Basics of Budgeting
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Even though inflation has receded back to normal levels, the cost of living remains high, especially in certain areas of the country. And if you can’t find a better-paying job, the only other solution to address the cost of living challenges is to start cutting your expenses.
The number one solution to paying off debt and meeting your savings goals is budgeting. Unfortunately, budgeting is about as popular as eating rice and beans for every meal. However, if you can find a budgeting system that works for you, you may be able to change your life.
Read below to learn about the basics of budgeting and how to make it work for you.
What is Budgeting?
The concept of budgeting refers to planning how much you will spend in each category, tracking your expenses and then comparing your actual spending to your planned expenses.
Many people take the first step and set up a budget. The problem is that they don’t tweak it. At the end of the month, you need to look at your budget and see where you deviated from your plan.
Based on this assessment, you can make necessary changes. For example, you may have thought that $500 per month for groceries was a realistic goal. Unfortunately, you forgot about the two potluck parties that you were invited to, which pushed you over your limit.
Another common mistake is that people don’t base their budgets on their actual spending, but rather on how much they think they spend. If you don’t review your current spending, you’ll create an unrealistic budget, often dramatically underestimating your expenses. Make sure to use your existing spending habits to create your current budget. Don’t pull those numbers out of thin air.
Also, be aware that every month may have a different budget. For example, you may spend more on gas during the summer or more on groceries during the holidays. Planning ahead can help you see where you need to cut back to make the numbers work.
Why Budgeting Works
People often avoid budgeting because it feels like a punishment. However, it’s all about your mindset. Budgeting helps you reach your financial and personal goals. If you don’t budget, you won’t be sure that you’re on track.
If you haven’t budgeted before, cutting back on your expenses can feel like fasting after years of eating at a buffet. To alleviate the potential shock, try reducing your expenses a little bit at a time.
Help With Your Debt
Budgeting Methods
There are so many different ways you can budget. Here are the most popular methods – and what makes them helpful.
Spreadsheet
If you’re a whiz at Excel, you may enjoy using a spreadsheet for your budgeting needs. Services like Tiller can create a budget using an editable spreadsheet. Tiller will also import transactions directly from your bank or credit card so you don’t have to manually input them.
Paper and Pen
Old-school folks – or those who simply love stationery – can try the paper and pen version of a budget. To do this, simply write down everything you spend and use a calculator to track how much you’re spending compared to how much you’ve allotted.
Some people find this system more meditative because they’re forced to think about every purchase as they write it down. However, it can also be harder to manage and it may be easy to inadvertently forget some smaller purchases.
50/30/20 Budget
The 50/30/20 budget works as follows:
- Allocate 50% of your income to needs
- Allocate 30% of your income to wants
- Allocate 20% of your income to savings and debt payoff
This method doesn’t ask that you divide every expense into a specific category. However, these ratios may be out of date.
In many cities, the cost of housing has drastically increased, making it almost impossible to spend only 50% of your salary on needs. And if you have a lot of debt, spending 30% on wants may be impossible. If you like the simplicity of this method though, you can tailor the percentages to fit your specific circumstances.
Pay Yourself First
This method prioritizes long-term savings. With this method, you automatically transfer a pre-determined amount of money to your savings account first – paying yourself. Then you pay your other expenses, such as rent, gas, utilities, loans, etc.
This method requires you to decide what your savings goals are and how much you can comfortably set aside while still covering cost-of-living expenses.
Envelope Method
The envelope method uses literal envelopes to make budgeting simple. You take all your spending categories and put the budgeted amount of cash in the respective envelope. Dave Ramsey popularized the cash envelope system to get people to stop spending more money than they had.
However, as more and more people are shopping online, the cash envelope system has fallen by the wayside. Fortunately, there are ways to use the envelope method digitally. Qube Money makes you create a budget and designate which digital “envelope” you’re using before your card will be unlocked. This form of budgeting makes you be intentional with your spending, even though it’s more cumbersome than just swiping your card.
Zero-Based Budget
The zero-based budgeting system entails tracking every dollar and giving it a specific use. The name comes from assigning every dollar you have/earned until you have reached 0 dollars.
The zero-based budgeting system can be useful if you’re living paycheck to paycheck and need to maximize every dollar. However, it can also be more time-intensive because you’ll have to track everything you spend.
Which Budgeting System Should I Implement?
There’s no perfect budgeting system. Every person is different. What works for your best friend may not be the right method for you to manage your finances.
Experiment with a few different methods for a month or two and see which one sticks. You can even try to combine a couple of methods to create your own budgeting smorgasbord. For example, you can use the 50/30/20 method just for your needs, savings and loan payments, and use a detailed zero-based system for your wants.
