Budgeting is just one of those things, like dieting or going to the gym, that you just know is the ‘right thing to do’ but that you may have been putting off. You think about doing it sometimes. Maybe you’ve even tried it. But you’ve never really taken the official headfirst dive into it.
Well, if you’re here because you’re interested in taking that dive, then you’re in the right place.
Budgeting is just about the single greatest thing you can do for your financial situation, regardless of how much money you have or make.
To put it simply, budgeting is like counting calories. When you’re not doing it, you don’t understand what the big deal is. But once you start, you realize just how little control you’ve had over such a major aspect of your life.
If you aren’t budgeting, stop and think for a second about where your money is going. How much have you spent in the last month on fast food? How much have you spent on things you didn’t need? How much money do you normally spend on gas in a month?
If you don’t know, think about all the other places your money goes that you’re not keeping track of. It may feel like you know; you are the one making the purchases after all. But just like you don’t know how many steps you take in a day, keeping track of where your money is going, and how much of it is going there, without a budget is just about impossible.
Before we get into how to budget, let’s break down what a budget even is.
A budget is simply an outline of your monthly income and expenses. Yes, it really is that simple.
It’s a method of separating what you spend each month into different categories. Then, as the month goes on, you keep track of each of your transactions, put them in a category, and add the amount of that transaction to that category’s total.
By doing so, you can quickly see how much you are spending on different aspects of your life, and make informed decisions about how to improve your financial situation.
Even if you make enough income to live comfortably, and never have to worry about what’s in the bank account, a budget can still help you come up with better ways to spend your money.
The most obvious benefit of knowing how much you’re spending and what you’re spending it on is that you can figure out where you need to cut back.
If you’ve been struggling to grow your checking account balance, or even meet your monthly bills, budgeting will help you identify points where you’re overspending. Once you know where you’re overspending, you can make a plan to cut back, by how much, and by what time.
Another major benefit of budgeting is it makes growing a savings account much easier because you’ll have a better idea of what you can actually put into it. If you’ve struggled with dipping into your savings account out of necessity, it could be that you’re not putting the right amount into savings each month. By developing a budget, you can create a monthly savings goal that is actually attainable. The same goes for investing. Once you have a better idea of what your financial situation looks like, putting it towards something like investing is a lot less daunting.
Managing debt is easier as well, because you’ll be able to figure out how much of an impact it’s having on your monthly income. You might even finds way to tackle your debt faster once you start budgeting by redistributing where your money is going.
Also, when you know where your money is going, it makes deciding whether or not to take on additional expenses much easier. If you’re unsure if you can afford an increase in bills, budgeting will tell you if you can and by how much.
Not only is it helpful from a practical perspective, but it’s also great for reducing stress. If you haven’t budgeted before, it may seem like the opposite is true. A lot of people find that even thinking about their finances causes them to stress out.
The truth is, that stress comes from feeling like you aren’t in control. You don’t want to check your balance because you’re afraid of what it will be. But when you budget, you have a much better idea of what it is, what it should be, and why it is the way it is.
Now that we’ve covered why you should budget, let’s start getting into how you actually go about it.
The first thing you need to figure out is what your monthly income is after taxes.
This is your baseline, your limit. When you’re determining how much you’re going to be spending on each of your categories, this is what will keep you in check.
Never go over your monthly income when setting your budget, and always budget by your net income, not your gross.
The biggest turn off for people new to budgeting is that they try to divide their finances up into far too many categories.
Figuring out how much you should be spending on groceries for the month is a lot easier than figuring out how much you should be spending on dog food, coffee, desserts, meals, restaurants, and fast food. Instead of trying to figure out how much you should be spending on each of these, just figure out how much you need to spend on food in a month, within reason.
How do you do that? Well, how much would you spend eating for one day if all of those meals came from the grocery store? If you’re a single adult, that’s probably around $15 ($5 per meal). Then multiply that number by 30 (because there are 30 days in a month).
Then, if you want to eat out or go to Starbucks throughout the month, decide how much you’d like to spend on extraneous meals, add that to your total, and you will now have a monthly food budget.
To make coming up with your categories simple, here’s a common breakdown that should work for most people:
• Bills (utilities, rent, insurance, car payments, cell phone, subscriptions) • Food and Dining (groceries, fast food, restaurant, coffee) • Gas • Miscellaneous Expenses (shopping sprees, savings, and investments)
Of course, when you come up with these categories, you’ll probably notice that there are expenses you don’t need to be making. Do you really need to go shopping for fun every weekend? Do you really need to eat out each night? Do you really need that Netflix subscription?
Making a list of your expenses will make it easier for you to discriminate between the ones that are necessary and not necessary.
One of the best financial tools of the modern era is the smartphone. A personal accountant right in your pocket.
Apps like Mint and Clarity make the whole process significantly smoother. Essentially what they do is connect to your bank account(s), pull information from each of your transactions into the app, and use that information to monitor your spending.
To set up the app, you sign into your bank account through the app’s interface. Then you set up your categories (based on what you did in the previous step), and voila! It will automatically sort all of your transactions into the categories you have chosen and add up their amounts. This is also a quick way to determine what you spend each month on your various categories, making the set up in the previous step a little easier.
This is an invaluable resource in your new budgeting endeavors. Each day you can refer to the app before making a questionable purchase (or after, if you’re feeling risky) and have an accurate idea of how that purchase will fit into your budget. Most of them also have a little bar that moves forward each day, helping you know if you’ve gone over your limit for that category on that particular day.
Mint is far and away the most popular option, but there’s plenty to choose from to suit your personal style. Several of them will also allow you to set up automatic savings transfers, so you can grow a rainy day fund without even thinking about it.
So let’s say you’ve set your budget up to the point that you think Dave Ramsey would be proud. You stick to it for a few months, and begin to reap all the aforementioned benefits.
But life changes, and it changes a lot. And as such, your budget needs to be able to adapt. This is where keeping it simple comes in handy, because the more complicated your budget is, the harder it is when you need to make changes to it.
Let’s say you get a new job, or your pay gets cut, or your insurance goes up, etc. Now it’s time for a budget adjustment.
The steps remain relatively the same. First, if your income has changed, then figure out what your new monthly income is.
If it’s an increase, then you can add the increase where you’d like. Let’s say you’ve been eating ramen and peanut butter for the past couple of months; you’re probably going to want to put that extra cash into your food budget. Or, if you’ve been living the high life, maybe you can move that money into your shopping spree category, or even start increasing your monthly savings.
If there’s a decrease in monthly income, then you need to figure out which category is going to suffer the hit. Sacrificing a portion of your Misc category is generally the way to go since that money is unallocated to begin with. If you’re taking on a new bill, add it to your Bills category, subtract from other categories where necessary, examine how it fits into your overall budget scheme, etc.
Creating a budget while in a relationship really isn’t too different from doing it by yourself. If you and your significant other keep your finances separate, then you can probably skip over this section.
If you and your partner combine your finances, then once again, the first thing to do is determine your monthly income. Except this time, you’re doing so by adding your individual net incomes together.
Once you’ve done this, you’ll figure out your various categories and how much you should be spending on each of them. This is where the process can be a little trickier than when doing it on your own. Your partner’s spending habits, needs, bills, etc., will most likely be different from yours. Make sure you’re both comfortable talking it through beforehand, as it can sometimes be a difficult conversation to have.
After you’ve done this, the rest is relatively the same. You’ll probably be adjusting your budget a lot more since you’ll have to keep up with the changes in both of your lives. Be sure that you’re sticking to the budget and remaining responsible, as you don’t want to be the one getting in the way of your relationship’s financial plan.
And most importantly, carefully consider before combining finances with a significant other, as it can easily turn into a difficult situation for both of you. Remember that in the end, you should both want what’s best for both of you. If one person is using the budget against the other, then it is probably in your best interest to keep your finances separate.
Are you starting to see how budgeting makes your money work for you, and not the other way around? You won’t have to be afraid of managing your money anymore, because you are in control of it.
For the uninitiated, budgeting can seem like putting a leash on your finances, and imposing restrictions on what you can and can’t do.
It is that, to be fair, but the result is a new sense of freedom. You won’t have to worry as much about your money, you won’t have to feel as guilty over spontaneous purchases, and you’ll start making your way towards more and more positive financial decisions.
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