According to a 2020 survey, almost 80% of participants claimed they’re on a budget, compared to 2019 when 70% were self-declared budgeters. Surely, the 2020 economic downturn has something to do with this. However, as a result, Americans are saving more money than ever.
Are you one of the 20% of Americans who’ve realized that you don’t have a budget in place? Not to worry! We’ve got you covered.
Today, we’re going to walk you through an easy guide with seven easy-to-follow steps to better understand budgeting. We’ll also teach you how to start making a budget!
What is a budget?
A budget is a spending plan that is specific to your financial situation. Budgets are set based on your income and your expenses. Typically, creating a budget consists of documenting how much money you have coming in, where the funds need to be allocated, and where you need to adjust so that you can also save money, too. A clear personal budget helps you organize your money, track your spending, plan for the future, and achieve your financial goals.
Why should you budget?
There is no financial downside to budgeting. Even the wealthiest of people have a budget in place for their personal and business needs. Sticking to a budget can be challenging, but that’s really the only con.
However, building healthy money management habits, saving for emergencies, paying off debt, growing your savings, adding to your retirement accounts, and having money to play with can only bring you peace of mind.
1. Choose your strategy
Everyone’s financial goals are different. They often depend on income, investment strategies, and lifestyle. Choose a strategy that helps you meet your goals while allowing you to focus on what matters to you the most.
People who want to be very meticulous with their spending habits should consider using the cash envelope system. Essentially, you’ll designate envelopes to each category of your spending. By adding the exact amount of cash that you’re allowing yourself to spend per month, you can completely avoid overspending. Only use the cash amount in the envelopes, and don’t use your debit or credit card. Once the money is spent, you’ll have to discipline yourself to wait until next month to spend more money in that category.
Bills that can be automated should be set on auto-pay, and the rest of your bills should be paid with cash. Typically, the cash envelopes will contain money for groceries, gas, eating out, essentials, and play money. Once your cash envelopes run out, you cannot refill your envelopes until the 1st or the 15th of the month, depending on your goals.
Another popular approach is the 50/30/20 method. Made popular by Elizabeth Warren’s book, “All Your Worth: The Ultimate Lifetime Money Plan,” this method is flexible and outlines how to spend your money. Warren suggests that you allocate 50% of your post-tax income on necessities and 30% on fun activities while putting the remaining 20% into your savings account.
Are you someone who wants to heavily invest? Or would you rather spend all your extra money on travel? Maybe you’re interested in saving every penny you earn. Does living on 20% of your income sound enjoyable? Are you looking to retire young?
Think about what it is that you truly want and how you’d like to live your life. From there, you can create a budget that prioritizes your goals and sets you up for success.
2. Collect your money trail
After you’ve decided on your strategy, it’s time to collect all your financial paperwork. This includes anything that tracks money coming in, money going out, credit card statements, past tax filing reports, receipts, and monthly expenses. If you pay for things in cash, keep your receipts. File them away in a shoebox or scan them into a receipt folder on your computer.
3. Add up all categories
You can make your own budgeting sheet in Excel or Google Sheets, but you can also grab a free template online. Once you have your budgeting outline ready to go, gather at least three months’ worth of statements to determine your income levels and figure out how much you spend per category.
For example, to find your average monthly grocery bill, add up what you spent on groceries in the past three months, and then divide that value by three. The amount that you calculate is what you can set forth as your projected monthly grocery bill.
If your income varies, due to commission-based jobs or side hustles, base your budget off of the lowest amount of money you make. During months where you make more, you can put the additional income towards debt, savings, or investments.
When documenting variable expenses, use the highest average amount. That way, you won’t end up being short on bills. Don’t forget to factor in random expenses that don’t occur monthly, like your tax bill or vehicle maintenance payments.
To incorporate these bills into your budget, determine the figure you spend yearly, divide that by 12, and put that dollar amount aside in a savings account every month. When it comes time to get an oil change or pay your taxes, you’ll have the funds saved up and you can pull right from your savings account.
4. Make adjustments
Now that you have a clear picture of your income and expenses, you can make adjustments. Spending too much money going out to eat? Cut back on your eating-out budget and relocate those funds to credit card debt.
If you’re finding it hard to make ends meet, your budgeting sheet will help you isolate the areas where you’re overspending and you can cut back where needed. Alternatively, noticing tha you’d be more comfortable with additional income can give you the motivation to get creative and find ways to earn supplementary income.
Some of the easiest ways to cut back on spending are by canceling cable subscriptions, pausing expensive gym memberships, skipping coffee runs, and eliminating the urge to get takeout. You can easily save hundreds of dollars using these tips!
5. Action plan
Now that you know where your money is going, you can come up with a plan to support a better financial future. Set a timeframe for your budgeting goals. For example, plan to save $500 per month over four years if you want to have enough for a down payment on a new home.
With a budgeting plan in place, you get to decide where your hard-earned money is going. From investing your money into stocks, saving for your kid’s college tuition, or taking that much-needed vacation, budgeting can make your dreams more likely to happen. After all, a goal without a plan is just a wish!
6. Put your money to work
Got your budget plan locked and loaded? Put your money where your mouth is! Keep your budget at the forefront of your mind so that you don’t forget about it.
Look for accountability partners or use the MoneyLion app to keep you motivated. You’ll be able to track your spending by category, monitoring your budget, and get updates on your progress with the Financial Heartbeat. Don’t forget to tell a friend about your goals and ask them to keep you in check when it gets hard. They’ll be there to support you, and you can count on them for support when the going gets tough!
Budgeting like a pro!
Is budgeting going to be easy? No.
Are there going to be hiccups? Absolutely!
However, don’t allow FOMO, temptation, or laziness to distract you from your self-discipline. If you fall off track, learn from your mistakes and avoid making them again. Now that you know how to make a budget and successfully execute it, you can look forward to reaping the benefits of your hard work!