A budget is a great tool for helping you get your spending on track to reach your financial goals. If we’re being honest, most of us are probably living outside of our means, especially in these difficult financial times.
Learning how to budget effectively is important, whatever season of life you are in, whether you are a single individual or creating a sustainable budget for your family. We all have financial needs and goals! By creating a budget, we are also being good stewards of the resources we have been given and making sure that our money is being used in the best way possible.
different budgeting methods.
There are lots of options when it comes to budgeting methods. Some of the most popular budgeting strategies include the zero-based budget, the 50/20/30 budget, the envelope method, and the pay-yourself-first method.
The zero-based budget is essentially taking a certain period, generally a month, and allocating all of your resources down to zero. Meaning that each month, you are starting from a “zero” base. This method is unique because it takes into account each month individually, allowing you to reassess your needs regularly. Each month can look a little different, depending on the resources coming in and varied spending needs.
The 50/20/30 method is also a very popular budgeting strategy. First, you take 50% of your net income and apply it to your needs. The next 30% is applied toward your wants. Finally, the last 20% of your net income is applied towards your savings. Similarly, the 60/30/10 budgeting method has also recently become popular. Essentially, it is the same principle, with 60% going to needs, 30% going to wants, and 10% going towards savings.
A really simple budgeting style is the envelope method. This method relies on using a cash system. I don’t know about you, but I find it much harder to spend cash versus credit! Because of that, the envelope method can be great for those trying to curb impulse spending.
Likewise, some people might find that using the envelope method is great for a short period, especially when saving for something in particular, to bolster your savings account, or when planning a trip. For this method, you withdraw a sum of cash each month and divide it into envelopes based on your personal spending needs. Categories can include groceries, gas, bills, etc.
Finally, the pay-yourself-first method is just what it sounds like. You treat saving money as a “bill,” choosing first to pay yourself before allocating the rest of your funds to your needs and wants. This method is simple and allows you to focus on prioritizing your savings.
Below are eight steps to create a budget strategy that works for you.
understand your spending before creating your budget.
Before creating a monthly budget, it is first important to understand where your money is currently going. In the age of credit cards, DoorDash, and online shopping, most of us are probably spending more than we realize!
To get a clear idea of your current spending habits, review several months of your statements. This will help you get a good average as to what you spend in each category, later helping you determine your budgeting needs.
Seeing these numbers in black and white can be a shock, but take a deep breath, it’s going to be okay. Be proud that you are taking those initial steps to take back control of your spending!
Also, if you have a partner, it is important to be on the same page. By doing this task together, you can both hold each other accountable to staying on track with your financial goals.
calculate your net monthly income.
Once you have a firm grasp on your spending habits, it’s time to see how much money is coming in each month. This number is your “net income,” or the money you receive after taxes are applied.
If you are a W-2 employee and receive a pay stub, this is your net pay for that period. Let’s say, for example, that you receive a weekly pay stub. To find out what you take home each month, take the net amount earned each week and multiply by 52 weeks in a year. Then, divide the number by 12 to see how much your net income is each month.
If you are not paid with a W-2, figuring out your monthly net income can be a little tricky. In this case, you can look back on several months of bank statements and get an estimate of what you earn each month. If your monthly income varies greatly, you can also take into account whatever you “anticipate” you will earn for a particular month.
It’s important to err on the side of caution and always underestimate your net income to avoid any surprises. Especially with a varied monthly income, reviewing your budget regularly will be particularly important. Finally, if you do not receive a W-2, remember to always set aside 30-35% of your income to avoid a tax bill surprise at the end of the year!
itemize your expenses.
With a net income in hand, you can start to itemize your expenses into different categories. Your “needs” fall under your “fixed” expenses. These include things like mortgage, rent, and other bills. I also like to include tithing and savings in the “fixed” category, treating them like another bill each month. Generally, fixed expenses are the same amount each month and occur with the same frequency, so they are easy to place within your budget.
I find it particularly helpful to have a calendar bill tracker. This helps me see exactly what bills need to be paid each particular week. Since each month varies, I am better able to anticipate what is due and avoid any surprises. Also, this can be a great tool for making sure that your bills are spread throughout the month in a way that makes sense for your particular financial situation. For instance, for some, it may be really difficult if all fixed expenses occur in the first week of the month, while others might prefer to have their fixed expenses out of the way early on.
Your “wants” or variable expenses are items that may change regularly, such as groceries, gas, play money, shopping, etc. This is the area of your budget where you have the flexibility to add or trim as necessary to make sure you are spending within your means.
After itemizing your spending, take the time individually or with your partner to decide where your spending will go each month.
overestimate your expenses & underestimate your income.
Remember, it’s always better to be more prepared than under-prepared. For this reason, I find it super helpful to overestimate our expenses and underestimate our net income each month. This leaves a potential surplus at the end of the month, which is great, as opposed to leading to overspending.
live within your means - and trim where necessary.
Similarly, make sure that you are spending within your means. It is okay and often necessary to trim some of the items in your “wants” category. Yes, this may feel disheartening at the moment, but it is important to keep your eyes on your ultimate financial goals.
For some, it may come as a shock that they may not be able to allocate as much as they want to a particular category, and trimming might be necessary. For others, they may find they have extra funds left over each month that they can choose to allocate accordingly. Everybody’s financial situation is different, and it is important to be realistic when it comes to our situations.
utilize auto draft & auto saving.
I love utilizing auto-drafts for both paying bills and personal savings. This makes it so simple and does the work for me. I just use a monthly bill tracker so I know what to anticipate, and then let the bank do the rest of the work for me. This way, I make sure that bills are paid on time and avoid unnecessary late fees, which can add up!
Also, this is great for saving money too. I essentially treat our savings like a “bill” that is paid each month, ensuring we are prioritizing our savings goals.
experiment with budget tracking tools.
After you’ve determined your budgeting strategy, set your expenses, and created your budget, it’s important to find and utilize budgeting tools to help you stay on track. There are endless ways to do this. Some people, myself included, prefer to use an Excel spreadsheet and calendar tracker to keep track of their budgets. Others might prefer to use one of the many budgeting apps available. Experiment by doing some trial and error to see which budgeting tools are best suited to you and your individual needs.
review your budget regularly.
Lastly, make sure that you are regularly checking and updating your budget. I prefer to do this every month, as each month can look very different for my family. This will help you stay on track, make tweaks where necessary, and reach your financial goals faster.
Budgets do not need to be daunting or overly difficult. Instead, they can become a simple tool to ensure you are spending wisely and reaching your financial goals. Taking a little time initially to create that budget will be something you appreciate so much in the long run, especially when you see that savings account number start to grow!
