A budget is a critical step towards a healthy financial life. It allows you to look at your monthly income and create a clear plan for what you’ll do with your money before you spend it. Whether you are planning to pay off debt, save for retirement, or control your grocery spending each month, budgeting can help you achieve your financial goals faster.
Know Your Income
All budgets start with knowing your monthly income after taxes, also known as “net pay.” Having a complete picture of where your money comes from helps you create the foundation for setting your spending and saving goals. Start by determining how much money you can expect to come into your home each month.
Choose Your Budgeting Strategy
Budgeting may seem like an overwhelming task for some people. But remember, the best budgeting method is the one that works for you. Carrie Lutz, a certified financial education instructor and founder of Money for the Mamas, said in an email interview with The Balance, “There are many great ways to budget, but each method fits different skill sets and financial goals. So don’t feel like you have to conform to a rigid way.”
50/30/20 Budgeting Strategy
If you’re looking for a simple way to budget, the 50/30/20 budgeting strategy might be worth trying. It works by dividing your monthly income into three categories: needs, wants, and savings.
| Budget Category | Type of Expense |
|---|---|
| 50% | Needs |
| 30% | Wants |
| 20% | Savings |
Cash-Based Budgeting
The cash envelope strategy works well for people who prefer a more tangible and practical budgeting system to help control spending. This technique involves labeling envelopes based on your budget categories – for example, groceries, services, and transportation. You then separate actual cash into each envelope. Once you’ve spent the cash, that’s all you can spend on that item for the month. This method can create a sharp awareness of your cash flow, making it very challenging to overspend.
Give Yourself a Margin
Trying to track every penny you spend may seem like a tedious task. Therefore, allocating a certain amount of money to be your margin for error each month is a way to create flexibility in your budget. Damian Dunn, a Certified Financial Planner (CFP) and Vice President of Advice at Your Money Line, said in an email interview with The Balance, “The margin is the secret ingredient to sticking to your monthly budget and reaching your financial goals.” However, make sure you still remain financially responsible. You can add some flexibility to your budget, but track your spending so you don’t exceed the margin you’ve given yourself.
Pay Yourself First
When trying to budget for a variety of expenses, finding money to save can sometimes seem impossible. Try budgeting for savings before anything else and paying your bills with what’s left over after planning for savings. This is often referred to as “paying yourself first.”
To do this, set up automatic savings contributions so you can save money before you start spending your paycheck.
Use a Budgeting App
When you need extra help keeping track of your spending, a budgeting app can assist you in managing your money right from the palm of your hand. The right app for you is one that aligns its features and costs with your financial needs. Some popular options include:
- Mint by Intuit: This free tool connects all your accounts, automatically categorizes your transactions, and helps you set budgets and track your spending.
- You Need a Budget (YNAB): This app uses a cash-based budgeting system. You can also link your accounts and manage spending, debt repayment, and savings. It’s a paid service that offers a free trial.
- Guard: Helps you improve spending, link your accounts, and save automatically. The basic version is free.
Track Your Progress
At its core, a budget is simply a spending plan. Track your spending to see what works, where you struggle, and where your money goes. Initially, tracking your spending on a daily or weekly basis may help, and assess your budgeting method about every month. Once you settle on a method that you think works, you can conduct evaluations over longer intervals.
Jeff Gramp, a director at Gateway Investor Relations, said, “The costs of things change over time, as do consumption habits. So, almost every year, re-evaluate and measure the accuracy of your budget.”
Frequently Asked Questions (FAQs)
What is a budget?
A budget is the process of creating a fixed and intentional plan for your money. Make sure your budget works for you. If you feel restricted by your budget, it may be time to change it. Ensure your budget includes some fun goals or splurges. This way, you’re more likely to stick to it.
Why is budgeting important?
Budgeting is important because it ensures you have enough money to cover your expenses and that you’re intentional with what you do with the rest of your money. It helps you pay close attention to your spending, saving, and overall financial health. When you create a plan and set goals, it becomes easier to control your money and make informed decisions about your spending. It also makes it easier for you to identify financial risks and opportunities.
What are some common budgeting mistakes?
Sticking to a budget can be challenging, and being unable to spend doesn’t help. If your budget has no margin for error or you’re too strict with yourself, you may become so frustrated that you give up on your budget. Additionally, you should ensure you’re tracking your spending, allocating funds for an emergency fund, and regularly reviewing your budget to ensure it’s current.
Source: https://www.thebalancemoney.com:443/budgeting-101-1289589
Leave a Reply