If the idea of budgeting your money makes you want to die inside, you are not alone. Most people, including me, fail at budgeting many times before they finally get the hang of it. This article summarizes what I've learned from my years of budgeting and helping others with their budgets in a way that I hope makes it easy to get started and hopefully stick with it.
What is a budget?
A budget is just a plan for your money. It's not a spreadsheet, an app, or a set of envelopes. It's not just tracking your spending, either. It's all about spending your money with intention and being flexible when your plans and priorities change. Mastering the skill of budgeting can dramatically improve your personal finance situation.
How can a budget make your life better?
Reduce stress related to money
According to a March 2022 study by the American Psychological Association, people are more stressed about money now than they have been since 2015. Creating a budget is one of the quickest and most effective ways to reduce your money stress. It eliminates uncertainty and charts a way for you to successfully cover your monthly expenses and reach your other financial goals.
Break paycheck to paycheck cycle
Living paycheck to paycheck is difficult and stressful. It can feel like the money in your bank account is never enough and the smallest financial setback can cause a massive disruption in an already tight budget. The first step to breaking the paycheck to paycheck cycle is creating a personal budget that accounts for all your monthly income and expenses, so you know where your money is going. Once you're informed, you can start looking for ways to save money. This could include things like cutting out non-essential purchases like eating out or excessive shopping.
Establishing a budget is plays an essential role in debt repayment. It can be difficult to keep track of student loan payments, medical bills, and credit card statements without a budget in place. A budget allows you to understand exactly how much money you can dedicate to paying off debt, allowing you to make steady progress towards financial freedom and peace of mind.
Understand and achieve your financial goals
Budgeting helps you understand where money is coming from and going to. Once you know how much money moves through each budget category, you can use this information to decide where your priorities lie. Having a budget puts you on the right track towards achieving your financial goals now and in the future.
Understand net income and emergency fund needs
Using a budget reveals your net income and monthly expenses so you can determine exactly how much money you need to provide a cushion should an emergency come up. By taking a detailed look into your finances and determining what money comes in each month and what goes out, you can create an effective plan that allows you to save the right amount of money for any type of unexpected event. Even if it's just a few hundred dollars in the bank, having an emergency fund can give you peace of mind knowing that you’re prepared when things don’t go as expected.
There are several popular budgeting methods, such as the 50/30/20 rule, zero-based budgeting and the envelope system. Here's a summary of each and then we'll dive into how to budget with the method I think works best for most people.
50/30/20 budgeting method
The 50/30/20 rule divides your income into thirds: fifty percent goes towards needs (like housing, food and transportation), thirty percent towards wants or fun activities and 20% to savings and investments. This is a great way to create balance in your financial life. You can learn more in my in-depth article about the 50/30/20 rule.
Zero-based budgeting method
A zero based budget means that your income minus your expenses equals zero. In other words, you give every dollar a job and don't leave any extra money without a defined purpose. Even if you're saving money, you're saving it for a specific goal. This method is great for helping you decide your true priorities because it puts you face to face with the fact that you don't have unlimited money.
How to make a budget
There are only a few steps to unlocking the power of a personal budget.
- Create budget categories for all the things you need and want to spend your money on
- Assign the money that you have available right now to each of those categories
- Track your spending
- Review your budget periodically
Create a list of monthly expenses
Certain expenses occur every single month. Rent/mortgage, utility bills, car payments, monthly subscriptions, and so on. These are the expenses most people think of first when they sit down to make a budget.
Fixed expenses are the easiest expenses to create a budget category for because they are the same amount every single month. Examples are rent/mortgage, student loan payments, car payments, cell phone bill, child support, and monthly subscriptions.
Variable expenses are harder to account for than fixed expenses, but with a little practice, you can get them running on autopilot. Utility bills are a classic example because energy costs vary seasonally and depending on your habits. Check your account records for the last year to determine the average monthly amount and budget that amount every single month.
Most people stop at budgeting for their fixed and variable monthly expenses, and when a "surprise" expense pops up, they get frustrated and feel like they want to give up budgeting forever because it just doesn't work. This is why you need to budget for your "true" expenses. A true expense is any expense that occurs irregularly. You don't know the next time you will have to pay for it, but you know you definitely will at some point. Car maintenance and repairs. Health insurance deductible. Home insurance premiums. Car registration. Auto insurance. And so on. You can check out my article about budget categories for a detailed list of possible true expenses.
Assign every dollar a job
Notice that we haven't talked about your total income, monthly income, your take home pay, or future paychecks yet. The very best way to budget is to budget only the money that you have right now. If you try to predict and budget your future income, you are far more prone to spend the money before you even have it. So, now that you've identified all of your expenses, even the irregular ones, it's time to look at your bank accounts and see how much money you have available to assign to each budget category.
A great thing about budgeting this way is that it doesn't matter how often you get paid. It works equally well for people with regular income who are paid monthly, bi-weekly, twice a month, or people with irregular income. All you have to do is ask yourself the question, "What do I most need this money to do before I get paid again?"
Track your spending
Tracking your actual spending is a key part of any budgeting process. It helps you review your spending limits and understand your spending habits. Looking at your budget before you spend money is a great way to practice following your budget plan and learn to be flexible when your priorities change.
Review your budget regularly
Review your budget and your bigger financial picture regularly. Determine if your financial plan is working for you. What is going well? What's not going well? What are you learning about yourself as you track spending? Does your budget make room for enough fun money? Make adjustments as needed. Flexibility is key to success over the long run!
There are many budgeting tools on the market. And who can forget just having a trusty budget spreadsheet? Whether you use a tool like Mint, EveryDollar, or You Need A Budget, pick a tool that helps you stick to your budgeting habit. I've written about why You Need A Budget (YNAB) is my budgeting tool of choice and why I recommend YNAB over EveryDollar and Mint, other popular budgeting app.
Challenges to sticking with a budget and how to overcome them
If budgeting were easy, everyone would do it. Same goes for working out and eating healthy, right? We all want to feel good and look great, but not as much as we want to eat pizza and watch TV. We all also want to be rich, but not as much as we want that new car or latest gadget. Sticking with a budget can be challenging. Here are some common roadblocks to budgeting and how to overcome them.
Ever heard of retail therapy? It's true. Spending money releases dopamine and makes us feel good. Saving money, on the other hand, is like exercise. It's boring and terrible now, but if we do it a little bit every day, we'll eventually have a lot of money. Make sure to include enough money in your budget to occasionaly buy things you want, but don't need.
If you're budgeting in a spreadsheet, you are living my worst nightmare. Seriously, use a budgeting app. If you're interested in my advice, use YNAB. It's full of great features that automate the boring parts of budgeting and let you focus on the fun part...choosing your priorities and deciding how to spend your money. It makes tracking your spending a breeze, and if you fall behind or mess up, you can create a new budget with the click of a button.
Remembering to look at your budget before you spend
YNAB helps with this, too. The mobile app makes it convenient to have your budget with you at all times, you can install widgets on your home screen to keep your most important budget categories top of mind, and you can even use location based reminders (via iOS shortcuts) to get notifications about your budget when you arrive at your favorite store. (Yes, I do this!)
The biggest killer of the budgeting habit is simply having unrealistic expectations. New budgeters tend to budget how much money they wish they would spend on groceries or eating out, and are discouraged when they constantly over spend. If you find yourself regularly overspending in a certain category, just increase the amount of money you're budgeting for it. You might have to take that money from a different category, but hey, you've learned something about your true priorities!
Work with a budget coach
If you are starting to budget for the first time and you want to skip the learning curve, or if you've tried budgeting in the past but haven't been able to make it stick, consider working with a budget coach to help you meet your goals. Check out my article on everything you need to know about working with a budget coach, or schedule a time to chat with me. I'm a YNAB Certified Budget Coach, and I love helping people overcome their budgeting challenges.