Before you go looking for personal finance advice, you must create a budget. You need to determine the amount of money you earn and the amount you spend. It’s as simple as that. Most people do not realize that they often spend more than they earn until they actually sit down and do the math. You have to figure out and then set yourself straight, setting a budget and cutting back on unnecessary things.
However, there are some basic habits that provide people with the tools for success, and creating a budget is one of them.
When’s the best time to create a budget? Today! There are many methods you can use, and it’s important to know what’s available to you so you can take the best course of action when it comes to your financial goals.
Once you’ve decided to start budgeting your money, make sure you get your finances in order. Regardless of what method you choose, it’s a good idea to know where you are now to determine where you’re going with your financial health.
Gather statements for your credit cards and other loans, and have the most up-to-date information from your checking and savings accounts. This will help set you up for success.
Some people are very visual. If this is you, having a pencil and paper can be beneficial as you can lay out what your expenses look like versus your income. If you like to use spreadsheets and digital tools to create a budget, that’s fine, too.
Once you have all of your information and have decided how you want to track everything, total up your income and make a section for it. Depending on your job status (if you work full-time, part-time, or are on contract), you should be able to determine your monthly or weekly income.
If you’re hourly, try to average out your hours based on past information. If you’re salaried, you should have pay stubs you can refer to in order to calculate your basic income.
Once you have your income totaled, it’s time to determine your expenses.
If you have monthly bills, determine categories for these, such as utilities, rent/mortgage, gas, food, etc., and the monthly amount you must pay for credit cards and loans. You can start with just the minimum payment for a baseline budget, and then later determine whether you have extra income to put towards debt.Getting started with #budgeting isn't hard - just follow these tips! Click To Tweet
Speaking of debt, it’s important to include information like interest rates, payment due dates, and the amount of payments left (in the case of loans) in your basic budget organizing.
Just like it’s important to keep track of your spending, it’s also important to keep track of your debt and the progress you’re making.
Now that you know what your financial situation looks like, it’s time to choose a budgeting method that works for you. Remember, you can always change your method, or experiment with a hybrid version of methods.
Envelope System for Budgeting
One of the most popular and basic budgeting methods, the envelope system, allows you to divide your expenses into categories and allocate the funds within separate envelopes for those categories.
Many people use a physical envelope for this and use only the money in it for expenses. For example, if your gas budget is $100, you’d put $100 cash in an envelope labeled “gas.”
However, you can also have a separate bank account with the amount of money allocated to that category, and spend only from that.
Groceries are a great expense to use the envelope system with, as many people have trouble with spending on food, often spending more than they realize on fast food or restaurants. With the envelope method, once your money is gone, it’s gone.
It’s also a good way to visualize your spending, as you can easily see how much is leftover just by checking the envelope.
Many people use the envelope system to break bad habits or curb spending. Whatever is left over in the envelope after the money for that category is spent can be saved, rolled over, or used towards debt, depending on your preference.
Using the 50/30/20 Rule in Budgeting
Budgeting methods often allow you to determine how you want to live your life. If you’re the kind of person who wants to promote healthy financial habits, using the 50/30/20 rule may be for you.
The 50/30/20 allocates your money in the following way:
- 50% of your take-home pay goes towards necessary and essential expenses
- 20% of your income goes towards savings and debt payments
- 30% (or less) of your paycheck goes towards lifestyle choices that are “wants” rather than “needs,” such as entertainment, shopping, restaurants, and cable subscriptions, among other expenses.
Splitting your budget into three parts, with the majority of your income going towards the essentials and paying down your debt, allows you some freedom with your remaining money.
Plus, you can gamify your budget this way and challenge yourself to put less and less month towards lifestyle choices and more towards debt. Make it fun and reap the benefits of your budgeting choices!
This About Money article on the 50/30/20 rule provides a comprehensive guideline on how to make the budget work best for you.
Is saving money your number one goal? Reverse budgeting focuses on this priority at its core. Rather than focusing your budget on categories, you create savings targets that allow you to maximize your budget towards putting aside as much money as possible.
Most budgeting methods involve creating categories for particular expenses such as bills, your rent payment or mortgage, and your monthly savings amount.
However, with reverse budgeting, you set aside a particular amount of savings first, then determine the remainder you can spend for your chosen time period (either monthly or biweekly). You’re essentially paying yourself first.
For success with reverse budgeting, it’s often helpful to have a separate savings account set up. Even one with a separate bank where you can set up automatic transfers can be helpful.
This budgeting method is not for the faint of heart, however; if you have inconsistent income or debt you would rather pay off, you might focus instead on a different budgeting method that provides more stability and is easier to track.
Zero Sum Budgeting
If you’re the kind of person who struggles with temptation and tends to spend any extra money you have, zero sum budgeting may be for you. Instead of having money left over after bills, zero sum budgeting forces you to account for every dollar you have.
This allows you to allocate money toward your goals.
For example, if you try zero sum budgeting and find you have money left over from your groceries category, those funds should go towards debt payoff or savings.
One disadvantage of using zero sum budgeting is you have to be really hands-on to be successful. If you’re the kind of person who wants a low-maintenance approach to budgeting, zero sum may be challenging for you.
Still want to give zero sum budgeting a try? Pair your process with a site like Mint or You Need a Budget that allows you to categorize expenses. The Growing Slower blog provides a good blueprint of how to do this with your own budget.Take control of your #money and start #budgeting with one of these 4 methods! Click To Tweet
Your budget is what you make of it, and having some understanding of the many methods out there can help you decide what works best for you. Take some time to do your research and decide how you want to allocate your money.
Take charge of your finances and find a budgeting method you can embrace! You’ll be glad you did.
What budgeting method do you use? Have you had trouble budgeting in the past? What’s held you back?