If you've read any self-help finance books or listened to a money podcast, you know everyone talks about a basic rule: You need to make a budget. Budgeting gives you control of your money by giving you a sense of where it’s going, while also allowing you to create a spending plan so you’ll always have enough money to pay for the things you need and to save for the things you want. Here’s a helpful place to start when making your own budget.
According to a survey conducted by Debt.com, 8 in 10 Americans use a budget, which is up 10% over the past two years. It's clear more and more people are realizing the importance of budgeting and are seeing the benefits. Creating a budget means you’ll see exactly where your money goes each month, allowing you to cut back on what is unnecessary so you can save more money. Budget so you can figure out what's important to you, such as going on vacation.
If you have a partner that shares your living expenses, team up to make a plan. According to a survey by SunTrust Bank, money is the leading cause of stress in a relationship. If you aren’t on the same page about your spending, you’ll likely run into arguments when one person wants to splurge on something and the other thinks you should be saving instead.
It’s not over once you make the plan. Making sure everyone remains on the same page is crucial to a successful budget. Get comfortable asking questions of one another and raising issues or concerns as they arise.
Before you can even create a budget, you’ll need to dive deep into your current spending. You won’t know how to allocate funds properly until you know where your money is going and how much is going toward things like groceries, utilities, bills and miscellaneous expenses.
You can go through bank statements and put down numbers in columns and categories using a spreadsheet or even a notebook. You can also simplify the spreadsheet and simply divide expenses between housing, food, transportation (car payment, insurance, etc.), utilities (include cable and phone bills with water, gas and electricity), household items and personal. If you have kids in school or are saving for college, you can add an education column and try to save money on school supplies.
You can go through receipts the old-fashioned way to see what you spent on recent shopping trips. Add up the totals and jot that number down. As long as you have a solid grasp on how much you’re spending monthly on certain expenses, you can start the process of budgeting.
Your electric bill, gas bill and heating bill might not look the same every month and they are dependent on location. If you don’t have an idea of the average because you’ve lived in your location for less than a year, use an online calculator or err on the side of caution to make sure you have enough to cover those bills.
Make a list of all the things you pay that aren’t on monthly schedules. Life insurance policies, car insurance and even license plate renewals are all things you may have to budget for that you don’t pay every month.
Families should determine whether they are getting their money’s worth from subscription services, such as streaming, magazines and meal kits. Did that pizza dough from Blue Apron go unused? Might be time to cancel. How much are you paying for each streaming service? Is there one you use more than the others? Assess what the actual cost is for each of these subscriptions.
Not having to remember to make your car payment may be useful, but is it in the budget to always be paying your credit card off in full? Or worse, is there an auto-payment you forgot you are making for something you don’t use anymore? Going through your bank records and examining your auto-payments will help you get a fuller picture of your spending.
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Most people these days are relying on a budgeting tool instead of inputting numbers and figures themselves. Apps such as Mint and PocketGuard make it extremely easy to track spending by linking all of your credit cards and each bank account. To get the most accurate assessment of your spending and saving, make sure to link all accounts and every credit card you use. Mint is a free app and offers the option to create a personalized budget. When you link your bank and credit cards, Mint will track your spending and how well you’re sticking to the budget. You can also choose categories of spending and see all of your bills at a glance instead of having to go through paper bills and receipts.
Another key to getting your finances in order is to analyze your spending habits. Are you ordering takeout more than twice a week? Are you being a smart grocery shopper or not really paying attention to the stickers? According to the Bureau of Labor Statistics, the average household spends approximately $3,365 on food outside of the home each year. That’s $280 per month. Food is an essential expense, but it doesn’t have to break the bank. By budgeting properly, seeking out sales and clipping coupons, you can find ways to get everything you need for less.
This one is a given: You need to know how much money you have to spend — and you’ll want to save some of it too. Budgeting apps are useful for this, especially if you attach your bank accounts, allowing any direct deposits to be automatically factored into your finances. Once you know how much you’re bringing in after taxes, you can start to allocate that amount to your specific categories of expenses.
It sounds like simple math, and when organized correctly, it is. Whether you’re using an app or a spreadsheet, you’ll land on a number of what you spent. The remainder is what you were able to save during the month, and the goal of budgeting is to save more by spending within a limit.
Even little expenses like buying coffee everyday add up to be a lot at the end of the year. If you have a ballpark figure of what you want to save every month, it will be easier to gauge where you should cut on spending.
Senator Elizabeth Warren popularized something known as the “50-30-20” budget rule in her book, “All Your Worth: The Ultimate Lifetime Money Plan.” The basic rule is to divide your after-tax income into three major buckets and allocate your spending like this: 50% on needs, 30% on wants, 20% for savings. In Warren’s outline, the mandatory expenses, or the “needs,” include mortgage or rent, utilities, health care, basic groceries, transportation and childcare. The “wants” are cable/internet/phone bills, dining out, entertainment, personal care, shopping and travel. And as Warren’s plan states, the 20% left over at the end of the month allows people to handle unexpected expenses comfortably, pay off debt and prepare for the future.
There's a lot that can affect how much things cost and location is certainly one of them. To be better at budgeting, understand the cost of living in your area and do your research before settling on prices on everything from trips to the grocery store to shopping for a new roof. Some things you think might be reasonable could turn out to be expensive while other things you thought may be priced too high may be par for the course for your area. Knowing in advance will help you budget. Many sites have cost of living calculators and project calculators to help.
Big emergencies like unexpected unemployment can really put a damper on your financial goals, which is why experts suggest having the funds to cover three to six months of expenses in case you’re in that situation. You should budget with that goal for savings in mind if you don’t already have it.
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There is the fund for the unexpected job loss, but what if the car breaks down or you make a sudden trip to the emergency room? You should have separate funds set aside for the unplanned expenses like medical bills, and if you follow the 50-30-20 rule, that 20% in savings can be a lifesaver.
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No matter what method you use, tracking spending generally only shows where your money goes on a day-to-day recurring basis. But your budget should also factor in extra expenses like holidays and birthdays. At the start of the month, go through the calendar and mark any of these special days and either set out a specific amount to go toward them or spend less elsewhere to fit in gifts. If you did overspend on the holidays, here's how to recover.
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If you’re planning for something, make that a clear goal for budgeting to keep yourself focused. If you have a baby on the way or a wedding to save for, you won’t feel tempted to splurge on that new coffee maker or Xbox because bigger and better things are in sight.
One of the biggest budgeting rules is to set yourself up for success by creating a doable plan of action. If you start budgeting for the first time with hopes of saving more than half of your monthly income, it might end in frustration. Start small and work your way up to a desired savings account.
To hold yourself accountable, you can try the envelope system to save money. It involves putting cash in an envelope for different spending categories and labeling them. For example, one envelope can be labeled “eating out,” another can be “groceries” and “household items,” which includes cleaning supplies. You should try to spend only the money from the proper envelope on purchases of each category. And when the envelope is empty, you’re done for the month.
At the end of each month, it’s helpful to sit down and go over the month’s spending and savings and discuss ways you can improve your own system. You can adjust your budget based on what didn’t work and what went well, and once you have your own system in place, it shouldn’t be too big of an issue to make adjustments going forward. With the pandemic still affecting our day-to-day and spending, you can use a budget to save money while in coronavirus quarantine.
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