Budgeting 101

 

 

Why Everyone Needs a Budget.

 

Budgeting might seem boring or over-whelming, but it is a vital financial practice everyone should adopt. A simple, well-crafted budget helps you control your money and achieve goals. By creating a budget, you can find ways to cut expenses and save more. Whether you’re paying off debt or saving for a purchase, a budget is a powerful tool for reaching your objectives and securing your financial future.

 

Key Components of a Budget.

Income:

    • Take-home pay after taxes

    • Bonuses

    • Tips

    • Earnings from Side Hustles

Expenses: Fixed & Variable

Fixed expenses stay relatively the same on a routine basis, typically monthly or yearly and are easier to plan. Variable expenses can fluctuate in cost and occurrence, which make them more difficult to plan for. Lets go over some common examples.

Fixed Expenses:

    • Housing – Rent/Mortgage

    • Vehicle or loan payments

    • Insurance Premiums

    • Cell phone & Internet

    • Subscriptions

Variable Expenses:

    • Groceries

    • Dining out

    • Utilities

    • Gas

    • Clothing

    • Personal Care (haircuts, nails, etc)

    • Hobbies

Savings & Investments

    • Short-term Savings

    • Investing Accounts

    • Retirement Accounts

 

Steps to Create a Budget

When it comes to budgeting, there are so many different methods, so don’t get discouraged if it seems discouraging or frustrating at first. We will go over tracking income & expenses, setting goals, choosing a budgeting method, and implementing.

Pro Tip: Whichever method you choose, be sure to prioritize necessary expenses. You should always include these items although you can find ways to reduce your daily living expenses.

1. Track income and expenses:

A large part of budgeting is determining the difference between wants and needs. Remember, needs are things you can’t live without and wants are things you enjoy, but are not necessary.


2. Set Financial Goals:

This will be different for everyone. Maybe you want to be debt free, start an emergency fund, or increase retirement savings. These will change as you progress, but setting clear and realistic goals provide direction and motivation.


3. Choose a budgeting method – None of these are set in stone and can easily be tailored to your needs and goals.


Zero-Based Budgeting: Best for Tracking consistent income and expenses.

Assign every dollar a specific purpose, ensuring income minus expenses equals zero. Try to list all expenses as accurately as possible and if you spend more in one category, you can move cash from another to compensate for it. Best if you have a set income each month or can reasonably estimate monthly income.


Pay-Yourself-First: Prioritizing savings and debt repayment

Set aside a specific amount from each paycheck for savings and debt payments and spending the rest however you need or want to.

 

70/20/10: Categorizing “needs” over “wants”

This is great if you have higher expenses, low debt and are just starting out and want to slowly work your way to saving more. This method allocates income into three categories: needs, wants, and goals.

    • 70% for Needs: Rent, bills, groceries, car, insurance, etc.

    • 20% for Wants: Entertainment, personal care, clothing, etc.

    • 10% for Goals: Paying off debts & saving or investing in your future.

50/30/20:

Similar to the 70/20/10, but the main drawback is both of these rules might be unrealistic if you have high debt or high savings goals because 10% or 20% of your income might not stretch far enough.

    • 50% for Needs

    • 30% for Wants

    • 20% for Debt & Savings

 
Envelope System Budget: Making your spending more disciplined, not ideal if you prefer using debit/credit cards.

Similar to zero-based budget, but you do it all with CASH. You plan how to spend your money each month and fill an envelope with the allocated cash for each category. For instance, when you go do something for entertainment, like watching a movie, take your entertainment envelope and when you run out, that’s all you can spend in that category for the month unless you take from other envelopes. Avoid raiding other enveloped too often, though, because it can lead to a snowball effect, causing you to run out before the end of the month.

 
The No-Budget Budget: Best for lowering and avoiding debt

    • Keep and eye on your checking account balance – Use a budgeting app to track daily cash flow

    • Know when recurring bills hit your account.

    • Set aside cash for savings and extra debt payments

    • Spend what’s left over without overdrawing your account.

This may sound easier then other budgets, but its not always easy to tell yourself “no.”

 

4. DON’T GIVE UP!!

Whether you choose the right method or not, it can take a few months to get used to the system, especially if you’re new to budgeting. If you completely go over budget one month, that is okay, start again next month. Don’t be afraid to tweak your strategy along the way to make it more effective. Lastly, consider using a budgeting app to make the process easier.

Interactive Budget Calculator

 

Scroll to Top