When reading about different tips on how to budget, you are going to hear everything from “You don’t need a budget” to “You need detailed & complex budgeting worksheets to successfully manage your money”.
Here are some scary personal finance stats:
- 18% of people making over $100,000 per year admit to living paycheck to paycheck.
- Around 29.2% of Americans don’t put any of their income into a savings account.
- 84% of people underestimated how much they pay in subscription services. These respondents were off by more than $100-$199 in monthly spending.
Source: https://www.marketplacefairness.org/blog/personal-finance-statistics/
I am here to tell you that there is no one size fits all but I do believe that everyone needs some form of a budget. How can you take control of your finances if you have no real idea of the money coming in and, more importantly, where the hell it is going?
Think of some of the world’s most successful businesses. Do you think they are financially successful without any real knowledge of their income and expenses? No way!
Think of yourself as a small business. By successfully budgeting your money, you will get yourself closer and quicker towards your financial goals.
Whether that be saving more money, paying off debt, or growing your investments/retirement.
This article today will set you up on the basics to budgeting, actionable steps to take, and I promise you will be on a path towards reaching your financial goals.
Step 1: List all your expenses
The very first thing you will need to do is to list out all your expenses for the month. Yes, I am talking all the way down to the latte or coffee you may have bought last week.
The easiest way to do this is to go to your bank and ask for the most recent statement.
Usually, you can print this out or access via their online banking services.
Now, create some basic categories to help organize these expenses a little easier.
Here are some of the basic categories I use or have used before:
- Mortgage/Rent
- Credit/Debt
- Haircut
- Electric/Utilities
- Spending/Eating Out
- Groceries
- Retirement
- Savings
- Other (Subscriptions, etc.)
Admittedly, I am a spreadsheet geek and I do almost all my tracking through a Google Docs spreadsheet I created. If you’d like to use the one I have created, feel free to download it below by joining our mailing list by subscribing to our email list below.
It’s a whopping cost of Free.99.
Now, this doesn’t need to be perfect but the only way to control your money is to understand where it is all going. In this review of your most recent statement, you may find some pretty interest and eye opening finds.
For example, the very first time I did this, I found out that I was spending nearly $200 a month on fast food. I know, I know…gross. However, these purchases never added up to more than $10 or so here and there in the moment.
The point being that these small purchases added up to $200 over a month’s time. That’s $2,400 on fast food per year.
Step 2: The zero-based budget
There are a ton of great tips on how to budget your money. You can use the cash envelopes system, the 50/30/20 budget, and the ‘no’ budget.
The key here is to find the system that works best for you.Again, all great tips on how to budget.
Also, here is a pro-tip. It is okay to experiment over a couple months to find what works best for you. For this article, I am going to discuss in more detail the budget I used to help me pay off $10,000 in debt and save over 30% of my monthly income.
The zero-based budget.
The zero-based budget is a budgeting strategy that basically lines up all your expenses (including savings/retirement) then factors in your monthly income.
The goal is that you are accounting for every dollar of income through expenses and savings.
So after subtracting all expenses and savings from your monthly income, you reach the magic zero.Hence, the name “zero-based budget”.
Here is an example of what I mean:
What I love the most about the zero-based budget is that it puts a visual to accounting for every dollar of your income. Now, you can choose to do this on a monthly-basis or you can choose to do it for each paycheck you receive.
Personally, I do this for each paycheck I receive. I account for all my expenses like rent, groceries, cell phone, casual spending, etc.
Then, I see what number is left at the bottom. Because my goal is to make that number zero, I then input the remainder into my savings line item.
Out of all tips on how to budget this strategy has really helped me accelerate my savings accounts goals.
Action Plans
If you’re under budget
So, you’ve finished under budget. Congratulations! This is an amazing place to find yourself in. This is because you are living below your means and is the first step towards financial freedom and achieving your financial goals.
So, now that you are under budget. You may be asking, what’s next?
Well, it really comes down to your personal situation but it typically will break down to the following 3 action plans:
- Pay down debt
- Save towards emergency fund or sinking funds
- Investments (Retirement, Real-Estate, etc.)
First and foremost, if you are paying off debt that includes any form of high-interest debt. You need to allocate every single penny of extra dollars in your budget to this headache.
This is because high interest rate debt is your worst enemy on your path towards financial freedom. Do not get caught in the minimum payment trap.
If you are free of credit card debt or other forms of high-interest rate debt, it may be time to build or beef up your emergency fund. Your emergency fund should typically cover 6-9 months worth of your monthly expenses in the event you lose your job or face any sort of financial emergency.
If your emergency fund is beefed up, then consider saving towards sinking funds. Some categories could include shopping, travel, home repairs, car repairs, concerts, etc.
Stashing money into sinking funds keeps your budget on track.
For example, let’s say you suddenly experience a flat tire and need to get it replaced. Well, since you have a car repairs sinking fund, you can just withdraw from those savings versus having to rely on the next paycheck to pay for the unexpected expense.
When it comes to retirement and investing, you should aim to do this simultaneously with your savings goals as long as your emergency fund is in place. For me, I split half my total monthly savings between my retirement and sinking funds.
If you’re over budget
Yikes. You’ve completed your zero-based or other budgeting strategy and realized you are over budget. Well, no worries, this happens to all of us. This was me for the longest time. However, I am here to tell you it is okay and you will succeed.
The key here now is to begin exploring your purchases and expenses. While reviewing these expenses, it is time to trim the budget and begin to cut back on some items to move us back under budget.
I know, I know. You really love that Disney+ subscription and you really love your morning iced lattes. However, you must realize that by not living below your means, you are never going to improve your financial situation.
Here are some common areas to look when deciding to trim expenses:
- Morning coffee runs
- Subscription services
- Gym memberships
- Eating out everyday
- Bars/clubs
These are all areas that you should strongly consider eliminating altogether or reducing.
For example, if you are stopping at Starbucks every morning for a cup of coffee. Here is how much it is costing you.
Assuming the average Starbucks drink is $5:
- $35 per week
- $140 per month
- $1,680 per year
Another example, let’s say you eat out at work every day.
Assuming you spend $9 per meal:
- $45 per week
- $180 per month
- $2,160 per year
With these two examples alone, they are eating up over $300 per month of your budget.
Now, I am not saying that you need to cut back on the things you truly love spending your money on.
I spend without worry on things like travel and concerts because these are things I love to do.You should spend guilt-free on the experiences and items that truly bring you joy and happiness.
However, if you are finishing over budget without any money left over to save or put towards retirement, you will continue to be stuck in the dreaded living paycheck to paycheck lifestyle.
Bonus tips on how to budget
For those who are finding themselves over budget, here is a bonus tip for you. I warn you ahead of time, this may be a bit uncomfortable. However, it is going to free up a ton of monthly income for you to get you closer to your goals.
You are going to need to print off your most recent bank statements. I’m talking about everything that you may use for your monthly spending. This could be credit cards and bank debit card accounts.
Now, I want you to take your favorite color highlighter (or whatever is available) and highlight every line item that is a “want”. Not sure how to classify wants versus needs?
Let me help you:
- Wants – Anything that is not essential to your survival
- Needs – Food, shelter, transportation (to and from work)
Coffee runs, eating out, streaming service subscriptions, clothes, these are all examples of wants. By the way, when I mentioned clothes, I mean excess shopping. Of course, please wear clothes.
Now, add up all the dollar amounts to your wants and I want you to reduce that number by 25%. Congratulations, you just freed up an extra 25% of income per month.
For example, let’s say you found out these wants all added up to $700 per month. You just freed up an extra $175 per month.
$700 x 0.25 = $175
You will apply this $175 savings goal to your following month’s budget. My challenge to you is to increase the percentage you reduce by 1% every month. So for the above example, in month 2, you will reduce by $182.
$700 x 0.26 = $182
Resources
You now have the tools and tips on how to budget so that you can start on the badass path towards financial independence and breaking free from the living paycheck to paycheck lifestyle.
Below are companies that I’ve partnered with to offer some excellent products and services to help you achieve your goals, financially.
By following the links, the website may receive compensation. Please review ourdisclosure policyandprivacy policyfor further details.
Even Financial
You’ve got your budget and you are making some real progress. However, you are realizing that the high interest rate credit card debt is dragging you down. It may be time to consolidate that debt into a lower interest rate loan. This is exactly what I did.
Even Financial offers a wide array of loans and services to help eliminate that credit card debt.
CIT Bank
After budgeting, you realize that you are ready to start building that emergency fund or saving for that trip overseas. CIT Bank is a FDIC-insured financial institution who offers a great set of high-yield savings accounts and other financial products. For an emergency fund, I do believe it is smart to keep it separate from where you keep your primary checking account. Out of sight, out of mind.
I hope you enjoyed this tips on how to budget article and of course please leave me a comment below on what you found value in.
