What is a budget and how do you create a budget? These are the two important questions that we will answer today.
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How Is A Budget Defined?
A budget is a financial plan based on your income and expenses. It is a way to organize your finances and estimate how much money you will need to cover your cost of living.
Why Create A Budget?
Budgeting is a good way to organize your money. It will help you to not feel so overwhelmed with your finances.
According to a recent study by First National Bank of Omaha , there are a scary number of people who are in financial distress.
The financial study concluded that 49% of adults in the U.S. expect to live paycheck to paycheck in 2020. The study also found that 53% do not have an emergency fund that could cover three months of expenses.
But, 91% of those surveyed stated that they had a goal of starting better money habits in 2020, which included setting and sticking to a budget.
Looking at your personal finances can be a drag. But sometimes you may feel lost and unsure of where all of your money is going and that is not a good feeling. Maybe you are living paycheck to paycheck and don’t know what to do about it.
In these cases budgeting may be just the tool that you need to get your finances on track. A lot of the ideas that we will talk about below have helped us to become debt free and have paved the way for us to reach financial freedom.
The Top 5 Reasons Why You Should Start A Budget
- Budgeting helps you to plan for the future
- Allows you to save for unexpected costs
- Helps you to pay off debt faster
- Helps you to save for retirement
When you budget you assign your money a job. Making a budget gives you focus and creates spending limits so that you spend your money more responsibly.
Setting a budget will give you a clear idea of how much money you have left after paying for expenses. This leftover money can then be used to meet your financial goals faster.
How To Create A Better Budget
Step 1: Set goals
Decide what your financial goals are.
- I want to save ___ (amount of money) in order to _____
- I want to invest ___(amount of money) per month
- I want to save ___ (amount of money) for retirement
Step 2: Identify your income
Your income includes a lot more than just your salary. It also includes any money that you make from a side hustle, a part time job, or from any significant interest/dividends.
Step 3: Track your spending
In order to get to step 4 (Identifying your expenses) you need to first track them!
We like to keep a spreadsheet that includes all of our spending. When we purchase something we enter it into the spreadsheet. It’s pretty simple and straightforward.
Tracking your spending will give you an idea of where you are spending your money and how much you are spending each month.
Check out this article for a FREE Expense Tracker: Click HERE
Step 4: Identify and categorize your expenses
- Fixed expenses (rent/mortgage, loan payments)
- Common/Monthly expenses (utilities, cable, internet, phone, credit card)
- Everyday/Variable expenses (groceries, gas, entertainment, restaurants)
We do all of these initial budgeting strategies and they have helped us to determine where we stand financially. Once you complete these steps you can then assess your spending habits and decide if some changes need to be made.
We try to live a more frugal lifestyle and taking the time to track our expenses has really opened our eyes to superfluous spending.
Different Budgeting Strategies
There are two popular methods to budgeting.
Zero – Based Budget:
In this method every dollar of your income is accounted for. You assign a category for every dollar that you make so that you know where your money will go and exactly how much you (hopefully) have left.
In this method you allocate your income into three different sections:
- 50% for fixed expenses
- 20% for financial goals, for example repaying debt and adding to savings and investments.
- 30% for variable expenses
The 50/30/20 Rule allows you to see if you are spending too much in one area and need to make some changes in your life to be able to allocate your money better.
Do You Need To Use A Budgeting Spreadsheet?
When a lot of people hear the world budget they picture a spreadsheet full of numbers and they start to feel overwhelmed. The key to creating a good budget and actually sticking to it is to choose a method and strategy that fits you and your lifestyle.
If you are a pencil and paper type of person then create a budget on paper. If you prefer to use the computer then by all means, use a spreadsheet. Others may be more comfortable using technology to track their spending and budgeting.
If you are a paper and pen type of person, Clever Fox makes some great budget planners and trackers. They include a lot in one little book to keep you on track and help you meet your financial goals. Check them out HERE.
There is no one size fits all. Everyone has a different way of doing things. The important thing is that you choose the method that works best for you. By doing this you will set yourself up for success.
Budget Trackers And Apps
There are a few different budget planners and trackers out there for those of you who prefer a more high tech approach to budgeting.
- Cost: FREE to sign up and use
- Bank account tracking
- Investment account tracking
- Bill tracking
- Goal setting
- Budgeting tools
- Cash flow trend analysis
- Free credit scores
- YNAB (You Need A Budget)
- Cost: Free 34 day trial then $6.99/month
- User Friendly, comprehensive budgeting tool
- If you need a more hand held approach to budgeting wrapped up in an app that is easily accessible on your phone, then YNAB is for you.
Download Your FREE Budget Template Below:
So You’ve Created A Budget….Now What?
After you track your expenses, set up a budget, and assess the results, hopefully your numbers are in the positive.
If they are not, don’t worry! There are numerous things that you can do to get your finances on track.
If your expenses are greater than your income then it is time to decide how to get yourself out of the hole.
There are two key steps that you can take.
- Make More Money
- Save More Money
Or even better, do both!
Make More Money
If you have the ability to make a little bit more money, you will be able to fully cover your expenses, save more, invest more, and pay off debt faster.
You can increase your income by finding a side hustle which can be anything from selling on eBay to becoming a GrubHub driver. Or turn a hobby into a profitable business. For example, selling crafts on Etsy or refinishing furniture and selling it.
There are an infinite number of ideas on how to create and find a side hustle. But if that is really not for you, see if you can pick up extra work at your current job. This will allow you to make a little bit of extra cash.
Save More Money
If you are reading this article on how to start a budget then you are already taking the first steps towards creating better financial habits. Next on the list is learning how to save more money which will help you build up your net worth, pay off debt, and become more financially stable.
If you need to save more money in order to balance out your budget better then there are a few simple lifestyle changes that you can make.
- Living below your means: Your budget will make it very clear whether you are living below your means or not. This simply means that you are not spending more than you earn.
- Frugal Living: Living a frugal lifestyle means that you are making conscious spending decisions. You are intentional with your spending and prioritize the things that matter to you. This allows you to cut out unnecessary expenses.
When you create a budget you will set yourself up for financial success.
Budgeting is a tool that you can use to help you spend less than you earn. It is a crucial part of getting your personal finances on track and an important process to help you to reach your financial goals.
Setting a budget ensures that you always have enough money for the things that you need in life. When you see the numbers and know exactly where your money is going each month it will decrease worry and stress. You won’t have to question whether you will be able to pay your bills or have enough money to pay for your upcoming vacation.
It is a good feeling to know that you are in control of your finances and that you have the power to make the necessary changes to put you on the path to financial freedom.
Do you have any good budgeting tips or tricks? We’d love to hear them. Let us know in the comments below!