Budgeting – wow, super fun topic right?
For many years my income was the same from paycheck to paycheck and I had a decent understanding of what was coming in and going out. However, when I left my job and started freelance work a number of years ago, I suddenly felt overwhelmed because with a now highly variable income, I had no idea if I was in the red or the black when it came to my spending. Financial security has always been important to my peace of mind, so I realized that I had to bite the bullet and start a formal budget.
So I dived into learning about personal finance. I tried all the methods. I tried cash envelopes, I tried different apps, I tried this, I tried that – and ultimately, I settled on the system of zero-based budgeting which I have now been using for almost 3 years with great success.
Do I Have to Budget?
Can you survive without a budget? Yes, I did for many years. However, nothing will contribute to a sense of security and peace of mind than being on top of your finances.
I see budgeting as a spiritual practice. Truly nothing will highlight any low areas in your life quicker than listing out all of your expenses and having to categorize them. You will start to question what’s the point of even existing when you see that OMG FOR THE PAST 4 MONTHS I HAVE PAYING $7.99 PER MONTH FOR A STUPID MOBILE GAME SUBSCRIPTION THAT I DON’T EVEN PLAY ANYMORE. These moments will make your stomach drop, but I welcome them. That queasy feeling means you’re getting on top of your own sh*t.
Some additional pros to budgeting include:
- It shows you where your money is going
- It helps you identify waste
- It helps you make financial decisions
- It helps you reach your goals
- It can help keep you from accumulating further debt
What is Zero-Based Budgeting?
As mentioned, there are many methods for budgeting, but the only one that I have found useful to getting a handle on my finances has been zero-based budgeting.
It’s relatively simple. It is a method that has you allocate all of your income for a set period of time to expenses (both needs and wants), short- and long-term savings, and debt payments. The goal is that at the end of your budget period, your income minus your expenditures equals zero.
How Do I Start?
Every budget should account for the following categories:
- Income: including paychecks, side hustles, gifts, interest, inheritances, etc. Any money that is brought into your bank account should be included.
- Fixed bills: the amounts of these stay the same each payment period. Examples include –
- Housing
- Subscriptions or memberships
- Internet & phone
- Insurance
- Variable bills: the amounts of these fluctuate each payment period. This could include –
- Utilities – electricity, gas, water
- Tolls or parking
- Taxes
- Short term savings: these are things that you plan to do or purchase in the next five years (i.e. trips, Christmas savings, home remodeling, new cars).
- Long term savings: these are longer term savings for more than 5 years in the future. For example –
- Retirement
- Down payment for a home
- Emergency fund
- Children’s education funds
- Daily life: this includes any category of day-to-day spending. This will be somewhat variable per person, but it includes both needs and wants. Some general examples include –
- Food: groceries, fast food, dining out
- Entertainment: concerts, movies, books, hobbies
- Household: cleaning supplies, furniture, decor
- Personal: haircuts, nail appointments, personal care products
- Transportation: gas, transit passes, vehicle maintenance
- Kids: allowances, clothing, field trips, toys
- Pets: food, toys, vet
- Debt repayment: some examples include –
- Student loans
- Car loans
- Credit cards
- Personal loans
It’s generally recommended to “pay yourself first”. This means to set aside the amount that you’d like to save for long term savings. Then subtract bills and debt payments. What you’re left with is the amount that you can spend on different areas of daily life and shorter-term savings.
The big question is – once you have accounted for all of your fixed expenses, how exactly should you allocate the rest of your money? This question has a million different opinions, but ultimately it comes down to – what are your goals?
For example:
- Are you saving for a house? You’ll likely want to drop more into savings and less on daily life expenses.
- In debt? Best to focus on that and maybe less into savings.
- Life is good? Look at a balance of saving for a rainy day, while allowing yourself a couple of the extras that you can afford.
- Life is tough? Do what you need to do to survive. Focus on essentials and don’t beat yourself up. Keeping a budget will be essential for you in order to keep afloat on a tight income.
With sky-rocketing housing and living costs, it can be depressing to start to dive into personal finance recommendations as they’re sometimes just not realistic. Obviously I’m not a financial advisor, but my school of thought on this (and most things) is just to do the best you can.
However, if you are looking for some specific guidelines, here are some of the more popular guidelines:
- 50/30/20 budget (most popular)- 50% for necessities, 30% for wants, & 20% for savings/debt
- 70/20/10 budget (can be better for lower incomes)- 70% for necessities, 20% for wants, 10% for needs
- 80/20 budget (simplified version of 50/30/20) – 20% on savings, 80% on everything else (includes both needs & wants)
- 7 Baby Steps (can be good if you have a lot of debt)
Taking all of these aspects into practice, here is a walkthrough of how I personally do zero-based budgeting to help visualize general budgeting practice.
Please check out my FREE Excel Zero-Based Budgeting Template
(it’s saved my life for 3 years)
