Budgeting is a lot like exercising. It seems like a huge pain in the ass, but after it’s over, it actually feels pretty good. You might even feel in control.
Control is what it’s all about, really. Whether you’re in debt, you’re saving for a house, or you’re just trying to get your money sitch in order, the general goal is the same: you want to take control of your finances. A budget is the first step in doing that.
To me, budgeting is a no-brainer. But I’m also a money nerd, and as sad as it sounds, I also kind of like budgeting (I have other hobbies, too, I swear!)
Not everyone is as keen on budgeting, so getting started might not be easy. If you have no clue how to build a budget, this primer is for you.
What a Budget Should Be
Before getting into the nitty-gritty, it helps to know what exactly a budget is all about. It’s a plan for your money, sure. But beyond that, here’s what a solid budget should be:
Organized: You wanna know what your money is doing. Think of your dollars as employees. Each one of them has a job, and as manager, it’s your job to figure out what they’re doing. How many of them are slacking off, and how many of them are working hard to make you successful? Then, organize accordingly. Some people prefer a few general categories to make budgeting simpler. Others prefer specific categories to make things more precise. It’s up to you. Either way, a good budget includes categories for each dollar to do its job.
Goal-Oriented: If you’re trying to get your money right, it’s probably because you’ve got things you’d like to do with that money. The boring term for this? Financial goals. And a good budget is goal-oriented. Meaning, you draft the budget with your goal in mind.
Realistic: Yep, a good budget also gives you room to party. You don’t need to make a crazy, strict budget so that you can reach your financial goals faster. If you give yourself zero breathing room, your budget will backfire. You’re human, and that means you’ll give into the occasional splurge–even if it’s just a pack of jelly beans (my go-to splurge). Budget for it, and that splurge will be manageable.
Here are a few money mistakes to avoid:
1. Over-saving: Eager to speed up my savings goals, I put aside an unrealistic amount and left myself nothing for expenses.
2. Not being realistic: I told myself I would spend zero each month on dining out, movies–basically anything even remotely enjoyable. But I’m not a robot. So inevitably, I would bust my budget. This kind of goes with the first mistake. Basically, I didn’t give myself enough breathing room. Which is important.
3. Not budgeting for irregular expenses: I forgot to consider all the non-monthly scheduled bills I had. They took me by surprise!
Step 1: Make Some Goals
Like I mentioned, a good budget should be goal-oriented, so before anything, you want to review what those goals are. Here are some common financial goals:
• Paying off a loan / Getting out of debt
• Saving for retirement
• Saving for a big vacation
• Building an emergency fund
You may have multiple goals, too. For example, debt should be a priority, but if you’ve got nothing saved for an emergency, that should be a priority, too. And if your company offers a 401(k) match, you should definitely take them up on it, because it’s free money. I like Ramit Sethi’s ladder of savings, which goes something like this:
“First of all, if you have a 401(k) match at your office take it. Take it because that’s free money…so take that up to the match. Then, pay off your credit card debt. Now, if you still have money left over, I would like you then to go to a Roth IRA…If you still have money left over after [maxing out] your Roth IRA…go back to your 401(k) and contribute beyond the match.”
It’s one suggestion, and your mileage will vary depending on your debt situation. My point is: make some goals, then prioritize them. These goals will be the backbone of your budget.
Step 2: Create Some Basic Categories
Pull out your bank statements and take a look at your spending–bills, restaurants, shopping, rent–review it all. Don’t forget to look at expenses that might not be paid monthly, too. Car registration, for example.
Organize these expenses in some basic categories. For example:
If you want to get more detailed, go ahead. You’ll have time to do that later, though. For now, it’s about basic organizing. Calculate monthly totals for each amount. For those quarterly or annual expenses, divide by twelve and add them to the appropriate category. You’ll also want to add categories for income and thegoals you drafted in Step 1.
Step 3: Find a Plan That Works for You
After you’ve got your spending, income, and goals organized, it’s time to come up with a budgeting plan. Basically, it’s time to figure out how much you should spend in each category. If you need help getting started, here are a few basic methods:
The 50/30/20 method
50% of your income goes toward needs: housing, groceries, credit card payments.
30% goes toward wants: entertainment, shopping
20% goes toward savings or debt payoff: your goals
You can adjust these numbers as necessary. For example, if you live in a super low cost-of-living city, 50% might be high for you. Your rule might be 30/30/40, so you can pay off debt faster. The ratios are just guidelines for prioritizing. It’s probably the most straightforward plan for beginner budgeters.
The 80/20 method
20 percent of your income goes toward savings and debt payoff: your goals
80 percent goes toward everything else
Again, it’s a guideline, and you can adjust the numbers as you like. I actually prefer this one, because it’s more goal-oriented. Rather than focusing on each individual category, you’re just making sure you meet your goals. I use a variation of this rule…
The Goal-Based Method
I created and adopted this method for myself when I was getting out of student loan debt. It’s almost like the 80/20 method, but it’s based on numbers instead of percentages, which I find more useful. Here’s how it works, step-by-step:
a. Add up your annual take-home income. (For example: $30,000/year)
b. Calculate your annual lifestyle cost. Use the totals you calculated in Step 2. (Example: $24,000/year)
c. Subtract (b) from (a) (Example: $6,000)
d. Divide that amount by 12. (Example: $500)
e. This number is the monthly amount you have to throw at your goal.
You can also readjust your lifestyle costs (b) as necessary, depending on whether you want more to put toward your goal or live a more comfortable lifestyle. It’s up to you. Just be realistic.
So now you’ve organized your categories, and you’ve got a basic plan for how to divvy up your income into those categories. With your income and plan in mind, it’s time to assign spending amounts for each category. This means it’s time to choose a place to actually keep track of your budget.
Step 4: Choose Your Medium
Mint: Mint is an online budgeting tool, and I like it because it’s straightforward and free. You create categories and your expenses are automatically budgeted into the right category (for the most part). You set amounts, and Mint tells you when you’re getting close to spending more than your budgeted amount. It also has a goals tab for keeping track of your goal progress. If you want more info on how to get started with it, check out this article.
YNAB: You Need a Budget isn’t free (one time charge of $60), but it’s got rave reviews. I’ve never used it, but from what I’ve read, it’s more involved and customizable. It helps you stick to your spending plan, it’s detailed, and it’s flexible. Here’s more detail on how to get started.
Excel: Nothing wrong with an old school Excel spreadsheet for budgeting. You’ll have to keep track of everything yourself and remember to enter every detail. Here’s a good primer on how to build a budget with Excel.
Whichever medium you choose, it boils down to: entering your categories, assigning amounts, and then keeping track of your spending and goal progress.
Step 5: Stick to Your Budget
Here’s a great, tried-and-true tip for sticking to your budget: pay yourself first. Whatever amount you’ve allocated toward your goals, pay them first. For example, schedule a credit card auto-pay for the day after you get your paycheck. Or, when you get paid, make sure you transfer a set amount to your savings before anything else. This way, you’re not tempted to spend more on a certain budget category at the expense of your goals.
But what if you forgot to add an expense to your budget and it pops up? I keep a cushion in my checking account for just this reason. For example, when I first started budgeting, I totally forgot to consider my annual car registration payment. I’d already paid myself first, so I didn’t have any money left over in my budget to cover the registration. That’s when my small cushion came in handy. I replenished it by taking away from next month’s savings goals, yes. But then I simply readjusted my budget as necessary to include car registration.
But what if your car breaks down and you have no money to pay for it? This is why an emergency fund goes hand in hand with a budget. If you don’t have one, make it a goal. Experts recommend you save about 3 months’ worth of living expenses for an emergency. When I was getting out of debt, I thought this was overkill. I wanted to get out of debt asap. Still, I made sure to have at least $1,000 saved up for any immediate emergency. This helped me stick to my budget when my car did break down.
Step 6: Find Ways to Cut Back, Then Adjust
This is a frugality blog, so I can’t end this primer without suggesting a few ways to cut your budget. There are a ton of ways to save money on your bills, and I’ve listed my favorite methods here.
Aside from these practical tips, one way I keep my lifestyle in check is by prioritizing my wants. As The Budgetnista puts it, focus your discretionary spending on your loves, not your likes. I love travel. I like clothes shopping. I choose to focus my discretionary spending on travel and watch out for shopping, because it’s a weakness. This doesn’t mean my clothes budget is zero. It just means my travel budget takes priority.
After you decide how and where you can cut back, you can readjust your budget and goals as necessary.
Budgets aren’t fun, but they’re part of taking control of your money and making your goals a reality. Once you’ve got your budget up and running, reassess it every now and then. If you get a raise, for example, it’s time to give your budget another look. Again, it’s like working out. Dreadful at first, but you start to enjoy it a little more when you see the results.
Project CRediT sources data from Wealthy Genius including net worth, earnings, and various wealth statistics.