How to Create a Budget
I used to hate the idea of budgeting. I thought it meant that I needed to scrutinize every nickel that I spent. The thought of tracking every purchase seemed like it could be very stressful and result in a lot of anxiety. I have come to view a budget as a tool to allow me to decide how to spend my money. It allows me to prioritize my spending for the things that matter the most. If my priority is saving for a vacation, I can choose to spend less on other things like shopping or eating out.
What is a budget?
A Budget is simply a plan for how you will earn, spend, and save money. A budget helps you to ensure that your current needs are met, pay off debt, & reach savings goals. To create a budget, determine how much income you have, and make decisions about how to allocate it to meet your goals.
In this post I will discuss the following:
- Determining your income
- Tracking your current spending
- Suggestions for Creating a Baseline Budget
- Staying on track with a Budget
Creating A Budget: Determine your Current Income
An important step in creating a budget is to determine how much income you have available to spend. This is easy if you make a consistent income. You can look at your one or two bank statements to and get a clear picture of your monthly available income.
If you
Creating A Budget: Track Your Current Spending
In order to get a budget, track your current habits to determine what areas you would like to spend more and the areas where you need to cut back. This can be done by either holding on to receipts for a month and manually computing the total, or it can be simplified by using an app for tracking spending.
Apps for Tracking Spending
For Privacy reasons, I don’t like to give access direct access to my credit card or bank accounts. I am dividing the apps into two categories. The first category “Manual” are the apps the apps that require you to manually enter your expenses in to the app. The “Linked” category are the apps that can be linked to your credit or debit card to automatically track spending
Manual Apps for Tracking Spending
DollarBird
Fudget
Linked Apps for Tracking Spending
If you do most of your spending via debit cards or credit cards and don’t mind linking your account to an app. Tracking via a inked application is a good option for you.
BillGuard
Creating A Budget: Calculate your Current Income
Creating A Budget: 50/30/20 Budget Rule
The 50/30/20 is a general suggestion about what percentage of income should be allocated to different spending areas. Spend 50% of your income on needs, 30% of your income on wants and use 20% on savings and paying off debt.
- Some example of Needs Include:
- Housing Payments
- Transportation
- Child Care Expenses
- Car Payments
- Insurance
- Groceries
- Minimum payment on outstanding debt (student loans, credit cards, furniture)
Creating A Budget: sample 50/30/20 Budget:
| Total Income | $3,500 |
| Needs Budget | $1,750.0 |
| Rent | $1,150.0 |
| Groceries | $400.0 |
| Utilities | $50.0 |
| Insurance | $100.0 |
| Minimum Credit Card Payment | $50.0 |
| Total Needs Expenses | $1,750.0 |
| Wants Budget | $1,050.0 |
| Shopping | $500.0 |
| Movies | $75.0 |
| Internet/cable | $150.0 |
| Netflix | $13.0 |
| Gym Fees | $75.0 |
| Dining Out | $237.0 |
| Total Want Expenses | $1,050.0 |
| Savings/Debt Payments Budget | $700.0 |
| Automatic Savings | $550 |
| Extra Credit Card Payment | $150.0 |
| Total Savings/Debt Expenses | $700.0 |
Budget for Your Rich Life: Create Your Own Budget Rule
Creating A Budget: Staying on Track
Creating a budget is simply a method of choosing how to spend your money. Once you set a goal it is important to make sure you are staying on track. I normally check in on my spending every two weeks.
Money Envelopes for Staying on Track
Cash Envelope Overview
One popular method of sticking to a budget is the money envelope system. Using the money envelope system, you assign one envelope for each spending category. For example you may have a “Grocery” envelope, a “Personal Care” envelope and a “Dining Out” envelope. You take out cash each month and place them in the envelopes. You pay for groceries with cash from the Grocery envelope. You pay for a haircut or a manicure with cash from the “Personal Care” envelope. If you have lunch with friends, you pay using the “Dining Out” envelope. Each month you replenish the envelope with the budgeted amount for each category. Once the envelope is empty you’ve reached your spending limit for the month. If you have extra left over for the month, you can decide to roll it over to the next month, save it, or shift it to another category of spending. Again, the power in budgeting is that you are in control.
Creating a Simple Budget: Automate Savings
I found that if I had to remember to go in and automatically shift funds to my savings account, it probably wouldn’t happen. To make things simple my pay check from work is direct-deposited to my bank account every two weeks.
Choose an amount, no matter how small and have it transferred to your savings account automatically. I started automated my savings in college when I was making very little money. I set it up to transfer $25 from my checking account once per month. I let it sit and grow.
My preferred online savings account is CapitalOne360. I chose this account for savings because it is online and easy to connect to other online bank accounts. CapitalOne360 allows you to create accounts to meet specific savings goal, all within one login. So when I was saving for my wedding, I created an account called “Dream Wedding” and I automatically put money in there bi-weekly when I got paid. Once I got married, I was able t rename that account and use it for a different purpose. It is nice to use a CapitalOne360 savings account for short term goals like saving for a vacation as well as long term goals like saving for the down payment on the house. The interest rate on a CapitalOne360 savings account is much higher than the one offered by the brick and mortar banks that I bank with.
