I have a friend who makes a lot of money working as an engineer for a high paying tech company. Yet he always seems to complain about not having any money left to save at the end of each month! How is this possible when he makes such a high salary? Where does all his money go?
You may be shocked to hear that 51% of people making over $100,000 each year report living paycheck to paycheck. And you may already know that 70% of lottery winners end up going completely broke just a few short years after hitting the jackpot. How!?
Well, money coming into people’s life is rarely the problem. It’s the outgoing flow of money that most people need to fix.
It doesn’t matter how much money you have if you don’t have a plan for it. Budgeting IS that plan. It’s the cornerstone of personal finance, making everything else possible.
Why You (Yes You), Need A Budget
Picture your financial life as a long line of dominos, with budgeting being the very first (and most important) pillar. Once you conquer budgeting and knock over that domino, it has a ripple effect that flows into all other areas of personal finance.
When we don’t make any decisions ahead of time about how we are going to spend money, we fail to notice our spending and savings patterns. We are forced to make buying decisions in the moment, which can leave us with buyer’s remorse, and slow progress (if any) towards our biggest financial goals.
Simply put, budgeting is just making a plan for your money. And by planning your spending ahead of time, you’ll make financial decisions that better align with your goals and values. This is why budgeting gets a bad rap. It’s not there to prevent you from enjoying your life, it actually acts as the mechanism to help you achieve your most important goals!
Budgeting can actually be FUN!
While some people worry that budgeting will take the fun out of spending for them, I believe that the opposite is actually true. How often have you gone on vacation without a budget, only to stress about how much money you’re spending while you’re on your trip. Or how about purchasing something you’ve wanted for months, only to feel guilty about it after the fact?
Instead of being a strict dogma that sucks the fun out of your life, budgeting is entirely customizable to your lifestyle. When you create your budget, you get to choose how much money you put towards each facet of your life. And in doing so, you give yourself the freedom to spend guilt-free on the things you’ve budgeted for!
Instead of stressing on vacation, you know you have the money in the bank set aside for you to enjoy your trip. Instead of feeling guilty for spending money on yourself, you get to enjoy your purchases with a clear conscience knowing that you’ve already made the decision to spend on those items. All while making progress on your biggest financial goals!
Yes, budgeting does mean cutting back in some areas in order to save money. You can’t afford everything, of course. But since YOU get to decide where the cuts are made, you can make cuts from things that don’t actually provide much if any true value to your life.
How To Make A Budget
Budgeting your money is easier than you might think. It takes up to a few hours to set up, but once you create your budget it can be maintained month over month in just a few minutes. There are even some nifty (did i just say nifty!? 🤦♀️) budgeting apps and software applications that take a lot of the manual work off your hands.
So here are some easy steps to follow to start budgeting like a pro!
Ps. If you already have a budget, and it’s just not working, then read this post first to help fix it!
Step 1: Choose Your Budgeting Approach
The first step in creating a budget is to pick which budgeting approach will best suit your needs. Feel free to change it up if the method you originally picked isn’t working for you after a few months.
Everyone has a different budgeting style. It’s also OK to create a hybrid approach and tailor your method to the ways you work best. It’s your budget, so you get to decide.
Here are a few common methods we recommend people start with:
The 50/30/20 Budget
The 50/30/20 budget is a great method to start with if you’re a beginner. It works for any income level, and groups most spending into 3 main buckets.
It works like this:
- You’ll budget 50% of your monthly income towards your needs
- Next, you’ll budget 30% of your monthly income to your wants
- And you’ll save or invest 20% of your monthly income (can include debt payoff).
One of the biggest benefits of choosing this method is that it can provide you with some helpful guidelines for how much you should be spending in different areas of your life.
For example, if you realize that you’re spending way more than 50% of your income on your needs, you can take steps to pare back those expenses like:
- Negotiating your monthly bills
- Saving more money on groceries
- Slashing your gas, water and electric bills.
- You might find that you need to take more drastic steps like selling a car or moving to a cheaper apartment when your lease is up!
And if you find that you’re spending too much money on wants, you can work on practicing mindful spending techniques. Pare back subscription expenses. And make sure that your living expenses and wants are under control ensures that you can prioritize the most important part- sacking away 20% of your income for savings and investments.
**For the rest of this article, we’ll be referring back to the 50/30/20 budgeting method for our examples**
Envelope Budgeting
Another budgeting method you can use is envelope budgeting, aka “cash stuffing.” This budgeting technique can help to mitigate impulsive spending.
Here’s how it works:
- Grab a handful of envelopes, and label each of them with the different line items in your budget, like “entertainment, food, clothing, etc.”
- Then, each month, fill the envelopes with the exact amount of cash you budgeted for each category. For example, if you budgeted $400 for groceries, put $400 in cash into the envelope labeled “groceries.”
- Then, whenever you spend money, take the cash from the envelope associated with the purchase. So for groceries, you’ll pull money from the groceries envelope.
Using cash envelopes ensures you’ll never spend more money than you have. Because you literally can’t!! Once an envelope is empty, you’ve run out of cash and can’t spend any more.
Zero Based Budgeting
The final budgeting method we’ll discuss is for the ultimate money nerds and number crunchers. A zero-based budget is when you give every dollar you earn a job. The goal at the end of each month is to have $0 unaccounted for.
Zero based budgeting is great for more advanced budgeters because it allows you to see your spending trends in greater detail. You’ll know exactly what you’re spending your money on, and where. This helps you to make even more accelerated progress on your biggest financial goals.
The downside however is it takes time and effort to balance every single dollar, every month. If there’s a $25 mismatch or a few things unaccounted for it can drive you nuts! So if you’re a beginner and already have a hard time wrapping your head around budgeting, our suggestion is to start with a broader budget style and not get too into the weeds.
It’s worth noting that even when you graduate to the zero based budget, it’s still important to prioritize saving 20% of your income. Or more!
Step 2. List All Your Income
Once you choose which type of budget you want to use, you can decide how you want to keep track of it. Whether you prefer to go old school with some pencil and paper, use Excel or Google Sheets, or use budgeting software, the first step in creating your budget is to list out all of your income.
If you only have one income source, like a 9-5 job, this is pretty easy. But, don’t forget to always subtract any paycheck deductions. State and federal taxes, health insurance, etc.
If you’re budgeting with a partner or for a family, you can add their incomes as well. Be sure to include any money from side hustles, as well as gifts or unexpected income (for example a tax return).
Budgeting with variable income
If your income changes month over month, predicting your exact income can be a difficult task. Budgeting is possible, but it requires a lot of flexibility and checking in. If you are able to, it is best to get a month or two ahead and budget for the coming month with last month’s income. Ending the cycle of living paycheck to paycheck can help part-time workers, freelancers and business owners to budget their money more effectively.
Another way to budget monthly for variable income is to take your total annual expected salary (based on last year’s revenue) and divide it by 12. You may fall short some months with income, but it should balance out when the higher paying months come.
Read our full post here: Budgeting with irregular income amounts
Step 3. List All Your Expenses
Now that we’ve covered the money coming in, we’ll need to start paying attention to the money going out. Tracking your expenses is one of the most important parts of budgeting, because it’s impossible to attack your financial goals if you don’t know where your money is going.
Print out all of your credit card and bank statements from the past few months, and write down each transaction one by one. Or, cut/paste them into a big excel spreadsheet.
Now it’s time to group all of your expenses into the three categories we mentioned earlier under the 50/30/20 budget. Needs, wants and savings.
Needs are things that you can’t live without, like food, shelter, and transportation.
Wants are things you’ve purchased that are non-essential, like clothes, takeout, restaurants and travel.
Your savings category can include any money you’ve transferred into savings or investment accounts. You can also include debt payoff in this category if you’re working to eliminate high interest debt from your life.
Once you’ve broken down your spending into categories, total up the amount of money you spent month over month for each of them month over month, and take note of how it compares to the percentages for the 50/30/20 budget.
Important note: It’s important not to beat yourself up here if you’re noticing more spending than you’d like. There’s no place for shame in personal finance. You can’t travel back in time and change the past, so what’s important is moving forward and taking action to improve your finances today!
3. Set Budget Goals
Now that you’ve got a list of everything you’ve spent on over the last few months, it’s time to analyze your findings and set some budgeting goals!
First, let’s take a moment to recognize some of the wins. Did you put a big chunk of money into your savings account two months ago? Spend barely anything on groceries one week? Sell some old clothes and make a quick $100? Give yourself a pat on the back and take some credit for what you’re doing right.
Then, identify some areas of your spending that you believe you can improve and set some spending goals. For example, if most of your discretionary spending went to takeout last month, check in with your values and see if it aligns with them. If you’re hoping to save for a big family trip, ask yourself if you can cut that takeout spending in half to make more room for your bigger goals within your budget.
Make sure to be realistic in your goals. Setting yourself up for failure by trying to go “cold turkey” is a great way to lose motivation and give up forever. Instead, try setting SMART money goals, which allow you to get some quick wins under your belt, motivating you to keep going on your personal finance journey.
How to set budget goals for non-monthly expenses:
But what about things that don’t fall on a monthly payment timeline, like short term savings goals, variable expenses, and annual or irregular expenses?
Don’t worry! While budgeting for these things can be a little more difficult, there are certainly ways to simplify it for easy budgeting.
To start, let’s talk about budgeting for variable expenses, like gas, electricity or food. Budget these categories by averaging the amount you spent on each over the past few months. Make efforts to keep your spending in these categories below that amount, but if you go over by a few dollars, you can take it from another category where you still have leftover cash.
For payments that fall on an annual schedule, the solution is simple. Just divide the charge by 12 and then set aside 1/12 of the cost each month when creating your budget. For example, if your car registration is $360 each year, set aside $30 each month in your budget for that line item. By the time 12 months rolls around, you’ll have the cash saved to pay that registration bill in full and not be taken by surprise.
You can also create sinking funds to manage your short term savings goals or any irregular expenses, like car maintenance or travel.
What About Savings?
You’ve probably heard of the term “pay yourself first.” Well, this basically means prioritize saving money before you do any spending.
We should really call it the 20/50/30 budget, with the “20” for savings at the front. It should be viewed as non-negotiable, each and every month. As soon as you are paid, pay yourself first by putting this money into your savings or investment accounts before paying bills or spending any money. In doing so, you won’t fall into the trap of waiting until the end of the month and not having money leftover to save.
Congratulations! You’ve just created your budget for the first time. Treat yourself to a small reward to celebrate! 🥳
4. Review & Adjust
Every few weeks it’s important to check in with your budget to account for the money you’ve spent. If things are looking off, you’ll have time to make small adjustments as the month goes on before the grow into big problems. To keep this from feeling like a chore, we recommend adding a little ✨spice✨ to your monthly budget meeting.
If you’re budgeting as a couple, maybe you and your spouse could budget over a bottle of champagne? Perhaps you get takeout from your favorite restaurant while you review your numbers? Making a little ritual that you look forward to will keep you from dreading budgeting.
If you find that you’re struggling month over month to stick to your budget, or notice that you’re not happy with the way you’re spending your money, it might be time to make some bigger changes to the process. For example, if you are always overspending on home repairs, but have extra cash left over in your clothes line item, you can move those funds permanently to a different category.
Remember, it’s totally okay if you screw up! We all do. What’s important is that you take the time to figure out why you’re struggling to stick to your budget and take the necessary steps to correct it.
Another great way to monitor your budgeting success is to start tracking your net worth. As long as it keeps growing slowly but surely, you’ll know that your budget is helping you to improve your finances. Plus, it can be super motivating to watch your “pile of money” grow over time!
How often should you review your budget?
If you’re a beginner, we’d suggest budgeting at least monthly. If you can check in half way through each month it’ll really help also to make you aware of any overspending. The earlier you catch problems, the better.
Once your budgeting is on auto-pilot there’s no need to check in too often. I know people that just review their spending every 3-4 months, because there are rarely any changes to their routines.
All in all, it’s your choice how often you review your budget. But the only way to get better at something is to do it often. So if you’re a complete budgeting newbie, start out monthly!
What about an annual budget?
Once you reach the beginning of a new year, it’s a good idea to make a rough annual budget using your numbers from the previous year.
This can be a helpful way to take a look at the big picture, and ensure your monthly budget lines up with your priorities for the year. Forecasting your spending for the upcoming year can help you to see if there’s room for new short term financial goals.
For example, I have 4 weddings this upcoming year!… And while I’m excited for my friends getting married, I know this means gifts, travel, parties, and probably a few outfits I might need to rent or buy. Having an annual budget to make room for an extra $1,500 (or maybe more?) is a good idea to make sure i’m not caught off guard when one of these weddings pops up.
5. Put it on Autopilot 😎
Month after month, budgeting will become much easier. And you’ll notice some ways to streamline and cut out time. Here’s when you can begin using automation to make managing your finances even easier.
Here are a couple ideas to put your budget on autopilot:
- Auto-deduct savings: To help ensure you’re saving 20% of your income each month, you can set up automatic transfers from your bank account to your savings and investing accounts each time you’re paid. This will make sure you’re paying yourself first every time money comes in.
- Autopay credit cards: Set autopay up for your bills and credit card payments so that you no longer need to pay them annually. Just make sure you’re still taking the time to view the transactions each month so that you still “feel the pain” of that money leaving your accounts.
- Use an aggregation software: Tools like YNAB or Credit Karma (here are some other alternatives) make tracking your expenses much easier by connecting to your bank accounts and credit cards.
- Round to the nearest $10: Instead of accounting for every cent you spend, try rounding to the nearest $10 in your budget categories. Or for larger incomes/budgets, maybe round up/down to the nearest $100. This will save time grouping and recording expenses and likely have a similar overall outcome.
More tips for success
Just like learning any other skill, budgeting gets easier the more you do it. However, here are some tips to help ensure your budgeting journey is smooth sailing from the beginning.
Create a Bare Bones Budget
Separate from a regular budget, it can be a good idea to also create a “bare bones budget.” A BBB contains only your needs and no wants at all. It is not meant to be a long term thing, but rather to serve as a backup plan should a financial emergency strike. That way, if you ever need to quickly downsize your spending, you’ll be able to shift to your bare bones budget at the drop of a hat.
Narrow Down Your Categories
If you find that your budget has too many categories, don’t be afraid to make it a little more generalized. There’s no need to have 100 tiny line items in your budget when 10 larger ones will do the same job.
Try to combine a few categories that usually go together. For example, if you usually buy paper towels and cleaning supplies at the grocery store, you can lump those into your food budget. That way you don’t have to manually split up your transactions later after paying at the store.
You can even create a miscellaneous category, or “slush fund” in your budget with leftover cash that can be used for anything you’d like. For example, you could keep an extra $50 in your miscellaneous category to be used for small purchases or cash spending.
Gamify your budgeting!
A great way to make this housekeeping task more enjoyable is by gamifying your budget! Get some friends involved and see who can pare down their spending more in different categories, or create rewards for yourself along the way for your accomplishments. You’ll be more motivated to stick with it, and make even more progress on your biggest money goals.
Turn to Software for Help!
If you struggle to keep up with recording transactions and adding up categories, don’t be afraid to turn to software. Although the best budgeting software (YNAB) costs $99 per year, the average user saves $600 over the first two months and $6,000 in the first year!!! So it can definitely be a worthy purchase if you find you need some extra support. YNAB tracks your income and expenses in one place, and you can test it out using their free 34 day trial.
YNAB is also FREE for students. So if you’re in school, using YNAB is a no-brainer.
All the Benefits of Budgeting
While it can take a good amount of work to get your budget up and running, it is totally worth all of the elbow grease. There are tons of benefits that budgeting can bring to your life, even aside from just helping you to save more money. Here are just a few ways that budgeting can change your life for the better.
1. It Puts You In Control
We all want more control over our lives, and budgeting can give you some of that power you seek. When you budget, you get to make decisions about where your money is spent. You get to choose what goals you want to accomplish, what businesses you want to support, and which ways you get to treat yourself, and there’s something super empowering about that!
2. Helps You Become A Mindful Spender
One of the best parts of budgeting is that it can help you to build healthier spending habits. When you have a plan for your money and your financial goals set out in front of you, it makes you think twice before swiping your card. The more you budget, the more you’ll start to develop mindful spending techniques that ensure your purchases align with your goals and values.
3. It Helps You Achieve Financial Goals
Each time you update your budget, you’re taking an actionable step towards improving your future. Budgeting forces you to prioritize the things you care about, and cut back on things that don’t bring you joy to make room in your life for what really matters.
If you have big dreams for your money, you need to start budgeting. It will break up your mammoth goals (like building a $2M nest egg for retirement) into small, actionable, monthly steps and make things seem less daunting.
4. It Helps You Plan for Emergencies
Budgeting can also be a great way to make sure you will be able to weather any financial storms. By creating a bare bones budget and setting aside money each month for your emergency fund, your finances will become invincible!
5. Give You Confidence and Peace of Mind
Lastly, most of us experience money anxiety because we fear the unknown. Budgeting takes the guesswork out of your finances. Having a plan for every dollar that comes in and out of your budget can help to leave you feeling more confident in your ability to tackle life’s everyday challenges.
The Bottom Line:
As you can see, even the most frugal people can benefit greatly from getting organized and creating a plan for their money. Budgeting can help us to live more fulfilling lives, because it forces us to think about the ways we spend our money, and helps us to make decisions about our finances with our values in mind.
If you still aren’t sold about the benefits that budgeting can bring to your life, we challenge you to try it for a few months. Watch as you make more progress on your biggest money goals than you ever thought possible!
Well, that’s all we have to say about that! Be sure to check out these related posts for more helpful tips on how to make budgeting work for you.
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