For just about everyone who is serious about their financial health, creating a good budget and sticking to it is a must. If nothing else, I’m sure you’ve heard that. Now, everyone has different expenses and income, so every budget will be different. The trick is to find the best system that works for you, and one that isn’t so complicated or tedious that you have a hard time keeping up with it. Learning how to budget doesn’t need to be a crazy process.
At the end of the day, all a budget does is basically determine where you’re putting your money each month. By monitoring what you have going out and what you have coming in, you’re able to run a tighter ship and save a lot more money. You’d be surprised how much money you can spend when you’re not paying close attention. Without further ado, let’s go into how to budget so you can save money and get your finances on the right track!
Calculate Your Income
Hopefully this part is pretty easy. Take how much your household makes in a given month and total it up. The only caveat is that you need to be sure that you calculate your income after tax, not before. In other words, you need to figure out how much money you actually get sent to your bank every month.
If you have irregular income because you’re an entrepreneur or work in an abnormal field, try taking a six month average to make sure you get the most accurate estimate. The best rule of thumb is that when you’re in doubt, err on the side of a lower income. It’s better to underestimate how much you make rather than overestimate it.
Calculate Your Typical Expenses
Next up, you’ll need to figure out how much you spend each month. There should be several easy, static expenses for you to knock off your list first, like:
- Rent or mortgage
- Utilities
- Car payments or other transportation fees
- Insurance
- Minimum debt payments
- Basic maintenance
- Groceries
- Childcare
And the list goes on and on. Do your best to make an accurate and complete list of everything you spend money on regularly each month and how much you’re spending on it. Again, if it varies take an average of a few months to get the best idea.
Add In Irregular Expenses
This is everything else, including expenses that you don’t have to deal with every single month. Maybe you try to make an extra debt payment every other month, you get an oil change every few months, or you’re saving for the family’s annual vacation. Anything you will have to pay, it’s best to calculate it into your monthly budget so that your savings aren’t decimated down the road.
Of course, if you take a hands on approach, it is possible for you to alter your budget accordingly on the months where the extra expense occurs. Personally, I don’t want to spend a ton of time on my budget each month. I like to create a budget, try to follow it, and do a check of my finances at the end of each month. Doing that, I can then adjust as needed instead of having to micromanage a budget. However, if that’s what works for you then by all means, do it!
Compare Your Total Income And Expenses
Hopefully you’ve reached this point and found that your income is far greater than your expenses. In that case, great, read on! However, if your expenses are greater than your income, you have a couple of options to try.
- Start by budgeting in your minimum saving and investing goals. This way you can look at the rest of your expenses and go through them, one by one, determining what you need to drop in order to reach those goals.
- Cut one of the 3 major expense categories. Generally, those are your housing, transportation, and food expenses. If you live in more house than you can afford, move. If you have an expensive car, get a used vehicle (it can save a fortune), and if you dine out frequently try cooking at home more often. Just taking the time to cut one of those three can give you huge savings each month.
Know Your Goals
I just alluded to it in one of my previous points, but knowing your goals can help you out. If you have concrete goals set, you have the perfect jumping off point to start editing your budget. If you can set any category (like savings or investments) as mandatory, then that lets you focus on the other categories and finding what you’ll need to cut elsewhere.
Of course, remember to budget in some “fun” money within your categories. If you go overboard trying to reach your goals, you’ll stretch yourself too thin and might not be able to stay consistent. As we all know, a budget isn’t of much use if you’re not able to consistently follow it. A budget is about raw utility for you, not to dream about how much you wish you could spend on different types of expenses or investments.
The 50/30/20 Rule
A common starting point for beginners is to spend 50% of your budget on needs, 30% on wants, and 20% on savings or investments. While this is a decent budget to start with, as you learn I highly encourage you to save more as you’re able to. If you’re able to save 50% of your income, you’re really killing it and on your way to an early retirement!
Additional Tips And Tricks On How To Budget
- If your goals aren’t possible with your current income, make them more realistic until you can afford more.
- Never make a budget based on your gross income (what you make before tax) because that will lead to an inaccurate budget and you’ll probably overspend.
- Automate what you can by setting up recurring deposits and investments. It will make your life much easier and help you stay consistent.
- If you overspend in specific categories, trying paying only in cash for them and see if that helps you manage it better.
- Review your budget and expenses at least once a month, especially when you’re starting out. That will help you tweak your budget and fix any issues.
Conclusion
Hopefully this article gave you the fundamentals to start making a budget. If you have any questions, or want to share some tips, be sure to leave a comment. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter!
