Love it or hate it, if you want to be financially successful you are going to need to budget your money. Getting your finances in order and build wealth takes planning and your budget can help you do just that.
If you don't plan you can't win. Ever heard the saying "failing to plan is like planning to fail?". In this blog post, I'm going to walk you through the process of budgeting and how you can win at it!
- Benefits of budgeting
- Creating your monthly budget
- How to stick to a budget
- Budget categories to use
- Budgeting and paying off debt
"If the wealthiest people in the world plan their finances, what's your excuse?"
For many people, budgeting is just not any fun. It means limits or lack of or even punishment. But having a budget or some form of a budget is really important for your financial success. I personally prefer the word "plan" to the word "budget" because it doesn't sound so constraining.
So, why should you create a budget?
Here are some pretty solid reasons why you should be budgeting!
- It helps you keep your spending in check
- You can track your expenses
- Helps you ensure spending more than you earn
- You control your money and your money doesn't control you
- Leveraging a budget is how you build real wealth!
Having a budget allows you to enjoy life without the stress of how to pay for it later. Because “later” rarely comes. Paying for things in the present instead of the future, allows you to truly enjoy yourself and live the life you want.
Your priorities will change in the future and you never know what life may throw at you. It is easier to get through life without climbing a mountain of debt forever.
Budgeting allows you to live within your means while still having fun and having a life. You just have to plan for it.
Why do people think they aren't good at making budgets?
Well, there are a variety of reasons people think this way including the following:
- They don't know where to start and don't have a formula that works for them
- It becomes too much work
- They find it too complicated
- It makes them feel bad about their finances
- They feel like it's punishment or limiting
That being said, the process of budgeting doesn't have to be difficult or complicated. You just need to create a system that works for you.
Also, people often allow their emotions to cloud their judgment when it comes to planning their finances, but if you look at your money objectively for what it really is, a tool, then it's easier to make your plans!
You definitely don't want your feelings and emotion derailing your financial success right? Think about it this way, every dollar you earn is a soldier in your financial army and in order to win the monthly battle (against your spending and expenses), you need a war strategy and that strategy is your budget.
Otherwise, you are just sending all your soldiers (dollars) to die at the front line (unplanned spending and not tracking expenses will cause your money to slip through your fingers).
There are many benefits of budgeting including using your budget to build wealth.
When you create a budget and stick to it you can also:
- Create an emergency fund
- If you have a retirement match, contribute enough to get the full match
- Start knocking down your debt
- Give back
- Plan for other goals like buying a house, paying off your house, saving for the short and midterm
I was able to save $100,000 in just 3 years by making a budget and sticking to it. Budgeting lets you plan your goals and stick to them. It also helps reduce your overall stress surrounding your finances. Making a budget is simply making a plan for your money. Once you decide what your priorities are, the budget should reflect them.
If your priority is to save money, make it a priority in your budget. Same goes for whatever your big goal is right now whether it’s saving or paying off debt. It could be going on vacation.
Whatever it is, plan for it in your budget so that you know you can afford it. That way you can pay for it ahead of time and not stress over the credit card bills coming the next month.
A budget gives you freedom and is the foundation for everything you do with your money.
Now one of the reasons many people shy away from budgeting is because it can seem tedious, annoying and perhaps even difficult. As a result, they struggle with starting a budget or sticking to it when they do.
However, it doesn’t have to be that way. Creating your budget can be fun and it allows you to have fun without worrying about how to pay for it later.
So how do you make a budget? 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!
Finding what works for you is the most important step because not everyone’s brains process information the same. You may like one of these methods or a hybrid of a couple of them.
The most important thing is to just do it. If one doesn’t work, try a different one.
"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. However, you do not have to pay bills with the envelope system. You can continue to pay your bills by check or online and use cash for everyday expenses.
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.
The cash envelope system works best for categories that you commonly overspend in. So, things like clothes, food, eating out, fun, kids expenses and things like that. Do not make it overly complicated or it will be hard to follow and stick to.
Cash envelope budgeting is helpful because it can help rein in overspending and you actually spend less with cash. It makes it easier to stick to your budget and studies have shown that you spend on average 15-20% less when using cash.
2. Budgeting 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.
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. 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. It's helpful to maintain a budget worksheet for this method too. Using a budget template or worksheet (get ours above!) is helpful to see where your money is going. It can help you create your budget easier from month to month.
3. How to budget using the reverse budgeting approach
In this method of budgeting, 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.
4. Using a zero-based budget
Another form of a budget is zero-based budgeting. This is the method that Dave Ramsey advocates using. Basically, a zero-based budget is planning for every single dollar in your budget. So, instead of having $x amount leftover at the end of the month, you have $0 left on paper anyway. When you are planning out your budget, you account for everything you can think of in the budget so that every dollar has a job.
You won’t really have $0 at the end of the month because you have accounted for different savings funds in the budget. This method is effective because it makes you be intentional with every dollar so that what is “left” doesn’t disappear every month.
- 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.
Following these simple steps will help you streamline the budgeting process and actually stick to your budget. Budgeting doesn’t have to be scary and overwhelming. Once you get in the hang of doing it, it gets easier and easier every month. Before getting started, follow these simple steps to master your budget.
1. Call it something fun
Call your budget something that you like and that motivates you to keep up with it. Who says it has to be called a budget?
The word budget is boring anyway! Remember, your budget is your blueprint for managing your money you can build wealth.
2. Create a budget in advance of each month
Creating a budget in advance of each month means that once the month starts you have a plan and you aren't scrambling trying to figure out what to do.
Plan to create your budget a few days before the month starts this way you have time to lay things out and figure out what your finances will look like in the upcoming month.
Once you get in the habit of creating a budget, it will get easier and easier every month. You will even be able to plan out your budget for several months at a time.
3. Don't assume every month will be the same
Every single month should be planned for separately. No two months will be exactly the same financially and so you want to prepare in advance for things like one of bills/one time expenses, travel plans, events you have to attend, etc.
This is why it's really important, as stated in my prior point, to create a budget specific to each new month.
4. Base your budget on your projected income for that month
If you get paid once a month, twice a month or every two weeks based your budget on that project income so you know exactly how much to have to budget around and keep in mind that if you get paid every two weeks there will be a month where you get three paychecks. So plan accordingly.
5. Pay your expenses before splurging
This means paying for your essentials, debt, and goals (savings and investments) first before you do any splurging or miscellaneous spending.
The last thing you want is to find that you have overspent on what isn't necessary and don't have a way to pay your bills.
However, that being said, it's ok to splurge, you just want to make sure you are building your splurges into your budget so they can be guilt free.
6. Track your transactions
Tracking your transactions allows you to make sure you stay within your budget and keeps you conscious of your spending habits.
You can track your transactions in a spending journal, spreadsheet or with an automated app or online tool.
If you are just getting the hang of budgeting, it's a good idea to track your transactions and check in with your budget every day. It will only take a few minutes and it will you stay on top of your finances.
Plus, you'll be building up the essential habit of checking in on your finances frequently.
In addition to managing your income and expenses, you want to use your budget in planning to build your long-term wealth!
In order to successfully plan, you need to understand where your money goes each month and then you can create a plan to help you re-adjust your spending and/or help you ensure you are within the ranges of your plan.
You can break your monthly budget out into four categories and they are as follows:
Budget category #1 - Money for your future self, your emergency fund & your debt repayment
Ever heard the words "pay yourself first"? This should be a consistent part of any plan you make.
Before you pay any bills or do any shopping, a portion of your earnings should be diverted into your retirement account for your future self and your emergency savings accounts for a rainy day. No ifs, no maybe's. Just do it.
Time goes by so quickly and planning for the future version of you will ensure that you can enjoy your retirement and not have to depend on the government or your children to take care of you.
Also having an emergency fund provide you with a buffer in the event of a rainy day so that you can rely on your emergency savings instead of a credit card or other debt.
You can also include money to pay off any debt you have in this category or add it as a sub-category e.g. your credit card debt, car loan, student loans, etc. because it is essential that you pay them off your debt as soon as you can so you can focus on building wealth.
Budget category #2 - Your essentials & needs
Next would be your essentials and needs - the things you need to live your life. This does not include money for shopping or getting your nails done - those are not essentials.
This is for things like your housing costs (mortgage or rent), transportation and food.
Budget category #3 - Your other money & life goals
This would include money you are saving outside of your retirement account. i.e. your midterm savings and investments for the next 10 - 15 years, business savings, saving for a home purchase, college savings, etc.
I recommend creating separate accounts to save for each of your different goals. I have automated deposits set up for different goals and it's helped me stay on top of my savings!
Budget Category #4 - Everything else
This is where your splurge money would fall under. The money you would spend shopping or save for a wish list item, eating out, traveling, entertaining yourself and whatever else it is that you would typically do to enjoy your life.
- Budget Category Percentages
For each of the categories mentioned above, below is a general guideline of how your money can be allocated:
- Money for your future self, your emergency fund, and debt repayment - at least 20%
- Your essentials & needs e.g. shelter, food, transportation, Insurance - no more than 50%
- Your other money & life goals - 15%
- Everything else - 15%
Keep in mind that regardless of the breakout you choose, you want to be careful spending more than 30% of your income on just housing alone, otherwise, you won't be able to put as much money towards your other goals e.g saving and investing, becoming debt free, etc.
If you have debt, you should plan to pay as much as you can towards your debt each month. This would mean lowering the amounts you contribute to the different budget categories/buckets above and reallocating the difference to paying off your debt as quickly as you can.
If you can allocate your finances into these buckets and percentages and then track your spending against the buckets frequently (once a week at the minimum - I personally like tracking my spending daily), you'll be well on your way to budgeting successfully.
Like with everything money related, sticking to your plan requires discipline.
If you struggle with your plan initially, having an accountability partner is a great idea!
Like any art, budgeting takes time to master. If you slip, brush yourself off and get back on track. Take the lessons you learned about budgeting from the previous month and apply it to the next month.
Don’t beat yourself up if you made some mistakes in your budget. Learn what worked and what didn’t work and make adjustments to the next month.
It can take up to 3 months to really figure out what is working and not working. So give yourself some slack and move on when you mess up. Because you will mess it up.
The most important thing is to start and just keep going even when it gets tough.