How to Budget
Budgeting isn’t difficult, but it will require some discipline. To get started on your budget read the guide below.
Understand What Goes Into Your Budget
First you have to recognize the difference between needs and wants. And then you have to learn to prioritize putting needs before wants. Examples of needs are rent, groceries, electricity, medications. Needs are essential to life. Examples of wants are frappucinos at Starbucks and a brand new car when your current vehicle is still fully functioning. If you’re anything like my sister I can already hear you saying “But Starbucks is a need!” Let me repeat myself. It is not and you should probably seek help because you’re addicted. Wants make life more fun and enjoyable, but you can’t put making life more fun and enjoyable over the life essentials.
Itemize Your Budget
Once you’ve wrapped your head around that, you need to start listing what you’re spending your money on. Start with your bills and remember that there are bills that are needs and bills that are wants. Don’t confuse the two. Then keep going and list all your other expenses. I find it helps to look at the prior month, but be careful if the prior month is around Christmas time. Most banking websites and their apps have spend categorizations that can break down expenses so there’s little work involved. If you have purchases over many different accounts there’s a couple of other options to reduce your workload. I also recommend them anyway for tracking overall net worth. The first is Personal Capital. The second is Intuit mint. I can’t personally vouch for mint, but I’ve found Personal Capital to be awesome.
Compare Cash Flow to Budget
Now you have a list of where all your money is going. Next up find out exactly how much money you’re bringing in after taxes in a month. Compare the total amount you bring in to the amount you’re spending. Do you have surpluses or deficits? A surplus means after you’ve paid all your bills and spent money on extras, you still have quite a bit left. A deficit is just a way of saying you’ve overspend. If you find that you always end up buying more than you can afford, you need to make adjustments to your buckets and figure out a way to cut expenses based on your lifestyle – check out my previous post for some ideas. The other alternative is to figure out a way to generate more income.
Do Some Heavy Analysis
Next we’re going to start analyzing on an expense category level. What percentage of your income is going to rent/mortgage, groceries, eating out, utilities, insurance, fun activities, savings, etc? Overall, you should be spending 30% or less for housing and 50% total on needs. 20% of your income should ideally be going to savings. I say should and not must, because everyone’s situation is different. There can be times where it isn’t possible due to life circumstance, but there’s also a difference between living beyond your means. Not being able to save money because of an expensive medical condition is nothing like choosing not to save money so you can lease a brand new BMW. If you find yourself in group two go back to the first paragraph. Reread my friend.
Start Planning Ahead
So now you have an idea of how much you’re spending and where you’re spending it. Now start planning where your dollars should be going instead. Make buckets for your categories with a total of how much SHOULD go into each until you get to zero. Give every dollar you have a job. Now that you’re tracking your spending you can be more cognizant of your purchasing decisions to keep it within that bucket. Plan your budgets a month in advance – as in don’t wake up on June 15 and start budgeting for June. Things to keep in mind when you’re planning your next month’s budget are trips, activities, holidays, special occasions, etc. When you get really good, you’ll find that you’re budgeting for events that are way down the line instead of only thinking about them a month or so in advance.
Keep Track
It’s important to write down your budget so it can be reviewed. After all, you can’t change things you aren’t measuring. You can be super old school and use pen and paper. Some people love spreadsheets and use that to track their monthly budget. Personally, I prefer using EveryDollar to help me manage my budget as I found managing a spreadsheet to be too much work. It’s super easy and pretty intuitive. For an extra cost, EveryDollar can connect to your bank account and automatically add your transactions to your buckets. I’m cheap so I do it myself, but it is an option. At first, it’ll be more important to check in often (ideally weekly) and compare how you should be doing vs actual so you can adjust. Once you have your new spending habits instilled, you’ll find you won’t have to do this as often because you’ll be more aware. As you get better it will also take up significantly less time than it did to start.
Now that you have tools and a guideline – go rock that budget!
