Budgeting lies at the foundation of every financial plan. It doesn’t matter if you’re living paycheck-to-paycheck or earning six figures a year, you need to know where your money is going if you want to have a handle on your finances. Unlike what you might believe, budgeting isn’t all about restricting what you spend money on and cutting out all the fun in your life. It’s really about understanding how much money you have and where it goes, and then planning how to allocate those funds best. Here’s everything you need to help you create and maintain a budget.
Do you know why a budget is so important? On the surface it seems like creating a budget is just a tedious financial exercise, especially if you feel your finances are already in good order. You might be surprised at just how valuable a budget can be. A good budget can help keep your spending on track and even uncover some hidden cash flow problems that might free up even more money to put toward your other financial goals.
How to Create a Budget
The hardest part of creating a budget is sitting down and creating one. It’s like staring at a blank piece of paper when you need to write something, and that first step seems like a massive hurdle. Don’t worry—I’ve broken down the budget creation process into a few easy to follow steps. You’ll be able to sit down and create a basic budget in just a few minutes.
Traits for Success
Once you've taken the time to create a budget, now it’s time to make sure you follow it. Budgeting can be like going on a diet—you start with good intentions, but after a few weeks or months you drift away from your plan. Don’t let that happen to you. Here are a few basic traits that will ensure budgeting success.
If you’re having difficulty coming up with all of the various expense categories for your budget, use this budget worksheet that can help you organize everything. This worksheet has the most common expenses and can help you keep track of everything in an orderly fashion.
How Overspending Breaks Your Budget
The main reason to create a budget is to help you keep your finances under control by keeping track of how much money you’re spending and where it goes. When you begin to stray from your budget, it’s usually because of spending too much money somewhere. But if you have a budget that tells you exactly how much you’re supposed to spend, why is it so easy to overspend? There are a number of reasons we overspend, so when you understand what causes overspending, you can help put a stop to it and keep your budget on track.
Try Using Cash to Keep Spending Under Control
Swiping plastic has become incredibly easy. With both credit cards and debit cards, we can be in and out with a purchase in a matter of seconds. Unfortunately, this convenience comes at a cost. By using plastic, we can begin to lose track of how much money is being spent. Sure, two dollars here, four dollars there, it doesn’t seem like much at the time of purchase, but if you aren’t careful, they can add up and bust your budget. One trick to help keep your daily spending under control is to use cash instead of your credit or debit cards. It might not be as fast, but it helps you visualize just how much money you’re spending.
Automate Your Savings Plan
Sometimes, remembering to save can be a struggle. Automating your savings is an easy way to stay on track with your savings plan. Schedule automatic transfers from your checking account to your savings to build your emergency fund. Open an individual retirement account and set up automatic contributions every payday to build your nest egg. You can also use automatic contributions to fund a 529 college savings account for your child's education. Automating deposits into different accounts ensures that you're saving instead of spending and over time, the power of compound interest can help your money grow steadily.
Outline Your Savings Goals
If you're going to save money, having a specific goal to work towards can be a huge help in maintaining your momentum. Think about what you want to accomplish with saving, in both the short and long term term. For example, you may want to save money for a vacation in the next six months, or you may be planning to buy a home in the next year and need to save a down payment. Consider what you'd like to achieve with your money, and then break your goals down into specific, actionable steps. Set a timeline for achieving each goal and track your progress to stay motivated on your savings journey.
Find the Best Savings Resources
Saving money becomes less of a struggle when you have the right tools on hand. A budgeting app like Mint, for example, can help you manage your budget on the go and track your spending automatically. The app allows you to sync all of your bank and credit accounts in a single place so you can see how well you're doing with your savings goals at a glance. Choosing the right place to keep your savings is also important. A high-interest savings account, for example, may be convenient for stashing your emergency fund. An IRA or an IRA CD, on the other hand, are great vehicles for setting aside money long-term for your retirement.
Frequently Asked Questions (FAQs)
What is budgeting?
A budget is a system that tracks your money. It allows you to record how much money you have coming in (your income) and plan for where it is going out (your expenses). Budgeting prevents you from spending more than you earn and allows you to work toward financial goals such as paying down debt or saving for retirement.
How do I start budgeting?
To start budgeting, track all of your income and expenses for a month. Then, create a plan based on how much money you earn each month. Set aside what you will need for mandatory living expenses, such as rent or utilities. Then, plan for how much you can save or use to pay down debt. Any money that you have left beyond that can be used for your discretionary expenses each month.
What is zero-based budgeting?
Zero-based budgeting is a system that encourages you to give every penny of your monthly income a job. All of your income for the month should go toward expenses, debt repayment, or savings. By accounting for where all of your money goes, you know exactly how much to spend and where to spend it, and you can work toward your financial goals each month.