It occurred to me the other day how often I write about budgeting, the importance and trials and tribulations of it all. There’s no doubt that everyone knows about budgeting, but the real questions are whether or not they actually make and maintain one and does it really work for them? In fact, budgets sometimes are strictly “fantasies” and that, my friends. is the rub in all of it. If you just pretend to have a budget, then you don’t have one at all and every cent that passes through your finances is a crap shoot. So today I’d like to talk about how to make a budget that works for you.
When you are doing that “big gamble” with your finances and ignoring a budget, you’re putting everything at risk. I’m just going to say it out loud here: it’s not very smart and you will eventually regret your actions. So today I am going to tell you how I think your budget should be made to actually try to make it work!
How Smart Do You Really Have to Be?
You don’t need a degree in finance to learn how to make a budget that works and be smarter with your money. Creating a budget, using your credit wisely, and saving your money can go a long way in helping you build a strong financial future. But even more important than building your financial future is the managing of your financial present.
Let’s face it, most of us worry all the time about our finances and sometimes it is actually unhealthy when it happens. The way to avoid a lot of anxiety is to have a grip on your money and that means a budget and a scorecard that enables you to know where the money came from and where it’s going. That’s the purpose of a budget.
Why a Budget Is Important
A budget keeps your spending in check. It helps you to live within your means, put money aside for savings, and pay off your bills. It helps ensure that you spend your money on what you truly value. That’s pretty much it and why it is important.
So where do you begin in this process? Follow these steps and you will make your budget. And if you are all inclusive, it will work for you.
How to Make a Budget That Works for You
It’s going to sound so simple and guess what, it really is! Making a budget isn’t brain surgery although you might think it is due to the fact that so few of us are any good at doing it. The steps are:
1. Calculate your monthly income after taxes
Look at your monthly paychecks after your taxes, insurance, 401(k) savings, and other deductions have been taken out. Include any other income you may have. Once you’ve totaled it up, this is how much you can afford to budget for each month.
2. Pay yourself first
Decide how much you can afford to save and invest (keeping in mind you’ve already accounted for your 401(k)). This includes money saved towards an emergency fund, sinking funds, retirement savings, and other goals. You can always refine this number after the next step.
3. List your typical expenses
Include in that list everything that you usually spend money on each month. This includes your rent or mortgage payment; utilities like water, gas, internet, or electric bills; medical expenses including medications and doctor’s visits; debt or credit payments; and entertainment costs like streaming subscriptions or basic needs; transportation costs, groceries, clothing or eating at restaurants.
Don’t forget to include periodic expenses, like annual insurance premiums or holiday gifts. You can take annual expenses and divide by 12 to get a monthly approximation.
It’s a good idea to track your expenses for a few months to see what you’re really spending on each category, but you can start with your best estimate and refine the numbers from there. Remember, this is your opportunity to plan your spending on what you value.
The Nuances of Your Budget
This is so important that I ought to say it twice, but I won’t: Split your budget into your needs and wants.
Aim to spend about 50% of your income on your needs, 30% on savings and debt, and 20% on wants. Depending on your finances, you might spend more or less in a certain category, but make sure that the bulk of your budget goes toward your actual needs and savings versus the things that you just “want”.
You can have as many categories as you need. Just remember that if you’re too specific, it will require more upkeep to track, and if you’re not specific enough, you may have trouble figuring out where your money actually went. My wife and I have over 40 expense categories because we like to have more control.
Here is a starter list of potential categories. Choose however many you need, or create your own.
- Mortgage Interest and Principal
- Real Estate Taxes
- Homeowners Association (HOA) Fee
- Water Bill
- Sewer Bill
- Trash Bill
- Lawn & Garden Care/Landscaping
- Electricity and Gas
- Homeowners/Renters Insurance
- Household Repairs
- Household Furnishings
- Auto Loan Payment
- Auto Insurance
- Auto Maintenance and Repairs
- Auto Registration/Driver’s License/DMV Fees
- Parking Fees
- Public Transportation Fees and Passes
- Life Insurance
- Health and Dental Insurance
- Medical Care and Prescriptions
- Over the Counter Medications and Vitamins
- Eye Care and Glasses
- Dental Care
- Fitness/Gym Membership
- Take Out
- Household Supplies and Paper Goods
- Clothing and Shoes
- Dry Cleaning
- Grooming and Makeup
- Cable TV or Subscription Services
- Internet Service
- Phone Service
- Donations/Charitable Giving
- Electronics and Software
- Debt Payment
- Hobby Expenses or “Fun Money”
- Babysitting Expense
- School Supplies
- Legal Fees
- Pet Expenses
- Holiday Expenses
- Miscellaneous Expenses (Don’t use this too often or you won’t know where your money goes)
Tracking Your Budget
Don’t skip anything and actually track everything you spend. That means every utility bill, parking fee, movie ticket, and even your daily coffee. Tracking your expenses will help you identify where you’re spending most of your money, which will make it a lot easier to see where you can cut back on your spending.
You can use one of the many budgeting apps, budgeting software, and other resources that can make it easier to track your spending and follow your budget, but it isn’t a necessity. You can keep tabs on your spending in a spreadsheet or even just use a notebook and write it all down with pencil and paper. The main thing is to do it.
One helpful thing that my wife and I do is to keep a running average of each category of our expenses and income for the past 12 months. That way, we can see if we’ve been generally on target with our budget numbers despite any ups and downs in a particular month. Whether you do that or not, be sure to evaluate your budget at least once a month compared to your tracked income and expenses. And update your budget as often as necessary!
How Does a Budget Help You to Begin Saving Money?
Once your budget has rolled out, you will find you have newly gained control of your money and some better peace of mind than when you were just wheeling and dealing and running up debt. With a budget or plan (as it actually becomes), you now can make the decision to cut back on wants and get back to that need I mentioned before: savings. Why?
It’s important to start saving money as early in your career as possible so that you can then build wealth over time.
What Are the Best Ways to Start Saving Money?
Build an emergency fund
Save up to three to six months’ worth of salary in this fund. If you are laid off or have a medical emergency, the emergency fund will help you pay your bills. Furthermore, if you have a sudden large expense such as a vehicle breakdown or a leaky roof, your emergency fund can help you pay for it without going into debt.
Build and maintain your retirement account
The sooner you start saving, the more money you will earn in interest and investments for your retirement. If your employer offers a 401(k) savings plan, try to contribute the maximum amount possible. You can also open an Individual Retirement Account (IRA). I always say the time to begin savings for your retirement is the day you begin your very first job!
It’s been a long time since I talked specifically about how to make a budget that works for you and I feel better now. In the future I can tell you to reference this post whenever I talk about budgets and now you have a real cheat sheet that you can refer to.
Budgets have been around for a long time and every business that I know uses them to control their money. Individuals like you and me need to do exactly the same thing. And just remember: Review your budget every month and make changes whenever necessary to stay ahead of the curve of any troubles you may have. If you do that, you won’t have nearly as many issues or nearly any as severe. That’s something you will learn yourself and you won’t have to take my word for it.
Do you have a budget plan? If not, why not? Is there any information you don’t have to get started now?