What do you picture when you hear the word budget? Ramen and brown bag lunches? (mmmm, peanut butter sandwiches though)
You have probably heard about skipping the lattes and avocado toast so that you can buy a house.
Budgeting is often associated with sacrificing enjoyment but not all budgets are bad. If you've never learned how to budget, it can seem like a daunting task.
You can create a budget that works for you and allows you to live your life and enjoy the things you love. If you find yourself with an overdrawn bank account and maxed out credit cards, the stress you are experiencing will be enough to motivate you to make a change.
So what exactly is a budget? And how do you budget?
A budget is an estimate of your income and expenses over a period of time, except the expenses are broken into different categories. Think of a budget like a roadmap or a blueprint for how you will spend and save your money. Whether you’re an experienced budgeter or you’ve never created a budget in your life, follow these steps, and you’ll create a budget that will help you live the life you want, while also allowing you to live.
A budget isn't supposed to restrict you, it will set you free.
Today, we will teach you exactly how to budget.
Table of Contents
Track your Spending Effortlessly
You track the score on all of your favorite sports games, and you probably track how many reward points are left before you earn that free pizza or sandwich. We keep score to measure performance or figure out how long it will take to reach a goal. Why not track your spending to see exactly where it goes, and then make a plan for where you want it to go? Tracking your spending could mean more free pizzas and movie nights!
Before creating your budget, get an idea of how much you spend for one month. You can use a budgeting app like Mint.com, excel spreadsheets, or pen and paper. You might be surprised by how much you are spending, but don’t worry, and don’t beat yourself up! Remember, you’re only using this to help you create a budget that you can actually follow while living the life you want.
After a month of budgeting, you might discover you’re spending $100 a month on snacks and beer while watching the game, so you may have to cut back. Look for bars with happy hour specials to help cut costs instead of eliminating this expense altogether. On the flip side, you might be spending on unnecessary things, such as late fees and overdraft fees. The right plan (we’ll cover this in detail below) will help you pay your bills on time and eliminate this expense. Sound like a plan?
Start an Automated Savings Plan
If you have problems saving your money, you’re not alone.
According to a recent GOBankingRates survey, 57 percent of Americans have less than $1,000 in their savings accounts. How do you save money without feeling the pinch?
Just automate your savings by setting up an automatic transfer to a savings account from your checking account. When you don’t see it, you will forget that its there.
How much should I save? A good rule of thumb is to save 20 percent of your income or take-home pay. It could be more or less, depending on your debt and financial situation. You may be worried about whether you will be able to make ends meet before you can save money. That’s okay; just plan it all out on paper. You can save money, even with a low paying job. The reason we harp on this is because you have to create good financial habits up front to set yourself up for the future.
As Mark Twain said, “The secret of getting ahead is getting started,” save as much as you can when first starting out.
If you have a high income, leverage that to save more. Don't look at your income as how much you can spend!
If it helps, join a savings challenge to make it fun. The Penny Challenge and 52-Week Challenge may not sound like a lot of money (or it sounds like a lot, it all depends on your income and expenses) but it can help if you make savings a game. Every little bit helps.
Identify Your Necessary Expenses
Some costs are inescapable. Other costs only seem necessary.
Now that you’ve put 20 percent towards your savings, you have 80 percent of your take-home pay to use for necessary expenses, and even few splurges.
Let’s tackle necessary living expenses first. This category includes rent/mortgage, transportation or vehicle expenses, groceries, and utilities. Separate the fixed expenses from your variable expenses because you have to treat them differently. Make sure that your housing arrangements are practical for your budget so that your entire paycheck doesn’t go towards living expenses.
Next, identify your debt, including the total balance owed, as well as the minimum monthly payment. If it’s a larger debt such as student loan debt or mortgage, be sure to include the minimum payment in your plan. With credit cards, treat the card like cash, and plan to pay off your credit card balances in full each month.
Ideally, use up to 30 percent towards discretionary spending (think dining out, movie nights, and concerts). These are expenses that you can cut back when you need to tighten the belt, such as leading up to pay day or after incurring emergency expenses. With the right budget, you may be able to spend more in this category!
Your budget will help you decide on how much of these extra items you can actually afford. You want the latest smartphone, but can you afford the monthly payments? Can you afford paying for it in a lump sum? Know your numbers before taking the plunge. You want to save, but you also have to enjoy your life!
Pay Expenses Based On Your Habits & Preferences
Decide up front how to pay each of your expenses and schedule your payments.
Will you be paying online, and if so, will you be paying on a website or using your bank’s Bill Pay feature? To really make good use of your money, use your credit and debit cards to your benefit. If you have a card that gives you rewards points for gas, be sure to use that card when you pull up to the gas station.
Certain cards offer cash back and rewards points for dining out, so when it’s time to go out for a fancy dinner, use the right card to boost your savings. A word of caution about credit cards: while it’s tempting to make minimum payments, try to pay off your balance in full each month.
If another card you own gives you 10 percent cash back for Amazon purchases, you should make sure you use that card whenever you shop on Amazon.com. Once you write it down, stick to the plan, and stretch your budget even further.
Make A Debt Elimination Plan
Debt is a weight on your finances like no other. If nothing else this year, make debt elimination your number one goal.
When you created your budget, you listed out your monthly minimum debt payments and worked them into your budget. Aside from that, you also need to create an action plan to pay down your debt. Experts are conflicted about whether you should pay off high interest debt first, or pay off your lowest balance first. Whatever you decide, remember this- the more you can reduce the payments you need to make, the more you can use that money towards paying down your debt.
If you have multiple credit cards, consider transferring your balances to a balance transfer credit card to enjoy 0% interest for 12-21 months. You will be able to pay off one card faster, especially with low or no interest.
If you have more debt, reduce your discretionary spending and put the rest towards paying off your debt. Don’t stop living – just cut back temporarily so that you can live better.
Budgeting doesn't have to give you a headache and creating a budget that doesn’t make you groan is totally possible. You can save money, pay off debt, and still enjoy the things you love to do.
Have you ever tried to create a budget and failed miserably?
Have you created a budget that helped you pay off your debt?
Good or bad, we want you to share your stories in the comments below!