You’ve tried your hand at budgeting and can’t quite seem to get it right. Despite your best efforts to follow the advice of financial experts, use the savviest apps, or track your spending through your bank’s online portal, your budget continues to blow up in your face month after month.
Or maybe you’ve been flying by the seat of your pants and never quite followed a budget. And now you need to save up for a special event, trip, or to meet a financial goal. But you don’t know how to control your spending to free up income.
Either way, you need a budget that’s functional and will help you escape financial ruin or accomplish whatever goal that’s on your radar. By following the instructions found in this guide, the spending plan you develop will work. Even better, it won’t take much of your time and you can kiss the days of pulling your hair out over your budget goodbye.
Ready to get started? Fantastic, but before you whip out your notebook and perform a mental dump of expenses and income, there are a few steps you should take to ensure your budget is successful.
Select a Budgeting Method
The method you choose will depend on where you are financially and what you’re looking to accomplish in the near future. Two popular options to choose from:
The Zero-Based Budgeting Method
This approach is straightforward and popular among consumers. In a nutshell, it mandates that every dollar has a name on it before the month starts. For every dollar of income that comes hits your checking account, there must be a corresponding expense. So, if you create your budget and still have $5 of income left over, allocate it to an expense category.
If you have minimal disposable income after covering expenses, this budgeting method should not be difficult to pull off. However, if you have a hefty amount of disposable income, which isn’t a bad problem to have, you could find it more time-consuming to adjust your spending plan until the bottom line is zero.
The 70:20:10 Method
Is debt payoff at the top of your list of financial priorities? If so, the 70:20:10 method may be a better fit. Under this approach, allocate 70 percent of your income to expenses, while the remaining 20 and 10 percent will go to debt and savings, respectively. (You can also swap the 20 and 10 percent for savings and debt if saving money is your top priority or your debt balances are under control).
Keep in mind that every dollar still has a designated function before the month starts, similar to zero-based budgeting. However, following this approach ensures you hit your debt-payoff or savings target by limiting the amount of income you allocate to other expenses.
The 50:30:20 Method
The 50:30:20 method is for individuals in decent financial shape and desire to live a little. Why so? Since you can only use 50 percent of your income for needs under this approach, debt balances must be little to non-existent to pull this off. You will have 30 percent at your disposal to spend however you please. And the remaining 20 percent will go towards your cash stash and investments to secure your financial future.
The Budgeting Process
Have you selected a budgeting method and are ready to get into the nitty-gritty of budgeting? If so, here’s a breakdown of how to create your budget, along with prep work to set yourself up for success:
What You’ll Need
No need to go out and spend a fortune on fancy notebooks or budgeting software. In fact, it’s not even necessary to download a budgeting app to your smartphone or computer. All you’ll need is a piece of notebook paper, pencil, and lots of patience.
If you’d prefer to draft up your spending plan electronically, Microsoft Excel or Google Sheets will suffice. Be sure to send a copy to yourself once complete in case you’re unable to access the file later on for any reason.
A Step-By-Step Approach
Step 1: Adopt a Positive Money Mindset
Sorry to break it to you, but nobody budgets just to budget. There has to be an incentive. Think about it: no matter how much you love your job, you go to work every day to earn a living. The same rule applies when creating a budget: you should be doing it to accomplish a particular goal beyond paying bills and surviving. Otherwise, you will quickly throw in the towel and revert to your old habits.
This also means ending the perpetual cycle of only being disciplined when the well is running dry (a week before payday after you’ve blown your check) and spending recklessly the moment the next paycheck rolls around.
Easier said than done, so you have to commit to changing your mindset and believing your budget will work.
Step 2: Set Financial Goals
Perhaps the most exciting part of budgeting is setting financial goals. They’re the final destination you’re trying to reach or the light at the end of the tunnel. It’s the reason you’re following a budget in the first place.
You should have three sets of financial goals:
- Short term- anything you wish to accomplish in the next year (i.e. build an emergency fund so you can sleep better at night)
- Mid-range- anything you wish to accomplish in the next two to five years (i.e. save up for a downpayment on a new home that’s spacious and in a safe neighborhood)
- Long-term- anything you wish to accomplish in the next five to ten years (i.e. quit your job, open a restaurant or add more money to your 401(k) retirement account)
Make your goals exciting and worthwhile. Think about the why; getting out of debt is boring but getting out of debt to travel to Hawaii is more enticing.
But don’t just write them down and shove the list in a drawer. Instead, start with the top short-term goal, quantify it, and set a deadline. For example, if you want to save $1,200 for a cruise in the next year, you know you’ll need $100 each month to pull it off.
*Quick note: these goals may change over time as your finances evolve, which is normal. The idea is to get excited about budgeting and have something to work towards.
Step 3: List Your Expenses
Next up: listing expenses, which can be the most time-consuming part of the entire process. But why do we start with expenses? Simple. It’s tempting to spend as much as you bring in so it’s best to take a snapshot of your expenses so you’ll know exactly how much you need to cover your monthly obligations.
Make a list of all the expenses that come to mind and review your account and credit card statements to add those items you may have missed.
Once you’ve done so, rearrange expenses so needs come before wants. Then take things a step further by converting variable expenses into fixed expenses. For example, if your electric bill ranges between $150 and $200 each month, make the expense amount $200.
Next, jot down the amount you wish to give to church or charity, followed by your savings and other financial goals for each month at the top of the list of expenses.
Your finished list should look a little something like this:
- Category 1: Giving
- Category 2: Saving
- Category 3: Financial Goal
- Category 4: Needs
- Category 5: Wants
Step 4: Account For All Sources of Income
List your net income, or the amount deposited into your bank account on payday, above the expense items. Be sure to include side hustle and part-time income.
*Quick note: if your income is variable, use the fixed portion and save what’s left for income smoothing at a later date. So, if you are a freelancer earning between $3,000 and $5,000 monthly, but $3,000 is the absolute minimum, use this figure as your income. Stash away the remaining $2,000 and use it when you take time off or if your business takes a dip.
Step 5: Put it All Together
Compare expenses to income and allocate any remaining income to your giving, saving, or financial plan until the sum is zero. As mentioned earlier, regardless of the budgeting method you select, account for every dollar prior to any income hitting your bank account.
Step 6: Make Adjustments
Have more bills than money? You have two options: go back through your budget and cut expenses ruthlessly or prioritize expenses from least to most harsh consequence until you make more money. For example, you need a roof over your head, food to eat, and utilities, so it makes sense to pay the rent, buy groceries, and pay your utility bill on time.
If the latter applies, make earning more money a priority sooner than later to protect your credit rating. In addition, it’s worth reaching out to your landlord, service providers, and creditors to see if they’ll work with you until you get back on your feet financially.
Step 7: Rinse and Repeat
Follow this approach each month and make adjustments as you see fit until you get the hang of things.
Useful Budgeting Tips and Tricks
Before you dive in head first, here are some other tips and tricks to keep in mind to boost your chances of having success with your budget:
It’s one of the oldest tricks in the book, but you can use envelopes to stay on track. Here’s how it works: you create a spending plan as outlined in the steps above but withdraw any funds allocated towards variable expenses, like dining out and entertainment, and place them into an envelope. The envelope system also works well for groceries, too.
Once the money’s gone, that’s it until the next payday. Your budget will work if you do this. And if something comes up, you can always revert to what you saved at the beginning of the month when you paid yourself first. This approach works like a charm, so if you’re having trouble with your budget, it’s worth a shot.
If you prefer a more tech-savvy approach, budgeting apps are always an option. But only go this route once you’ve gotten the hang of this budgeting thing. Reputable options include You Need a Budget, Mint, and Wally. Your bank may also offer a spending tracker.
Help! I’ve Tried Everything and My Budget Still Isn’t Working
- Are your expenses realistic? If you’re budgeting for $200 at the grocery store and spending $400, your budget will fail. A better idea: review all your expenses to ensure they’re realistic to avoid setting yourself up for disappointment.
- Are you leaving something out? Maybe you have a bill you only pay quarterly and forget it exists until the due date rolls around. Break it down and try to chip away at it each month. If paying each month isn’t an option, deposit the funds into a savings account so you’ll have enough when the bill comes due.
- Are you clear on your due dates? If not, you’re likely paying late fees. So, it’s best to call the service providers and creditors to get due dates adjusted if they’re causing problems for your budget.
- Are you over-complicating things? Maybe you’re overthinking things or trying to follow a complicated app without having a handle on budgeting just yet.
- Are you feeling entitled? Maybe you’re throwing in the towel because you feel too restricted by your new spending plan. But remember why you started and use it as motivation to get you through the rough patches.
The Bottom Line
Building a budget that’s guaranteed to work isn’t always easy business when starting out, but you’ll eventually get the hang of it and your efforts will pay off.