Budgeting can sound about as appealing as visiting the dentist to have a cavity filled. But once you start, you’ll wish you’d started sooner.
“If someone is hesitant to start budgeting, the number one thing I would tell that person is how much less stress they’re going to have,” Grace Moser, CEO and founder of lifestyle blog Chasing Foxes, wrote in an email.
She explains that not knowing where your money is going and why it always feels like you never have enough is stressful. “When you actually create a plan and have some breathing room, you gain so much peace (and more money to spend on you),” Moser said.
Read on to learn more about what budgeting is and how to get started.
What Is a Budget?
A budget refers to a spending plan for a certain period, such as a month, a year or even 30 years. Creating one involves calculating your estimated income, essential expenditures, and discretionary income for the period. You can then decide how to spend the money you have left over. For example, you may want to add 10% to your savings, 5% to paying off debt and 5% to an upcoming vacation.
“You’ve got to look at a budget as a roadmap. Much as you’d follow a map to reach your destination, by following a budget, you’ll have your journey to financial success mapped out ahead of you,” Michael Foote, insurance and finance expert and founder of Quote Goat, wrote in an email.
[Related:Read: How to Create a Financial Plan Like a Pro]
The Purpose of a Budget
The purpose of a budget is to gain greater control over your financial situation. Budgeting shines a light on how much money you have and where it needs to go. As a result, it can help you to pay off and prevent debt, feel less stressed, save money and prioritize important expenses.
How to Create a Budget
When you’re ready to create a budget, follow these four main steps:
— Calculate your income. Take inventory of all the income you earn. This includes earnings from a full-time job, side hustles, government support or other financial support you may receive. If you’re married or living with a partner you want to include in your budget, add their income in as well.
— Determine your expenses. Write down all your expenses from clothing and rent to food and entertainment. Having a full understanding of your financial responsibilities will enable you to see the amount of money you have left over for other items.
— Set your priorities. Prioritize your spending. Separate your wants from your needs and rank your expenses from most to least important. Is there anything you can or should eliminate so you can redirect the funds elsewhere? Here’s where you can make adjustments to reach your goals as quickly as possible.
— Establish your timeline. Determine how much time you want and need to give yourself for each budgeting goal. For example, you may have a vacation as a short-term goal, a down payment on a house as a medium-term goal and retirement as a long-term goal. Figure out how much you can save per month for each goal, then set a target date for achieving the final budget goal.
[SEE: 10 Best Budget Apps.]
How to Stick to a Budget
Now that you’ve set your budget, it’s time for the harder part — sticking to it. Here are some tips that can help:
— Lose the credit card.If you’re trying to keep your credit card balances down, take the cards out of your wallet to help prevent impulse purchases.
— Keep it honest.Be honest with yourself. If you break your budget, note it, and readjust for that week or the month. Overspending will happen, but make it the exception, not the rule.
— Meal plan. Meal prepping can help you and your family stay on budget because you’ll be less likely to eat or order out.
— Learn to say no.There will be things you want to do like visiting an amusement park, going to brunch or buying a new car. Don’t eliminate all discretionary spending, but set a limit and do your best to stick to it. Doing so will require you to prioritize what’s most important to you, put off some purchases until later and pass on some things altogether.
— Set up auto-draft. Set your most important bills to auto-draft from your bank account so you can ensure they get paid on time.
— Track your spending. Track everything you spend. Staying aware is key. Consider using a budgeting app. “Budgeting apps are fantastic tools that make tracking expenses and balancing your paycheck so much simpler. Keeping it simple makes it easier to stay on track,” Foote said.
— 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 to $1,825 in a year.
“When it comes to sticking to a budget, don’t be overly strict. It’s just like a diet; if you’re going overboard with it, you’re most likely going to quit,” Moser said.
[READ: What Is ‘Lifestyle Creep’ and Should You Try to Avoid It?]
Popular Budgeting Strategies
Not sure where to start? Here are three popular budgeting methods:
— Zero-based budget.This strategy is one in which you assign every income dollar to a specific budgeting category, like rent or groceries. If you don’t use those dollars, you can roll them over into new categories. “You’ll learn a lot about yourself and your spending habits by adopting this strategy. Only by understanding where your money is going and plugging holes can you achieve your financial goals,” Foote said.
— 50/30/20 budget.This technique is one of the most popular. The general rule of thumb is that 50% of your income goes toward essentials (rent, food, bills), 30% toward personal wants (travel, dining out) and 20% toward savings.
— Envelope budget.Envelope budgeting is an old-school way of sticking to a budget. You set a budget for each category of spending — like groceries and rent — and put the assigned amount into a separate envelope for each. Once that money is gone, you’re finished spending on that category for the month. Try using virtual envelopes so you can follow this method digitally.
With proper planning and execution, budgets can get you 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, medical bills or whatever else life throws your way.
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What Is a Budget? originally appeared on usnews.com
Update 09/06/24: This story was previously published at an earlier date and has been updated with new information.
