The Basics of Budgeting
September 11, 2020
By Rahul Iyer
Budgeting – it’s a word no one likes to hear, but it’s the most important word in your vocabulary. Most people equate budgeting with sacrificing, but it’s not.
What if instead, you viewed budgeting as empowering?
It tells you how much money you can spend, how much to save to meet your goals, and when you need to cut back on spending. It’s like a map for your money.
Some people are just afraid or unsure of how to make or follow a budget, and that’s okay. Keep reading because it’s not as bad as you think.
Know how Much you Make and Spend
Are you aware of the money that goes in and out of your bank account each month? If not, don’t worry, it’s easy.
Pull out your last few months’ bank statements to get a good idea. If you earn a salary, figuring out your income is easy – just look at your paystubs. If you work on commission or for yourself, look at your last six months of income and take an average.
Next, add up your expenses. Think of fixed and variable expenses.
Fixed expenses include:
Car, health, and life insurance
Credit card and personal loan payments
Cell phone and internet bills
Variable expenses include:
Car registration/license plate registration fees
Now compare your spending to what you bring in – are you in the red or black?
Choose a Budget
Next, choose a budget. There isn’t a one-size-fits-all approach. Everyone likes something different, but here are a few favorites:
Zero-based budget – Budget your income so that you have $0 left at the end of the month. This doesn’t mean that you’re broke, but that you gave every job a dollar. Any ‘extra’ funds should pay down your debt and/or go into your savings account.
Envelope plan – If you need more direction for spending in certain categories, use the envelope plan. You set a budget for each category and put enough cash in each envelope for the budget. Once you spend what’s in each envelope, you’re done spending in that category until next month. This is a great option for visual learners.
50/30/20 plan – If you want something with a little more flexibility, the 50/30/20 plan is great. 50 percent of your take-home pay covers your fixed expenses, 30 percent covers your variable expenses and/or wants, and 20 percent covers your savings and debt pay off (in addition to your minimum payments which go into your fixed expenses).
Set Financial Goals
Hopefully, a line item in any of your budgets is savings, but what are you saving for? Having a goal is crucial. Set short-term, mid-term, and long-term goals.
Short-term goals include things like saving for a vacation or buying a large piece of furniture. Mid-term goals could be saving for a house or a car, and long-term goals are usually saving for college or retirement.
If you haven’t set up an emergency fund yet (3 – 6 months of expenses), make that your priority before saving for any other goals.
Figure out How to Follow your Budget
Next, figure out – are you a pen and paper person, or do you want everything automated? If you’re an automated person, there are many simple and free apps to track your budget. Mint and EveryDollar are two of our favorites.
If you prefer old-fashioned pen and paper, just make sure you track every dollar going in and out – it can get tiring or easy to forget so don’t be afraid to try an app.
Set up your Budget Today
It’s never too late to start budgeting unless you keep putting it off. Start today, even if you just write down your income and expenses. See where you stand and where you need to make changes to meet your financial goals.