How to Budget Your Money

How to Budget Your Money

With a reported 95 million Americans out of the workforce and the average household having a credit card debt of $16,000, it’s a no-brainer that creating a budget is absolutely essential in today’s economy. However, budgeting shouldn’t be about living a bare-boned lifestyle where you’re scrimping on absolutely everything. You’re simplifying your life, planning your future, and putting a little aside, so you have something to depend on whether it’s for 3 months, 1 year, or for retirement. Here are some steps for how to budget your money.

Why Budget?

There’s no point in going through all of this unless you have some specific goal or goals in mind. Are you in massive credit card debt and need a plan to get out from under this mess? Maybe you’re flat-out broke and want to find some practical solutions to guide your way out. Are you concerned that you’ll have nothing to live on in your old age? Whatever it is, define your purpose in creating a budget. It’ll be your source of inspiration when you feel like going off the tracks. You don’t just have to have one goal in mind. Maybe you’re in credit card debt, AND you want to put in something for your 401 K. Prioritize your focus in terms of now, the immediate future, and the distant future.

Track Your Purchases

Once you know where your money is going, you’ll be able to make an educated decision in prioritizing your goals. Take a moment and see what you’ve been spending on for the last month, few months or year. Use past bank statements including bills. The farther you go back, the more accurate you’ll be in your average monthly revenue even though it might take more time. This is important to think about if you’re a freelance contractor with varied income versus a consistently paid salaried employer. Don’t forget to not leave out any purchases no matter how small. Then, categorize the spending in terms of needs and wants. How you track your expenses is up to you. Choose from smartphone apps, pen and paper, or an excel spreadsheet. Use what works for you. In the process, you’ll be able to zoom in on your problem spending areas.

Organizing Your Cookie Jar

When creating a plan for how to budget, shoot for having 3 or 4 simple categories as opposed to 20 across the board. This will help simplify and sustain you to carry out the strategy in the long term. The main differences between the budgeting formulas are a matter of how to bundle the smaller categories into bigger ones. Some of these categories are savings, fixed costs, and flexible spending. No one plan works for everybody, so see what works for you.

The Discretionary-Heavy Plan

Under this plan, 35% would be put aside for housing and utilities. 45% on discretionary spending which include things that can vary from month to month like eating out, groceries, shopping, hobbies, entertainment and gas. People under this school of thought believe that people should put aside at least 10% of their savings in the form of a direct deposit. Either put it in short savings which consists of interest-bearing saving accounts, 6-month certificate of deposit, or a money market fund. Or put it in long-term savings such as a tax-friendly, retirement savings tool like an IRA or 401 (k). Maximizing your IRA or 401 (k) should be your ultimate goal. The rest of the 10% can be put aside for saving something specific like a new car or your kid’s college education.

50/20/30 Approach

You can also follow the 50/20/30 approach when getting started with how to budget your money. This method breaks down fixed costs into no more than 50% of your take home pay. 20% goes into securing your financial freedom, and the rest of the 30% into flexible spending. In this plan, fixed costs refer to any bills that don’t change from month to month, including gym memberships and Netflix accounts. Securing your financial freedom means paying down credit cards, saving for retirement and creating an emergency fund.

Giving Yourself Breathing Room

Remember that even though it’s important to stick to your budget, drastic cuts may not be sustainable. You may become too discouraged to continue with your budgeting. Think of it in terms of giving yourself breathing room. Although you won’t be able to spend on every single thing you want, you’ll be able to cut back on things that unnecessary for your goals. After you’ve met all the financial goals for the month, you can spend as you like as long as it’s 30%-45 of your take-home pay.

Avoid Living like the Joneses

First, take a look at some of your luxuries. What are some of the things you throw away money on but don’t really need? Some of these common culprits are vacations, a heavy data cellphone plan, and cable. Remember that down-sizing doesn’t necessarily mean that you’re living a lower quality of life than your co-worker at work, your neighbor down the street, or your seemingly successful friends. At the end of the day, you don’t have access to their bank accounts, so they may be drowning in more debt than you are. Focusing on financial security means you’ll be able to have peace of mind. You won’t be that person starving and worrying about whether you’ll be able to afford next month’s rent because you went on that unnecessary vacation to Madrid, Spain.

Become John or Jane Frugal

Downsizing doesn’t always mean that you have to completely sever that thing from your life. If you’re working mostly at home or spending most of your day at work, maybe you should consider using the local Wi-Fi and switch to a cheaper data plan. Do you really need all those unwatched, cable channels? The fact of the matter is that cable is ridiculously expensive, and there are much cheaper options such as Netflix. Learn how to do things yourself. Learn how to do basic preventative maintenance on your car and get excited about home projects. Instead of eating out 2 or 3 times a day, maybe save it up for one big dinner you cook yourself. If you’re really broke, think about getting ingredients such as brown rice, beans, potatoes, green vegetables and other ingredients that are both nutritious and cheap. Consider negotiating your rent or maybe moving into a cheaper place.

Kill Your Debt

Don’t ignore your debt and risk financial disaster when you first are learning how to budget. Late fees and interest rates can quickly turn from a minor inconvenience to a persistent gnawing of your soul. The key is to figure out the maximum amount you can afford paying off each month. Then make sure to send those payments on a consistent basis. Keep doing that every month despite seeing your payments going down. Some additional things you can do are calling up your credit card issuer and requesting a lower interest rate. Whether you’re behind on bills, rent or debt, asking for a payment plan or a payment extension are also an option. Here are some more tips for how to How to Get Rid of Credit Card Debt.

Small Debt vs. Big Debt?

There are two different schools of thought when coming up with a debt repayment plan for how to budget. The first one is paying down your smallest debts before your bigger ones. The thinking behind this is that eliminating your first small debt will motivate you in tackling your second and third credit card accounts. The second approach focuses on first paying down debts with the highest interest rates. The benefits are that you’ll be saving more money. Choose what works for you. Do you need continual psychological boosts to tackle your debt or do you want to save more money?

A Summary of How To Budget

  • Brainstorm some solid goals as to why you want to come up with a budget
  • Track your spending with bills and bank accounts in the last month, 3 months, or year
  • Choose a budgeting strategy with 3 to 4 main categories
  • Eliminate luxuries like data-heavy cellphone plans, expensive vacations, and cable
  • Become more frugal by eating out less, cooking your own meals, and moving into cheaper housing
  • Erase debt by sending out the maximum amount consistently every month
  • Figure out whether you want to tackle the smallest or biggest debts first
  • After you’ve met your goals for the month, relax and enjoy your flexible spending