For many people, budget might as well be a four-letter word. Budgeting reeks of pain and sacrifice. But if done properly, living on a budget doesn’t need to be painful at all.
What budgeting really means is freedom—the freedom to choose where to allocate your money and what financial goals you’ll pursue. Once you give every dollar you’re sending out a purpose, it begins to work for you. And it all starts with simple reflection and your willingness to finally find out “where is my money going and why?”
In this article, you’ll learn:
- What a budget is
- Why you may need one
- How to create a budget
- The various implementation strategies for budgets
- Tips for building a successful budget
- How to stick with it for the long haul
What is a Budget?
A budget is a means of calculating and tracking all of the money you have coming in and going out. With a standard budget, you’ll assign dollar amounts to specific categories of spending like food, entertainment, housing, transportation, etc.
Using your budget as a guide, you can more effectively manage how much is going out and ensure that each dollar serves a distinct purpose.
Why Do People Use Budgets?
The impetus for many people to start budgeting is to get a handle on overspending or save towards an important financial goal. According to a survey from Slickdeals, 74% of Americans claim to use some kind of budget, but 79% of budgeters have a hard time sticking with it.
The difficulties in adhering to a budget meant survey respondents spent on average $7,429.24 more than their budget allowed annually. That breaks down to approximately $600 each month in overspending. If you can reign in the monthly overspending using a budget, it may free up some serious cash to put towards bigger financial goals.
Do I Need a Budget?
Spending based on a budget is one of the best ways to balance personal finances. A well-crafted budget can be an extremely valuable tool. But like trying to start a diet or exercise plan, you need to be in the right mental space to do so. Before you move forward with creating a budget, answer the below questions to clarify if a budget might be right for you.
- Why do I want to make a budget now? – This question will expose the underlying reason why you need a budget, but also why now? If this isn’t clearly defined, you might as well stop right here. Your “why” will be a core piece of what drives you every day in not only establishing your budget but also being able to follow it. And when you come up against a challenge, reflecting back on your why could be the stop sign that keeps you on track or the green light that lets you cruise right past and continue overspending.
- What are my financial goals? Think short and long-term. If you’re trying to save because you want to be able to buy a house in the next five years, that’s a great, meaningful goal! Knowing that extra savings from your budget will directly impact your ability to buy your own home is a great way to keep motivation high. You can also work backward from your savings goal and factor in how much to save per month in your budget to ensure you’ll hit the five-year plan.
A budget is a small thing but a significant change if you’ve been living paycheck to paycheck for years or decades. Keeping your “why” and financial goals in mind will help keep you on track, even when monotony sets in.
How Do I Make a Budget?
There are two main elements to take into consideration when you’re establishing your first budget.
This includes all money that flows into your household from your paycheck after taxes. Think about it as your take-home pay. Whether or not you’d like to include income from a side hustle or other passive income stream is up to you.
If you have a side hustle or other passive income that’s already serving a purpose like paying off a specific loan, it may be easiest to leave it alone and focus on all other income instead.
The easiest way to catalog your expenses is to look at how you’ve been spending your money over the past few months. Since there’s often variability month to month, looking back 3-6 months should cover enough time to enable you to pull out the outliers vs. recurring expenses.
Thanks to online banking, this is a pretty simple task. Most online accounts already categorize your expenses into groups like utilities, food, entertainment, etc.
You may want to also consider tagging your expenses as mandatory and flexible, sometimes referred to as fixed and variable. Mandatory expenses are those that keep a roof over your head, your family insured, and your debts up-to-date. These would include things like your house payment, utilities, car insurance, etc.
Flexible expenses are those that you could flex up or down or eliminate entirely in a time of need. Costs that are flexible are things like your monthly pedicure, daily lunch out with co-workers, or your cable TV or subscription services.
If your expenses are more than your income, now is the time to stop and re-assess.
Look at it from both sides. Can you increase your income? Is it time to ask for a raise at work since you just finished up that huge project? How can you add other streams of income?
On the expense side, do you need that clothing subscription service or every TV streaming channel that ever existed? Are there ways to trim down spending that won’t have a detrimental impact on your quality of life?
Ask yourself these questions, then make phone calls if needed. Maybe switching from one home internet service to a competitor puts an extra $20 in your pocket each month. And that $20 can be funneled directly towards your bottom line and long-term financial goals.
Creating a Budget in 5 Easy Steps
With an awareness of your monthly income and expenses, you’re ready to buckle down and create your budget. Here are the basic steps, which we’ll go into more detail on below.
- Outline income and expenses: You’ve already done this step and should have a good idea of where you may be overspending and places where you can afford to save a bit more.
- Group expenses into categories and set limits: Some standard categories of expenses are household, transportation, savings, investing, insurance, food, and entertainment. But depending on your unique situation, you may have more or fewer categories. Make sure every expense is in a bucket and set a dollar limit on the group as a whole. The sum of all of your category limits should be equal to, or less than, your income.
- Decide on a strategy: We outline various options below, like the envelope system and anti-budget. Deciding which approach to use depends entirely on personal preference. Would you be inclined to spend less if you had to use cash? Do you want to have specific category assignments, or does working from a lump sum seem more your speed?
- Decide where extra money will go: Even though you’re giving every dollar a purpose, there may be months where you end up with a bit of extra cash in the bank, envelope, etc. Reference your long-term financial goals and outline a plan for where you’ll move that money before it happens.
- Track progress and stick with it: Failure to track your budget may put you in the same place you were before. It’s critical to follow your money throughout each month to see if you’re hitting the mark or not. Below we outline tips and tricks for helping you stick with a budget long-term.
Budgeting Implementation Strategies
While creating a budget is a relatively standard process, there’s more than one way to implement it. Some of the most popular options like the envelope system and zero-based budget have been extremely successful due to their simplicity. Check out the types of budgets below to see if a particular one might work better for you and your situation.
The Envelope System
Popularized by financial guru Dave Ramsey, the envelope system relies on using good old cash money to manage spending. You’ll create a pen and paper budget and at the start of the month (or on payday), take cash out of the bank for the amount of your monthly spending.
Since so much of our banking for paying bills, utilities, or loans is automated, the amount you take out in cash may reflect only your grocery, restaurant, and entertainment budget. The most critical piece of this budgeting style is that you’ll do everything in your power to only spend what’s available in your envelopes without running back to the ATM during the month.
Benefits of the Envelope System
- Easy to review how monthly spending is going by counting up your envelope balances.
- Simple to swap from one category to another if you need extra food money for clothing or vice versa.
- Having to spend physical money encourages more mindfulness around spending.
The Zero-Based Budget
The value of the zero-based budget is that you’ll start from scratch and zero out your bank balance at the beginning of every month. The underlying principle is that your income minus all of your expenditures should be equal to zero.
Seeing extra cash in your account after payday can encourage overspending. But you’ll combat this with the zero-based budget by transitioning any additional money out of your checking account, and into a savings account or other vehicle, on payday.
For example, let’s say you get paid on the 1st and 15th, and each paycheck is $1,500. If you get paid on the first, and your new balance is $1,750, you’ll transfer $250 to a savings account, investment, or otherwise so that you’re starting your monthly budget from $1,500, as you designed it.
Benefits of Zero-based Budget
- You can combine the principle of the zero-based budget with any other budget tool to start fresh at the beginning of each month.
- Encourages you to save and use excess funds to make meaningful financial changes.
- Each month is a clean slate.
The Percentage-based Budget
In the percentage-based budget, you’ll allocate specific percentages of income towards larger financial categories. The most commonly used percentage-based budget is 50-30-20. But based on your unique needs and living situation, you can alter this to suit your budget categories.
- 50%: This section holds all your mandatory payments or “needs,” like housing, food, transportation, debt, insurance, etc. These are the expenses that you have to pay each month to keep living your life as you know it, and they are generally non-negotiable.
- 30%: Perhaps one of the biggest allures of the percentage-based budget, 30% is for the fun stuff, the “wants.” This category would include tv streaming subscriptions, entertainment, travel, dining out, clothing, etc.
- 20%: The 20% category is for savings and debt. You should have already made a list of your debts when you outlined monthly expenses. If debt repayment is not a part of your expenses or doesn’t take 20% of your budget, put the remaining amount towards savings. The savings might be your emergency fund, vacation fund, or new car fund. Whatever its purpose, your savings should serve as a protective cushion to avoid taking on new debt in the future.
Benefits of a Percentage-based Budget
- It can feel less restrictive than assigning dollar amounts.
- Simple to calculate based on your income.
- An increase in income is evenly distributed across all budget categories.
The anti-budget is a strategic budgeting option that encourages you to take your fixed payments like housing, transportation, insurance, debt, etc., off the top of your paycheck as soon as you receive it. After all of your mandatory expenses are taken care of, the remaining chunk of money is yours to allocate however you decide.
The anti-budget is for the person who wants to budget but would rather work from a lump sum of cash than individual categories. With the anti-budget, you’d be able to flex certain budgeting categories up and down based on your preference. And it doesn’t matter how much you spend on groceries vs. eating out as long as you don’t spend all of your remaining money.
The crucial thing to remember about the anti-budget is that your initial payments should include savings. The most dangerous thing for your financial plan is to wait until the end of the month to save what’s leftover. Since often, that ends up being nothing.
Benefits of the Anti-Budget
- Less need to track expenses obsessively.
- Saves time.
- Great for people who want to budget without the hassle of creating a budget.
Aren’t There Apps That Can Do This for Me?
Yes, indeed. There are many fantastic budget apps available. Most of these will link up with your bank account to automatically track and categorize your spending.
- EveryDollar, a Dave Ramsey product, has a free and paid version that helps you set your monthly spending limits across categories. It then links with your bank account to track expenses as they happen.
- Another extremely popular option is You Need a Budget (YNAB). Complete with goal tracking, reports, and the ability to share finances with a partner, YNAB is a simple, comprehensive tool that encourages not spending less but spending right.
Remember that the best type of budget is the one you’re going to use. So if you’re a tech junkie and know that you’ll use an app more than a spreadsheet, go for it! The underlying principles are the same no matter what type of solution you choose.
Tips for Building a Successful Budget
Make it More Fun Than Work
Gamification is an incredibly successful tactic that people use to do everything from money management to weight loss.
If you’re budgeting with a significant other, challenge your partner to see who can stick to the budget the best over the next month. Maybe the loser has to make dinner or pack their partner’s lunch for a week. And if your family can stick to the budget for several months, plan a fun, low-cost family outing. If everyone is invested in making sticking to the budget fun, you’re more likely to be successful.
Budget for Fun
Many people who create a budget view it as sucking all the fun out of their lives. But that might be because many people forget to create the “fun” category. Some people classify it as entertainment or miscellaneous. Whatever you want to call it, make sure you leave some buffer cash for having a good time.
Many people feel like with a budget, they’ll need to stop eating out, spending time with friends, and buying anything new. But if you build it in initially, that’s not the case. If your family really loves going to the movies on Friday night, factor that in and give yourselves a $100 movie category.
If buying a new pair of shoes makes your month better, make sure the shoe budget exists. Creating these categories and allocating space for fun makes it far more likely you’re going to keep with the rest of your budget, too.
A budget needs to accommodate your savings or investing goals by freeing up sufficient cash. But it shouldn’t be so overly restrictive that you could never stick to it even in the most ideal circumstances. Imagine you currently eat out 5 nights a week and spend $200 a week or $800 a month doing so. Setting an “eating out” budget of $100 is likely destined for failure.
Instead, maybe for the first month, you could try to eat out only 4 nights and set your new budgeting goal at $150 a week or $600 a month. You would still be stretching a bit to meet it, and if you can achieve it, you’ll have $200 extra to spend on something else that could really move your bottom line financially.
How Can I Stick to a Budget?
Creating the budget is the fun part. But now that you know what you need to do, it’s all about the execution. Are you really going to limit happy hour to once a week instead of three times? Can you successfully prepare a few lunches per week on Sunday? The following tips and tricks can help you stick to a budget, even when it feels tough.
Automate Anything You Can
Automation is a beautiful side effect of the rise of tech in banking. The majority of bills you pay each month will provide an option to establish an auto-draft payment. But don’t limit automated payments to bills.
If you’ve created a saving category in your budget and want to funnel out $100 from each paycheck into savings, set that up now! The less money you see as “available” in your checking account, the less inclined you are to think that money is ready to spend.
Get an Accountability Partner
This might be your significant other, parent, or close friend. Share that you’re trying to stick to a budget with someone who will support you. This person is the one that you can turn to when you’re on the verge of blowing the clothing budget at Target.
Practice Stimulus Control
Some of the major areas of overspending for people are online shopping and grocery stores. If you know online spending is something that may blow your budget, commit to putting items in your cart and waiting 24 hours to make the purchase. If impulse buys at the grocery are a weak spot, start taking a list every time and stick to it.
Controlling the environment around you is one of the most effective ways to make sure you can stay within your budget’s confines. Those prone to overspending at a particular store, like Target, might be best off to avoid it until spending habits are well established. Take the triggers you know exist and do everything you can to limit their potential impact.
Remember Your Why
When budgeting gets hard, and it will get hard at times, focus on why you created it in the first place. Maybe you wanted a better financial future for your family with an emergency fund in place.
Perhaps you have aggressive early retirement goals and want to join the FIRE community as soon as possible. Whatever your reason, think about it when you’re on the verge of spending beyond your budgeted amount and let it guide you back to what you’re really working towards.
The Bottom Line
If you’re looking for a way to get a handle on spending and transition out of living a paycheck-to-paycheck existence, establishing a budget is a great first step. And the best kind of budget is the one you’ll actually use. So weigh your options, try a few different strategies, and remember that budgeting is a constant work in progress.
If you blow the budget this month, step back and re-allocate expenses as needed. Your budget is meant to evolve with you, and nobody gets it right the first time. As long as you’re learning and getting closer to your personal finance goals, you’re doing it right.