What is a budget?
A budget is a spending strategy that helps organize your finances each month.
Why are budgets important?
Creating a budget can help you control spending habits and make your money work for you. Budgets build financial stability. They help you create healthy spending habits, prepare you for emergencies, help you build your credit score, save for those major purchase like a home or a car and set you up for a comfortable retirement. Budgets are key to living your best life for both day-to-day and into the future.
Set some goals
Now that you know what a budget is, the next step is creating one. But first, think about what you want to accomplish. Identifying your financial goals can guide you to build a budget that suits your finances.
What are your aspirations? Thinking about what you want now and down the road helps you form the foundation for your budget.
Set your budgeting goals around what's important to you. Use this budgeting guide to see how much money you're bringing in and how much needs to go out. What's left over can be used to help you meet your aspirations.
Decide what you want
If you're wondering where to start, it's with that long-term goal. Sit yourself down and ask serious questions about the future and be conscious of where your mind goes. If you're having trouble honing in on that goal, check out Financial Goal Setting for more tips on clearly seeing your long-term financial goal(s).
Set small goals
Deciding how much you spend is easier if you have a goal in mind. Whether you're looking to put aside money each month or planning for early retirement, it's important to be specific and honest with yourself about your own needs rather than following the suggestions of others.
When breaking down your goal into smaller tasks, remember to keep it simple. Setting the bar too high can de-motivate and discourage. When organizing your small goals, "SMART" is a helpful acronym to use as you get organized:
- Specific: A specific goal is something clearly defined or identified.
- Measurable: A measurable goal can be quantified.
- Attainable: An attainable goal is something that is possible.
- Realistic: A realistic goal is something that can be achieved by you or others.
- Time bound: A time bound goal has a deadline.
Create actionable tasks that feel doable, not daunting.
Once you've landed on your goal — tell your friends, write it down or make a vision board if that's your thing. Do whatever it takes to continue reminding yourself of the big picture. Then, set a deadline. Break down your goals into tasks and map out a timeline. Once your intentions are clear, it's easier to build a budget that fits your needs and the 50/30/20 budget rule is an easy way to get started.
Before you know it, you'll be well on your way to a brand-new path of good saving habits.
How to start a budget that’s right for you
There are three types of expenses to consider when building your budget.
- Fixed – amounts that do not change often (rent, mortgage, car payment)
- Variable – likely to change based on purchase or use (food, gas, personal care)
- Non-monthly – expenses that may come up unexpectedly (emergencies, gifts, travel)
So, the equation for budgeting breaks down into:
Income - fixed expenses - variable expenses - non-monthly expenses = money for goals
Non-monthly expenses and emergency funds are part of budgeting wisely. Each takes intentional effort and planning. Emergency funds help you stay away from using a credit card and eliminate the need to drain money from other savings goals when unexpected events hit. They help you keep enough cash on hand to cover deductibles or minor incidents. For emergency funds: try to save six to nine months of funds to cover any essential expenses. Think of it as insurance for your budget!
To start, imagine your budget has two parts
- Money coming in.
- Money going out.
So where does the money go? Is your money going to pay the rent or the mortgage? Utilities? Food? Clothing? Lattes? Take a few minutes to think about it and write down where your money is going.
If more money is going out than coming in, see if there are places where you can cut back a little. But don't go 0 to 60 when making changes to your budget or spending habits. You're more likely to succeed by taking small steps toward a change.
Organize your finances
You've got a solid base to build from, now let's talk about organizing that budget.
Here are some options to explore:
- Create expense buckets – Organize your account(s) then assign an account to each expense.
- Allocate to multiple accounts - You can use automatic transfers between multiple accounts to allocate your money to separate expenses and goals.
- Be mindful of spending habits - Automate expenses that are more routine to help you reinforce and protect good spending habits.
- Set up automatic transfers - Automatic transfers between multiple accounts can help you separate your various expenses to help make sure you don't miss payments.
- Don't automate a bad habit
- Fund your accounts - Make sure you have the money in your account when using automation.
- Set reminders - Set reminders and check-in regularly to make sure the multiple account system works for you.
Take a realistic look at your recent spending snapshot in detail, before you map out your budget
Whether you use an app, computer or pen and paper, choose a budgeting system that works for you. Start by recording where you're spending money. From there, compare how you're currently spending to how you need to spend based on your aspirations and goals. Look closely for spending that’s out of alignment. Typically, you’ll find these within your variable expenses.
Your new budget probably won't work if it's totally out of touch with your current spending habits. A spending snapshot will give you a starting place to build a personalized and realistic budget that you will be more likely to stick to.
When you know where your money goes, you can uncover where you can make cuts to your spending.
- List out all your expenses for the past 3 months and average them - If you list all your expenses (then categorize and average them) you will get a ton of insight on the best place to start to make changes to your spending. Typically, the more detailed day-to-day expenses are the ones we can impact the most, and the most quickly. That's why it's important to track the details of your spending.
- Determine if the spending is in line with your priorities - Simply said, your spending should reflect the priorities in your life.
- Tell someone you trust one thing you want to change each week - Excuses may not be as easy to come by when a friend, partner or parent is on your side. Tell them your goal and ask them to follow up with you on it. It might make some spending feel less like a need when you're anticipating explaining the why to someone (who isn't you).
Create a spending plan
Start making a spending plan before you get the money.
Whether you want to spend it all, save it all or something in between, make sure it's on purpose. Having a plan in place for the money before it's in your account can help you resist the urge to spend it before you have it or overspend. Money can disappear fast, especially when you're not keeping track of where and when it's being spent.
Here are a few spending plan ideas to help you stay on track:
Set a weekly budget — starting on Monday
When the money you allotted for the week is gone, you're done spending for the week. This can help you be more selective during the week when choosing to spend at events, meals out or a quick coffee — you name it. Especially if you're likely to spend more when the weekend comes, it can be helpful to get an idea of how much you will have left over throughout the week.
No spend days
How many days in a month can you turn into no spend days? Keeping track of your progress can help you see how well you're doing and keep you motivated. There are certainly days when not spending isn't an option and that's okay.
Cash only night out
Night on the town? Street fest? Weekend away? Only bring the cash you allot for the occasion. Dodge the surprise (or impulse) purchases.
Carpool vs. solo-ridesharing
Ridesharing offers options! Have the extra time? Take a rideshare pool vs. a solo ride. You'll save some bucks and maybe make some new buds.
Build up savings
Get a jump start on saving and planning for your future. Here are just a few options to think about when it comes to your savings plan:
- First, consider different savings buckets.
- Beef up your emergency fund to help protect your budget from the unexpected, like car or home repair. Calculate how much you need.
- Consider employer retirement options (typically a 401k) or an IRA.
- Put extra money in your Health Savings Account (HSA) if you are anticipating any upcoming medical bills.
Focus on your debt repayment
Make a list of all your debts, their interest rates and the remaining balances. Then, prioritize your payoff strategy, either focusing on your highest interest rate or lowest balance first. When you pay off one debt, roll the amount you were paying in to the next one.
Invest in yourself
Interested in starting a side gig or pursuing a new business opportunity? You can invest in your future by upgrading your laptop or taking that accelerated skill course. Enjoy your hard-earned money by making a plan you feel good about. While most prudent savers balance spending and saving, remember it's all about putting your money toward what's most important to you.
According to Cleveland Clinic, they have found that success can initiate dopamine which is linked to pleasure and — more importantly — motivation.
Download the Budgeting 101 Worksheet and break down your budget today. Remember to think small to win big.