The term “budget” is one that often strikes fear into those looking to balance their financial situations. However, budgeting doesn’t need to be a scary experience. With proper planning and execution, a budget can help anyone pay off debt, save money and put the right foot forward for a prosperous financial future.
What Is a Budget?
Simply speaking, a budget is a spending plan based on estimated income and expenses over a set period of time. The period of time is up to you and can be adjusted based on your budgeting goals.
For example, one person may choose to have a yearly budget for their family, calculating costs like groceries, rent or mortgage payments, electricity and health care. Meanwhile, another may set up a short-term budget to save for a vacation. Whatever your goals are, there are simple steps to create a budget that works for you.
What Is the Purpose of a Budget?
The purpose of a budget is to determine if you will have enough money to do all the things you have to do and want to do. By creating a spending plan, you can prioritize the financial items in your life that are needs versus the ones that could be classified as wants. A proper financial spending plan can also help you pay off debt or keep you out of debt by helping you save when you want to spend. No matter your income, budgeting can help you avoid stress and stay on track.
How Do I Create a Budget?
There are many ways to create a budget, and the option you choose may depend on what your financial goals are for the budget. Are you creating an annual household budget? A vacation budget? Paying off debt? No matter the type of budget you seek to create, there are four main principles involved:
— Outline your income. Take an inventory of all income coming into your household. This includes earnings from full-time jobs, side hustles, government support or other financial support you may receive. If you’re married or living with a partner, be sure to include their income as well if they are a part of your budget.
— Determine your expenses. Write down all of your expenses, from clothing to rent and everything in between. Having a full understanding of your financial responsibilities can help you see how much money you may have leftover for other items.
— Set your priorities. After reviewing your income and expenses, set your items in order according to priority. What is most important? What is least important? Paying items off in this way will help you maintain your quality of life over quantity of things you want to buy or do.
— Establish your timeline. Determine how much time you want to give yourself for your budget. If you’re budgeting to save for a vacation, your budgeting timeline may be shorter than those who are budgeting for an entire household for one year. Your timeline will depend on the goal of your budget.
How Do I Stick to a Budget?
Now that you’ve set your budget, sticking to it is one of the hardest parts. There are many tricks to sticking to a budget that can help you along the way:
— Lose the credit card. Leave your credit card at home if you’re planning on going out. This will help you avoid putting yourself in debt if you see something you want to splurge on.
— Keep it honest. Be real with yourself. If you break your budget, write it down and readjust for that week or the month. Things happen, but don’t ignore them.
— Meal plan. Planning meals will help you and your family stay on budget by having set meals. This helps you avoid eating out and making last-minute expenditures on food if you aren’t prepared.
— Learn to say no. There are going to be things you want to do, such as visiting an amusement park, going to brunch or buying a new car, but there are times when it’s best to just say no.
— Set up auto-draft. Have your most important bills set to auto-draft from your bank account, so you can ensure they get paid and do not get deprioritized for something more exciting.
— Track your spending. Write down everything you spend money on. Just like counting calories, this method helps you see on paper just how much you are spending.
— Avoid unnecessary splurges. Try not to splurge on items you don’t need, like a daily Starbucks coffee. Even saving that $5 a day adds up $1,825 in savings per year.
What Are Some Popular Budgeting Strategies?
There are many types of budgets, and finding the one works best for you may be a trial-and-error experience for some. Determining which budget plan will work for you depends on your flexibility, income and budget goals. Here are three popular methods for budgeting:
— Zero-based budget. The zero-based budgeting strategy is one where every income dollar is assigned to a specific budget category, like rent or transportation. If those dollars are not used in the assigned category, they can be rolled over into a new category.
— 50/30/20 budget. This budgeting technique is one of the most popular. The general rule of thumb is that 50% of income goes to essentials (rent, food, bills), 30% goes toward personal expenses (travel, dining) and 20% is dedicated to savings.
— Envelope budget. Envelope budgeting is for those that have a really hard time sticking to a budget. It’s more of an old-school way of budgeting: You set a budget for each category of spending, such as groceries and rent, and put the assigned amount of money into a separate envelope for each. Once that money is gone from that envelope, you are done spending.
With proper planning and execution, budgets can get you back on track or help you stick to your saving and spending goals. Remember to always leave a little wiggle room in case emergency expenses pop up, like auto repairs, failing hot water heaters and whatever else life throws your way.
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