For most people, saying the word alone is enough to make people break into a cold sweat. We all know they’re a necessary part of a healthy bank account, but not all of us know how to create one that keeps us from pulling our hair out.
Not to worry though, girlfriend! Today we’ll go over how to build a foolproof (and emergency-proof) budget that’ll keep your bank account happy and you even happier.
What a Budget Does
The person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went.” – Unknown
While the word has always had the connotation of restriction and scarcity, it doesn’t have to. In fact, in many ways a budget liberates you – from your unconscious money beliefs, poor spending habits, and sometimes, even your income ceiling.
In essence, a budget is the thorough tracking of all of your income sources and expenditures. Ideally, all of your income will match all of your expenditures, making every dollar accounted for and allocated properly. This way you will never slip far into debt or have excess money not being put to good use – whether to pay down debt, save for a rainy day, or treat yourself to something special.
A budget will usually vary very little from month to month, giving you a bird’s eye view of your biggest expenses and income methods so you can purposefully and consciously take action – something that’s very hard to do if you go month-to-month without keeping a careful eye on things.
For example, one $5 coffee is a nice treat, but done every day will set you back $150 every month. Such habits are easy to ignore on the day-to-day, but can easily drain you by the end of the month if you’re not paying attention. That $150 could easily go towards paying off a credit card debt, one of the important steps on the road to financial freedom.
How to Create a Budget
Understand Your Income
Naturally, you can’t establish an accurate budget if you don’t know what your limit is. Figure out your entire income, whether that comes from a paycheck from an employer or business profits. Don’t forget to add in any spare income from side gigs, royalties, or other things that regularly add to your income.
Understand Your Expenses
If possible, look back on your past month or two of expenses, even on tiny things. Do you notice certain trends? Do you have a weakness towards certain things, or is there anything that jumps off the page as an unnecessary expense? (Or check out my previous post on 5 ways to effortlessly save money.)
The Easy Starter Budget
One of the best and easiest budgets for beginners is the 50/30/20 budget. With this budget, you save 50% of your income for your needs, 30% for your wants, and 20% for your debt payments and savings.
This way, all of your income is accounted for in a way that keeps debt manageable, has your bases covered, and still allows you to indulge here and there while keeping some padding for the occasional emergency or unforeseen expense.
Needs – 50%
Your needs are all expenses that are required for daily life. These are the expenses that rarely change from month to month, such as your mortgage or rent, car insurance, utilities, and groceries. If you find that you’re spending a little bit more than 50% here, then no worries! You might have to dip into your Wants category for a spell, but it’s not the end of the world – anybody can find a side hustle to set them straight!
Wants – 30%
From a takeout dinner all the way to a large holiday, your wants category is made up of those little things that make life enjoyable. There are no set definitions on what makes something a want versus a need, but take a hard look over both categories and determine for yourself. Is vegan food a need or a want? Is cable necessary? Only you can speak to your individual circumstances. Be sure to make room for anniversaries, holidays, and gifts.
Savings & Debts – 20%
Financial experts like Dave Ramsey suggest that you create an emergency fund prior to tackling any large debts or saving for anything big. After all, it’s hard to get out of debt if you just add to it in the case of an emergency or unexpected bill. So with that in mind, start by saving at least $500, but perhaps as much as 6 months’ worth of expenses – whichever amount would make you feel most secure about your finances.
After that, it’s time to start your path to financial freedom: aggressively paying off debt. By starting off with the highest-interest payment and aggressively paying it down, then moving on to the next one, you can essentially snowball your debt payments and eventually live a debt-free life.
Meanwhile, don’t forget to contribute to your savings accounts, including your retirement fund, emergency fund, and any other large expenditures you expect to come up. Always keep your emergency fund full, since you never know when an unexpected event will occur and it’s important to not have your progress derailed because of it.
Now that you have a budget in place, you are in a much more powerful place with your money. You’ve got your expenses wrangled, income accounted for, and debt managed. Keep it up and you’ll be financially free in no time!
Do you have a different budgeting system that works for you? Let me know in the comments!