One of the reasons many people shy away from budgeting is because it can seem tedious, annoying and perhaps even difficult. As result, they struggle with being successful creating a budget and sticking to it.
Are you wondering how to create a budget? If so, there are a variety of different ways in which you can budget. Your success with budgeting can be greatly improved by the budgeting method or style you select. The method you choose is entirely up to you; the most important part is picking a style that works for your life. Trust me, even if you currently hate budgeting, there's a style out there for you!
"Your success with budgeting can be greatly improved by the budgeting method or style you select."
Below are a few different methods of creating a budget that you can consider.
1. How to create a budget with the envelope or cash system
Creating a budget using envelopes works by subtracting your expenses from your income and then putting each expense amount into its own envelope. This includes things like bills you need to pay and your day-to-day expenditures.
You can keep the money for your big bills in virtual envelopes that you track through a budget worksheet or an app. Then, put actual cash for your smaller expenses or day-to-day transactions in actual physical envelopes.
Once the envelope for a particular expense is depleted, you can no longer spend any more money in that category unless it is an emergency. If you don't spend all the money in a particular expense envelope, you can repurpose the funds toward bulking up your savings or paying off debt.
2. How to create a budget using percentage breakouts
The most common way of creating a budget using percentages is to use the 50/30/20 breakout. In this method, you break your income into percentages and then plan out your spending and savings accordingly.
- No more than 50% of your income goes toward your needs and essentials (things like housing, transportation, food, etc.)
- No more than 30% of your income goes on wants and non-essentials (travel, getting your hair done, shopping, etc.)
- At least 20% of your income goes toward savings and debt repayment
Keep in mind that these percentages are not set in stone. For instance, you can choose to spend less on the needs & essentials and wants & non-essentials categories and put more into savings or debt repayment.
So, for example, you can select a 35/30/35 breakout, a 35/35/40 breakout or even a 25/25/50 breakout. The goal is setting percentage breakouts that make sense for you. It's helpful to maintain a budget worksheet for this method too. Just be mindful of spending more than 30% of your income on housing alone. Otherwise, it can be harder to put money toward your other financial goals.
3. How to create a budget using the reverse budgeting approach
In this method of creating a budget, you focus on a single goal, such as paying off a certain amount of debt or saving a certain amount of money each month, in addition to paying your bills. Then, as long as you meet your monthly goal and pay your bills without exceeding your income, you can do what you like with the money you have left over.
- Using a spreadsheet or an app to set up your budget
Spreadsheets or apps? Which should you use? The answer is, use what works best for you and makes it easy for you to keep up with your budget. Some people love spreadsheets—they don't have to worry about bank security, or what's happening with their personal information. And using a budget worksheet allows them to get really close to their numbers.
Love budgeting with a spreadsheet but are worried about being able to access it when you're not home? Google Drive makes it easy for you to upload your budget worksheet for easy access on your mobile devices.
Apps, on the other hand, can make it really simple to budget, especially if you can connect your bank accounts to them so your transactions can be tracked automatically.
These days, most apps have extreme levels of security. But sometimes there can be delays in transaction updates. And apps are not always as intuitive when it comes to categorizing transactions, which will require you to spend some time setting things up.
That aside, for the most part, all you'll really need to do once things are set up, is check-in frequently. This will help you ensure your transactions are tracked the right way and set up alerts to keep you on top of your budget.
Whether you choose a budget worksheet or an app, you can set up your budget to be reflective of any of the above budgeting methods.