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Why Should You Make a Budget?
1. Save Money
The most obvious reason to set up a budget is so that you can save money to put towards your goals. Budgeting can help you save for an emergency fund, debt repayment, or major purchases.
Related: 67 Practical Tips to Save Money
2. Reduce Overspending
Creating a budget and tracking your monthly expenses can help you identify areas where you may be overspending. If you don’t follow your expenses, it can be tough to understand where your money goes each month.
3. Accelerate Financial Goals
We all have financial goals that we would like to attain, like buying a house or saving for retirement. If you want to get a head start or make up for lost time, making a budget can be a great way to get on track. Budgeting is an essential first step in being able to meet your goals.
4. Get out of Debt
Many of us are faced with significant debt, often in the form of student loans, car payments, and credit card debt. Budgeting is a great strategy to use if you really want to get serious about debt repayment. With efficient budgeting, you may be able to free up funds that will help you pay down debt faster.
5. Prepare for Emergencies
Creating a budget can also help you set aside money to start an emergency fund. Even if you have to start small, putting aside money each month into a separate savings account will give you a buffer if an unexpected or major expense comes up.
6. Live a Happy Life
Monthly budgeting can also give you a more satisfying relationship with money. If you feel out of control and like you can never get ahead, budgeting can help you achieve a sense of financial harmony. In this article, I’ll go over some useful strategies that will help you develop a practical budget.
How to Start Budgeting?
1. Identify Your Personal Financial Goals
Before you dive into the details of budgeting, you’ll want to get serious about what your financial goals are. Note that these can vary depending on your age, lifestyle, and debts.
If you don’t have any savings, then your primary goal should be to put money away for emergencies. Once you save up enough for a necessary emergency fund — $1000 — then you can focus on more meaningful goals such as retirement or a home purchase.
Whatever your goals may be, start by writing them down and discussing them with a trusted friend or family member.
2. Track Your Spending
To predict future expenses and create your budget, you need to get a sense for what your actual monthly expenses are. You can keep track of spending in a journal, day planner, or on graph paper. Each time you make a purchase or pay a bill, write down the date, the amount of the transaction, and the general category of spending.
There are also great financial tracking apps available, and most are free to use. My personal favorites are Mint and Personal Capital. Both options allow you to link all of your accounts in one place so that you can track everything over time.
3. Catch Your Irregular Expenses
Tracking your day-to-day spending is a good start, but what about those variable expenses that can pop up and leave you broke? Irregular expenses like automobile insurance can be easy to forget about, so planning for them is crucial.
Review your bank and credit card statements so that you can get a sense for when these irregular expenses occur, and then be sure to set aside funds in your budget.
4. Add Up All of Your Income
After tracking your expenses, it’s time to get organized and add up your monthly income. While many people receive a bi-weekly or monthly paycheck, plenty of others have income sources that can be irregular or less predictable. If you have income that is variable, such as from tips and bonuses, try to estimate them as accurately as you can. Don’t forget to account for sources of income other than your paycheck. You should also list payments from family members, roommates, small businesses or any side gigs.
What Strategy Should I Use for Budgeting?
There are many different budgeting plans and rules of thumb can help you decide how to allocate your funds each month. Take a look at the ideas listed below and see if there is one that suits your lifestyle and financial goals.
1. The Envelope System
In simple terms, the envelope system encourages responsible spending through the use of cash that is stored in envelopes. With this method, credit and debit card use for discretionary spending is reduced, and the majority of purchases are paid for using cash.
Why does this approach work? According to human psychology research, people are more likely to spend in excessive amounts when they pay for purchases or services with a credit card. Using a cash-based system helps to avoid this behavior.
After you get paid and cover major expenses like rent, you should withdraw your remaining funds in cash to divide between your envelopes. You can choose categories for your envelopes, like Groceries, Entertainment, and Transportation.
2. The 20/50/30 Rule
Another budget plan that you may have heard about is the 20/50/30 rule. The idea behind this plan is that you should allocate money into three main areas: savings, needs, and wants.
That means that 20% of your after-tax income should be put towards savings or debt repayment, 50% of your income should be spent on necessities, while the remaining 30% can be used for wants.
One of the more challenging aspects of the 20/50/30 rule is correctly categorizing your expenses. This could require taking a closer look at your spending patterns and deciding what items are genuine needs. Needs are necessities, like having a roof over your head, whereas wants include things like your cable package and restaurant budget.
3. Zero-Based Budgeting
Zero-Based budgeting is a simple concept that lets you keep close watch over every dollar that you spend. The central principle is that your monthly income minus your monthly expenses should add up to zero. In order to use a zero-based budgeting system, you’ll want to set up a budget where your monthly expenses are equal to your monthly income.
It’s a good idea to leave a bit of wiggle room, so I like to include a separate budget category for miscellaneous or unexpected expenses, and you should be sure to include categories for savings and debt repayment.
4. Values-based Budgeting
Values-based budgeting is a system that shifts the focus onto the relationship between your personal values and your spending habits. It provides another layer to the budgeting process that can help you spend money on the things that are most important to you.
To get started with value-based budgeting, try to get a sense for how spending makes you feel. What purchases feel right? Which ones feel wasteful? Try to align your spending decisions with your own personal, spiritual, and political beliefs.
5. Pay Yourself First Budgeting
It’s easy for a paycheck to get used up before the end of the month, leaving one with nothing left over. Before this happens, start by “paying yourself first”. If you can make a habit of setting aside money in a savings account each month, you’ll be surprised at how fast it can grow.
If other budgeting methods seem overly complicated or too detailed, this can be a great way to get started.
How to Stay On Track on Your Monthly Budget?
Budgeting is a significant challenge for most of us – it often seems like there are too many expenses and not enough funds. But with a little practice and dedication, you can improve your budgeting skills significantly. Below are a few tips that can help you in your financial journey.
Document your financial goals and your progress. For example, if you have major credit card debt, write down your debts on paper and post them on your refrigerator. Each month, write down the amount that you have paid off. A visual reminder can help keep you on target, and can also serve as a reward
2. Automate Your Savings
This is one of the best financial tips around, and it’s relatively simple to apply. There are a few different strategies here: automation can take the form of pre-tax contributions to your retirement account that are taken out of your paycheck, or you can arrange for monthly transfers that automatically move funds from your checking account into your savings account. If possible, you should try to take advantage of both methods.
3. Reward Yourself
Adhering to a strict budget can sometimes feel like a form of deprivation, even though the long-term benefits are more significant than the short-term challenges. Even so, it helps to build rewards into your plan to keep motivation high. Did you have to eliminate eating out from your budget so that you could save for an emergency fund? Well once you meet your goal, it’s okay to indulge occasionally.
4. Be Honest and Realistic
As you go to set up your budget, be sure to make realistic decisions. It can be tempting to tackle several financial goals at once, but people have better success by sticking to just one or two goals at a time. Part of being realistic means understanding that unexpected expenses can often arise – so be sure to set aside some extra funds.
5. Give Yourself Lots of Grace
Try not to get overly discouraged if you slip up – we all make mistakes, and budgeting takes time and patience to get used to. It can be easy to overspend or forget about a financial obligation. Try to review what went wrong, and determine what you can do to make a better choice next time.
6. Review Your Progress
At the end of the month, you should check to see how you did. Did you meet your savings goals? Were you able to make an extra payment towards repaying a debt? Make sure to review your expenses at the end of the month, and check to see if you were able to stay within budget. If you were able to meet one of your goals, then congratulate yourself! Smart spending habits will gain momentum over time, and seeing your success can be a strong motivator.
Map Your Future
By this point, you should have decided upon a budgeting strategy that works for you. The next step is to put your ideas into action and make your first budget!
Developing a budget can be a great way to come to terms with your spending habits, and it may inspire you to attain future goals. Have fun with the process, and good luck!