Building A Budget
STEP 1: Find our "WHY" and Write it Down
Starting a budget isn’t easy but finding your reason why is a great way to start. Many different reasons could lead you to creating a budget, you could have issues with impulse buying, or your determined to pay off your student loans. You could even be great with your money but your just not making progress with your long-term money goals. Having a reason to start your budget will help you tremendously and keep you focused. The more specific your goal is the better reason you have to follow through on your budget. Dig deep to really help motivate you.
STEP 2: Set Your Priorities
Setting priorities will help you figure out what you value and what you want to accomplish. Budgeting will help you improve your life and your relationship with money. By figuring out what’s important to you and implementing that into you budget can help with difficult financial decisions down the road. The best way to better your relationship with money is to figure out where exactly your money is going.
To successfully do this you must write down all your money goals, every single one of them. Then, focus on the couple priorities at the top of the list. For example, maybe you want to travel more, or have the money to buy a home soon, or even just pay off debt as soon as possible. You must be completely honest with yourself in order for your priorities to really help you stay motivated and on task.
STEP 3: Track Your Spending
The easiest way to start building a budget is to first understand your past and current spending habits. Monitor where your money has been going. This will help you understand what things you should be budgeting for. For example, this could help you figure out how much you spend on groceries in a month. You’ll also want to track your spending after you’ve created a budget so you can make changes as you go.
This has been made easier since the days of tracking your spending with a checkbook. You can now track your spending by checking your bank or credit card transactions. There are also money management apps that can help you with this. The best part about tracking you spending online is that many apps and serviced can help you break down you r spending into different categories. This can help you see how much you spend on gas a month versus groceries. If you don’t have access to any of these apps a pencil and notebook get the job done just the same!
By knowing where your money spending habits are going towards it can help you reach your final goal. You may be spending more in a category that can be cut back in order to save up more money. If you find out you’re making more than you’re spending each month you can start to save up towards your goal or emergency fund.
STEP 4: Choose Your Method
There are many different ways to approach budgeting. There are ones that are more complex and detailed and ones that are very simple. No method is better than another, they just need to match your goals and personality to truly work.
Here are a few of the popular budgeting methods:
50/30/20 Budget: Structured Rules for Spending
“Loose; big picture, no fine details”
The 50/30/20 rule is used as 50 percent of your pay goes towards your “needs,” such as housing, groceries, insurance, or your debts. For example if your after-tax income is $3,000 each month then no more than $1,500 should go towards you “needs.”
Next, the 30 percent goes towards your “wants.” This means if our budget is still at $3,000 then no more than $900 should go towards wants, meaning things you can live without but make life more enjoyable.
Finally, the last 20 percent of your pay goes towards your savings. This could go towards saving for anything such as putting money into investments or saving for a new car. Therefore, it is good to have your financial goals laid out first, so you know where your savings are going towards.
While some things may be easy to distinguish between “need” and “want,” not all things will be easy to categorize. Work clothes may be considered a “need,” while going-out attire could go under “want.” Also, some monthly subscriptions such as a service to back up your files could be a “need,” while a subscription to a music streaming device can be categorized as a “want.” As long as you categorize your wants and needs accordingly and consistently you can stay on track.
Zero-Sum Budget: A Plan for Every Dollar
“Detail oriented; every dollar has a destination.”
With a zero-sum budget, every dollar has a place it belongs. The amount of money that’s coming in plus the amount that going out need to equal zero. So, if you bring home $3,000 each month, you need to figure out where all that money will go. You will need to break up your spending into categories: for instance, rent/utilities, car related expenses, groceries, eating out, personal items, insurance, debt, and so on. Let’s say all your expenses are covered and you have $200 still left. You would then need to assign a task to the remaining money.
The reason for the zero-sum budget is that it leaves nothing up in the air and every dollar is accounted for and used specifically how you planned. The best way to approach this method is to write everything down. Figure out your anticipated take-home income before every month, then plan out where those dollars will go.
Anti-Budget: Spending by Priority
“Minimalist; use priorities to pay as you go”
With the “anti-budget” you don’t worry about specific categories. You simply pay as you go. There are a couple rules though, you have to pay your priorities first, and you need to make yourself the top priority. This is perfect for those who need to budget but are having trouble starting. It requires consistency and an understanding of your priorities.
You basically start by saving. Then you spend the remainder. This will help you not go over your budget for the month. Set your priorities (first needs, second wants), then spend what you have in that order. Once you have set aside money for savings and your required bills you can use what’s left depending on your priorities. This method is great for people who don’t want to track their expenses in such a detailed way.
Money Flow: Automation and Maintenance
“Automated; effort upfront, minimal maintenance.”
This method requires a little more work and some trial-and-error, but once it is set up it’s a breeze. The best approach is the figure out all your recurring expenses and setup an autopay for each, including rent and utilities, as well as cable and Netflix. Ideally, you can pay these expenses directly from your checking account, so money flows in on payday and out when your bills are due, and you don’t need to touch any of it.
Next, you take the rest of your available income and budget that. This means you only need to monitor your variable and discretionary spending, such as groceries, entertainment, gas for your car, etc.
You’ll still want to review your spending regularly and adjust it regularly if you don’t feel like you are making progress on your goals. In the ideal version of the Money Flow system, you do less month-to-month work, but you’re always aware of what’s happening to your money.
Now you can figure out which of these budgets is right for you. There’s certainly no one-size-fits-all answer. Your approach will depend on how you work best and how much detail you want to put into your budget.
STEP 5: Live with Your Budget
A budget is useless if you don’t use it. Once you’ve decided on your preferred method, try it out. Personal finance takes a lot of trial and error, so don’t get discouraged if your first attempt at budgeting doesn’t work out quite right.
No matter what method you choose it’s important you actually write down the numbers. While this may seem old fashioned, creating a basic spreadsheet is an incredibly effective starting point for all forms of budgeting.
DOWNLOAD: income and expense sheet
STEP 6: Update Your Budget Regularly
There’s always room for improvement. Make it a habit to review and revise your budget at regular intervals to get the absolute most out of your money. There are no rules for improving your budget. The only guideline should be your personal satisfaction
Here are a few helpful things to keep in mind:
Slash Expenses- Now that you know where all of your money is going you can now focus on cutting expenses to get closer to your money goal. These can be small cuts such as subscriptions you don’t use or big ones such as housing or transportation.
Create Seasonal Budgets- It’s helpful to create budgets for the holiday season or summer spending. This is because your spending most likely will peak during these certain times of the year.
Link Existing Habits With New Ones- If you’re trying to create new money habit. Link it to an existing well-formed one. For example, if you drink a cup of coffee every morning and you want to be better about checking how much money you have left, you can log in to your bank account to check your balance.
See Dates To Review And Tweak- Just like how goals and values change, so does your budget. Whether you’re happy with your budget it or not, you should schedule a budget review regularly.
For More Information Contact:
Gisela Quiroz, Marketing Coordinator
Gisela Quiroz, Marketing Coordinator