budget is often seen as a long and tedious process, so we want to say congratulations on taking the first step towards being serious about your finances!
Building your budget will set you free. It will open your eyes and allow you to take back control of your money.
We want to make that as easy as possible and know you can stick to it. Below is our guide on building a budget that works for you.
Set a Personal Goal for Success
Ask yourself why you need a budget.
Do you have debt (credit card, mortgage, car loan, student loan) you want to pay off as soon as possible?
Are you looking to save more money for retirement?
Do you need extra savings for a down payment on a house, car, or other large expense?
Perhaps you are planning a vacation?
Do you want to build your emergency fund in case something unexpected happens?
Maybe you want to expand your investment portfolio? Is there a time frame you want to accomplish this by?
Once you know the reason for making a budget, set that goal and write it down. Use it as motivation to ensure your success.
List and Log All Your Income Sources, Expenses and Savings Accounts
Make a list, one line at a time of all your monthly income, and a separate list of all your monthly expenses.
There are various ways to do this.
Or, for a simpler and more visual option, connect your accounts with a budgeting app such as Intuit’s Mint.
Include all your sources of income, your primary job (use take home pay), passive income, side jobs or projects. If any of these vary from month to month, calculate your income based on the prior six month average. Readjust in the future as needed.
Your expenses will have two sections.
The first section should include all necessary and essential recurring monthly expenses for living. Examples are rent or mortgage, car payment and insurance, gas or transportation, monthly utilities (electric, heat, water), internet and phone bill, child care, groceries, loans, credit card and other debt repayments.
Once you’ve gone through your essential expenses, the second section should include all non-essential expenses. Examples are television or streaming services, dining out, drinks such as alcohol, soda or coffee, entertainment, monthly memberships, gifts or miscellaneous items.
Compare your monthly total income with your expenses. What percentage are you using or have left over?
Look for Areas to Cut or Decrease Your Expenses
How does your monthly budget look? Do you have less wiggle room between your income and expenses than you expected?
Maybe your finances are better than you thought.
Either way, there’s surely room for improvement.
It’s time to make some adjustments to further your financial outlook and meet your goals.
Most of us over spend. Now that you have a break down of your spending, you can review those areas to find ways to save money.
Which are absolute necessities, and which are luxuries or wants?
Check your recurring monthly expenses first: loans, credit cards, streaming or television services, or other subscriptions.
Can you consolidate your loans or do a balance transfer to a lower interest rate or zero interest plan? Can you live without some of the channels on your television or reduce the number of streaming services (Netflix, Hulu, ESPN) you pay for? Are there website or magazine subscriptions you have that you don’t use or may have forgotten about?
Personally, changing my cell phone plan was an easy way to save money each month.
According to a report by J.D. Power, the average monthly cell phone bill is $73. That’s a lot. I shopped around and switched to Google Fi. You get unlimited calls and texts for $20 a month, and no roaming charges in over 200 countries (big plus for those who like to travel). Data is only $10 per gigabyte, and any data you don’t use gets credited back towards your account.
I connect to wi-fi wherever I go to minimize the amount of data I use each month. Most months I don’t even use 1 gigabyte. If I only use 500mb of data for the month, then I get $5 back for the remaining 500mb I didn’t use. That means my monthly cell phone bill is only $25 ($20 for calls and text + $10 for data – $5 refunded)!
That’s almost $50 less a month than the average. If your phone bill is too high, switch to Google Fi and give it a try.
Now check your non-recurring expenses: Dining out or going to happy hour, online shopping, trips, or local entertainment such as concerts and movies. We all need to enjoy life and have fun, but you may find some habits that you do too frequently for your budget.
For more great tips on reducing your monthly budget expenses, see our in-depth article on 10 Easy Ways to Save Money Today.
Choose a Budget Method that Fits You
At this point you know your budget and what you can do to increase the gap between your income and spending. Now you need to determine how you are going to do this.
We have listed the most common budget methods for you. Everyone has their own personality and style, so choose one that looks the most appealing to you.
“Balanced Money” or “Percentage Based” Method: First made popular by Elizabeth Warren and Amelia Tyagi, this method most commonly uses the values 50-20-30. The numbers represent what percent of your income you will apply towards various parts of your budget.
50 percent of your income would go towards your essential needs. 20 percent of your income would go towards your savings. 30 percent of your income would go towards your non-essential wants.
Depending on how much of your current budget is required to meet your monthly necessities, the percentage values may need to be adjusted.
This method only requires you to track three categories. If you are someone who doesn’t like to micro manage or track your budget line by line, this may be a good method for you.
“Cash Only” or “Envelope” System: This budget requires you to use only actual cash paper money. No credit or debit cards. No Google, Android or Apple Pay. Just cold hard cash dollars.
Take your monthly spending categories and create a paper envelope for each one. Place your paper money with your spending limit amount in each category. One example is your grocery shopping. If you allocate $300 a month towards groceries, withdraw that amount from your bank account and place it into your envelope labeled “Groceries.” You are only allowed to use what is in the envelope, and cannot take from other envelopes or sources.
This system is good for those who may not be able to trust their spending electronically. It’s so easy to swipe a card and never see your account balance. Having the money physically in your hand will make you think harder and smarter about your purchases.
If you don’t like carrying cash around with you but like the idea of this method, you’re in luck. There’s a budget app designed specifically for this purpose you can download called You Need A Budget (YNAB).
“Zero-Based” Budget”: This method involves taking advantage of every dollar and cent in your finance account, and making it count. The money from your monthly income matches the exact total of expenses, leaving you with a zero net sum in your account. Your monthly savings budget is treated as an expense, so you are essentially paying yourself, considering your savings as a recurring bill. American radio show host, author, businessman and finance guru Dave Ramsay advocates for this method.
If you like total and complete control over your money, and make a record of every single transaction, then this may be the method for you. You decide where your money goes, and plan in advance where each of your dollars are spent.
“No Budget” Budget: This method assumes you have a good rein on your spending habits and only requires you to keep watch of your bank account balance. This is ideal for those with a minimalist or hands-off approach towards budgeting.
It’s as simple as adding up your monthly bills and making sure there is enough money in the right account to pay for it. For this to work, you would want to automate paying your monthly bills, and automate the amount of money you decide to go into your savings. However, if your money is already tight, or you are living paycheck to paycheck, it would be advised not to use this method.
“Create Your Own” or “Pick and Choose” Budget: Now that you’ve read about the most popular budget methods, maybe you like parts of one and parts of another. There is nothing wrong in that and no method is a cookie cut design for everyone. Research additional budget methods. Know what it is that you want out of a budget. A combination of methods may work best for you. If so, pick what you are most comfortable with so you will stick with it.
Follow Your Monthly Plan
Saving money or eliminating debt doesn’t happen overnight.
All plans and goals require conscious action and decision making to succeed.
Budgeting is no different.
The good news is, once you get started, it only gets easier.
Check your budget each month, see your debt decrease and your savings increase. Prioritize any extra income you may receive to continue paying down your debt quicker or add to your savings.
Your wallet and financial future will thank you.