Everyone needs a budget. Not one that is restrictive or deprives you, but one that relaxes you since you know your money is going to the right places.
Budgeting is all about being intentional with your finances. Think of it as a plan or roadmap for your money. It organizes your expenses to help you meet your goals.
Here are a few tips on how to create a budget that works for you and stay on track.
How to Budget
Figure Out Your Income
The first step in budgeting is understanding exactly how much money is coming in each month. You want to look at your net income, the money you take home after taxes.
If you have side gigs, freelance work, or passive income, include that too, but note that it is variable.
Choose a Budgeting Method
There are plenty of ways to budget. Not every method will work for everyone. People have diverse habits, personalities, and approaches to managing their finances. Try a few different methods to find the one that fits your lifestyle. Forcing yourself to use a budgeting system you don’t like will result in failure.
A few proven methods are:
- 50/30/20 Rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment.
- Envelope Budgeting: Put cash in envelopes for each spending category. When an envelope is empty, the spending stops.
- Zero-Sum Budgeting: Give every dollar a job. Your income minus expenses should balance out to zero each month.
A good place to start is the 50/30/30 budget. What’s great about this method is that it provides a framework to save, manage debt, and indulge yourself all at the same time.
If you live in a high-cost area, such as New York or San Francisco, you may need to adjust the percentages to 60/20/20. The important thing is to make sure that you save at least 10% of your income and have money to spend freely as you like.
Prioritize Debt
Debt repayment should be a significant part of your budget plan. High-interest debt can drain your resources and make it harder to save. Pay down debts with the highest interest rates first. One method is to consolidate multiple balances into a personal loan for credit card debt. Consolidating debt can simplify repayment and lower your overall costs.
Create Your Budget
Write down all your monthly expenses: rent, car payments, gas, groceries, utilities, child care, gym membership, etc. Assign money to each category. Ideally, you will have money left over for wants, savings, and debt payments.
Distinguish Between Your Wants and Needs
A need is something essential to your life, such as rent, utilities, or your phone bill. A want is something that you can live without, like designer clothes.
Some items are more challenging to classify than others. For instance, organic groceries. What is important is to prioritize where your money goes. You can splurge on wants, but make sure to prioritize having the funds for essentials, such as rent.
Pay Yourself First
Treat your savings like any other bill. As soon as you get paid, set aside a portion of your paycheck before you spend it on anything else.
Adjust as Needed
Life isn’t static, and your budget shouldn’t be either. Review and tweak your budget regularly to reflect changes in your income, expenses, or financial goals. One month, you may spend more on groceries, and another month, utility bills will be higher; adjust accordingly.
You can also transfer money from one category to another within the same month. Not letting yourself shift money between categories can make budgeting too restrictive and harder for you to stay on track.
Budgeting Hacks
Now that you’ve created your basic budget, let’s explore some tips to help you stay the course.
Treat Yourself
A good budget lets you spend money freely on what you want (and can afford). Set money aside for anything you’d like. It could be for treating yourself to a concert, a new dress, or a latte.
The important thing is that your budget is not restricting you. You can spend freely and know what you can afford.
Automate Everything
Automation is your best friend. Set up automatic transfers to your savings, retirement accounts, and debt payments. When you automate payments, you’ll never be tempted to spend the money elsewhere.
Track Your Spending (At Least at First)
According to a NerdWallet survey, 84% of Americans with a budget say they exceed it. One way to avoid this issue is to track every dollar spent. It might sound tedious, but it works. Write down every cent you spend to see where your money’s going. Tracking spending helps you stay in control and see where you can cut back.
Create a Wants List
Have you ever seen something expensive you’d like but don’t need? We all have. Instead of making that impulse purchase, put it on a ‘wants’ list. That way, you can save up for the item rather than buying it now and later regretting it. Once you’ve saved up, go ahead and make the purchase.
The waiting period also makes you reevaluate whether you really want the item after all.
Use Cash
Swiping a credit card can make spending feel invisible. Paying with cash is a more personal experience.
Use cash for categories where you tend to overspend. It could be new clothes, coffee, or dining out. Whatever your indulgence is, cash will make you more aware of where your money is going. When the cash runs out, that’s your signal to pause.
Put Funds Away for Emergencies
Life loves throwing curveballs. And often, these curveballs are expensive. The best advice is to build an emergency fund to dip into as needed. Experts recommend having at least three to six months of living expenses stashed away.
That can be a lot of money, so start with $500. Then, build up your fund with consistent small payments every month.
Don’t Forget About Sinking Funds
Sinking funds are mini-savings accounts. They are used for predictable but irregular expenses like holiday gifts, car maintenance, or annual insurance premiums. By saving a little each month, you avoid last-minute budget chaos when those bills arrive.
Check-In on Yourself
Budgeting doesn’t work well when you set it and forget it. Schedule a regular money check-in – daily, weekly, or monthly – to make sure you’re on the right track. Review your spending, celebrate wins, and tweak your plan accordingly.
Save on Insurance
Take time once a year to shop around for better insurance rates on auto, home, or renters policies. Comparing quotes can save you hundreds of dollars annually.
Conclusion
When you build your budget around restrictions or deprivations, it’s doomed to fail. When done right, budgeting is all about freedom. A good budget allows you to see where your money is going and provides you with funds to spend as you like. You gain control over your finances rather than letting your money control you.
