Have you ever asked a friend if they want more money? Has that friend ever told you “no”? Yeah, didn’t think so.
Everyone wants more money, and a lot of us are quick to jump to what we hope will be fail-safe, quick-working plans, like buying investment or rental properties, investing in the stock market, or saving for retirement. These are all great ideas, and if your goal involves owning a second home or racking up retirement savings via the investment world, go for it! However, I hate to break it to you: you’re gonna need a budget first.
The word budget often makes peoples’ stomach churn because they’re afraid that a budget will limit their spending, their fun, and well, their life. It doesn’t have to be that way! In fact, budgets can help you find financial freedom and answer questions about where your money goes each month. Have you ever checked your bank account and wondered where your entire paycheck went? A budget isn’t meant to trap you; it’s meant to enlighten you and guide you.
Okay, So What is A Budget?
Before you get sassy and rush to protest that you already know what a budget is, let’s just clarify a few misconceptions about budgeting:
- A Budget IS NOT saving your receipts and then throwing the whole pile away.
- A Budget IS NOT an unbendable contract; you can edit it as you go!
- A Budget IS NOT an idea of where you think your money goes. You need to physically track it.
- A Budget IS a monthly plan that is either written down or tracked electronically.
- A Budget IS created before the start of the month.
- A Budget IS a plan or allocation for every single dollar you earn.
RECAP: a budget is a written plan that helps you decide and lay out a plan for where your money goes instead of trying to guess where it might have disappeared to. Does that sound familiar? Don’t worry; it’s familiar for a lot of people. The best part is that while you might have created this challenge for yourself, you are also the solution, and your budget can help you regain control of your elusive paycheck.
How Do I Get Started?
There are a lot of terms used to describe different types of budgets, but for the person just starting out budgeting, try out a zero-based, line-item budget with a 50/20/30 split.
Let us explain, since that name included a lot of adjectives.
A zero-based budget is simply one that has $0 leftover at the end of the month. There is nothing “extra” in your budget, because that allows you to be careless with some of your money, and that won’t be a good habit for you to build up. So, having $0 leftover at the end of the month doesn’t mean that you’re broke or that you’re out of money. A zero-based budget ensures that on paper, you have “spent” every dollar that you made, whether it went to gas, to groceries, to taxes, or to savings. At the end of the month, your budget will look like this:
Amount of Money You Made – Amount of Money You Spent/Allocated Somewhere = $0!
A line item budget is one where you list out the different items that you spend money on an individual line to total up at the bottom. Let’s say that you budget $250 for groceries for this coming month, and you spend $70 on groceries on the 1st of the month, and then another $40 on the 10th for a party. So, when you go to buy more groceries on the 18th of the month, you have $140 left to spend (250-70-40 = 140). The total of your line items, along with the other items listed out, will get totaled up and subtracted from the income or paycheck(s) you get each month.
A 50/20/30 Budget is a budget where you spend 50% of your income on Needs, 20% on Savings, and 30% on Wants. This type of budgeting will benefit you in several ways. First, by the name of the categories alone, you are going to need to determine the difference between your wants and needs.
Assuming that you don’t have an unlimited supply of money or that your paycheck isn’t thousands of dollars a month, you want to be very selective about how your money is spent. You need to be very clear about how much money you have coming in, where that money goes out, and how quickly all of that is happening. Budgets allow you to keep tabs on your spending habits and allow you the opportunity to catch on to potential problems before they sneak up on you.
Budgets can also help you SAVE money. When you budget, you can identify unnecessary spending, like overdraft fees, late payment penalties, and interest on debts. Budgets keep you from knowingly spending money you don’t have. You can’t say you didn’t know you were overspending if you’re using a budget.
If you’re trying to pay off debts or just want to have more wiggle room in your financial situation, you need to know where you have opportunities to make a change. When you have a budget lined up before the month starts, you tell your money where to go instead of it running off on its own. You get to be in control.
How Do I Start?
First, you need to map out your goals. Think about what you want to accomplish with your budget. Why did you decide to start this budget in the first place? Are you trying to cut back how much you’re spending on eating out? Are you trying to find extra money to start building up your savings? Having your goals written out will motivate you to stick to your budget!
Next, make note of your take-home income. This will tell you how much money you have available to achieve those goals. Keep in mind that your take home income and your salary are two different amounts. Why? Because Uncle Sam takes a (sometimes fairly hefty) slab of your monthly salary and you get whatever is left. Mini vocabulary lesson right here:
- Gross Salary/Income – the amount that your employer pays you every month (probably a combination of 2 or 3 paychecks, remember!)
- Net Salary/Income – the amount that you get to take home after taxes and insurance and savings and whatever else gets pulled from your check. This is the amount that you want to use for your budgeting.
You’ll want to be sure that when you’re building out your budget you are working with your Net Salary, meaning that you subtract out your taxes, insurance, and any other deductions that you have taken from your paycheck so you have a true number to work with.
In this example, look at how much money came out for taxes and insurance deductions. You don’t want to have a budget all planned out where you think you have $2,400 to spend, and SURPRISE. No, you don’t.
This person would start building their budget off the idea that they get $1,412.90 every paycheck. Remember, you typically get 2 paychecks a month, so the monthly total in this example would be $2,825.80.
How Do I Know How Much Money I’m Spending?
Your budget is like a fake psychic. (I’m not going to get into a discussion about whether all psychics are fake or not; I’m just trying to illustrate a point. Stay with me!) The fake psychic tells you information that was previously unknown to you and makes you think that they have some sort of mystical knowledge, when they’re really just going off of information they gathered from you.
Your budget can only tell you what you tell it first. Tracking your expenses will tell you how much money you’re spending in each category, allowing you to decide if you want to spend that much in that category. You often don’t know how much you’re spending in different areas of your life, so how could you possibly set a budget for those areas? Tracking your previous month’s expenses can help you decide if you need to budget $75 for eating out or $175!
Tracking your expenses for each month is not difficult. It is, however, deliberate. It will eventually become a habit for you, but like any habit, it takes some time to develop. A #ProTip is to keep all of your receipts to help you identify areas where you spend your money and then you can make a category for each of those areas. The success of your tracking all comes down to your categories. Remember that you are allocating every dollar you spend, so make sure that you have a category for everything you spend money on. (Miscellaneous should not be a category, by the way.) Find a name for each category so you can evaluate your spending. Note that some of these are required expenses/needs, while others are supplemental/wants. Make sure you budget out your “needs” before indulging your “wants”!
Budget spending categories include:
- Rent or Mortgage Payment
- Internet and Cable (if you still rock that satellite dish)
- Cell Phone Bill
- Health Care
- Doctor Visits
- Health Insurance
- Eating Out
- Coffee Shops (for some of us, this requires its own category!)
- Personal Care
- Beauty/Personal Hygiene
- New Clothes
- Salons/Hair Cuts
- You may not use this money every month, but you can still save an amount every month and use it the next month!
- Children Expenses
- Kid’s Clothes
- Kid’s School Supplies/Expenses
- Christmas isn’t going to sneak up on you, so there’s no reason to not have savings going for that all year round.
- “Going Out”
- Savings – this one is SUPER IMPORTANT.
So important, in fact, that it gets its own section.
Wait, Savings is a Spending Category?
Yes indeed! Remember that you’re building a zero-based budget, so every dollar gets “spent” on paper before the month begins. One of the most important parts of budgeting is to pay yourself first. Paying yourself first does NOT mean that you buy yourself treats and toys first. Instead, paying yourself first means saving for your future first.
But that’s so hard… I get it. Once your money is direct deposited or cashed into your hot little hand, it can be hard to part with it for something as boring as savings. Try this trick with a direct deposit: have a set percentage of your check go directly into a separate savings account at the same time the rest of your check comes to your bank account. That way, you keep your savings account consistently fed without facing the internal torture of having to part with even more of your money.
Deciding how much money to save all depends on your individual situation. The 50/20/30 Rule suggests that you save 20% of your income, and if that’s too much for you, that’s okay. Just be sure that you’re saving something! What are you saving for? It’s your choice! You could save for retirement, emergency expenses like doctor’s appointments or home repairs, or planned purchases like a car or a home!
An easy way to save for retirement is to contribute to a 401K. If your company offers a 401K, or even better, a 401K with a MATCH, you gotta do it because a 401K with a match is essentially free money! In an employer match program, your employer will match your contribution to your 401K up to a certain percent. Your company may offer a 50% match up to a certain percentage or they may even offer a dollar for dollar match. Either way, a match program means the employer is giving you free money to add to your retirement savings. How cool is that?!
Budgeting is the key to all of your debt-free/saving money/financial freedom goals! For a little extra motivation, take a look at this savings calculator to see how much money you can make with consistent contributions and the interest you’ll earn over time. Check out some of these helpful websites to get started on your own budget!