How to Budget Money: A Comprehensive Guide

We should learn how to budget money because it helps us align our resources to our life goals. Embark on a journey of financial empowerment where you, and you alone, command your finances. Contrary to the roller-coaster image that the term “budgeting” often brings to mind, think of it as constructing a secure fortress for your financial peace. Picture the satisfaction that comes from seeing your savings flourish. That’s the power of effective budgeting.

Assessing Your Financial Situation

Initiate your journey by grasping your financial standing fully. This isn’t an optional detour but a critical junction on your route.

Knowing how to use a budget effectively necessitates understanding your income, outflows, debts, and savings.

Consider this the foundation of your financial fortress. You’ll need to:

• Evaluate your regular income sources.
• Note your fixed monthly expenses such as rent, utilities, and subscriptions.
• Consider variable costs like grocery bills and occasional luxuries.
• Don’t forget about any debts that are draining your income.

According to the U.S. Bureau of Labor Statistics, the average American spends 33% of their income on housing, 15.8% on transportation, and 12.9% on food.

Seeing these average percentages might help you reflect on your own spending habits.

Setting Your Financial Goals

Once you’ve mapped your financial landscape, it’s time to set your destination. Clear financial goals guide your budgeting journey, whether you’re learning how to budget living on your own, as a family, or to save for a particular objective.

Goals could be short-term, like paying off a credit card, or long-term, such as saving for retirement or a down payment on a house. If you’re grappling with debt, your primary goal should be learning how to budget when in debt to gradually chip away at it.

Classifying Your Expenses

To conquer budgeting, you must understand the different types of expenses that you’ll encounter. Generally, these are:

1. Fixed Expenses: These are the bills you need to pay every month, like rent and utilities.
2. Variable Expenses: These costs fluctuate monthly, such as grocery bills.
3. Discretionary Expenses: These are non-essential purchases, like dining out or entertainment.

Understanding how to budget your expenses begins with effectively categorizing them. Doing so paints a vivid picture of your spending habits and indicates potential areas for savings.

Tracking Your Income and Expenses

The era of budgeting apps and good old-fashioned spreadsheets has made tracking income and expenses a breeze.

Embrace this. You can’t manage what you don’t measure. By learning how to budget and track expenses, you give yourself the tools necessary to monitor your financial growth actively.

Understanding Budgeting Rules: The 50/20/30 and 70% Rules

When it comes to budgeting, there are a few popular rules that can provide a helpful framework for allocating your income.

While these rules are not one-size-fits-all solutions, they can serve as guiding principles to shape your budget. Let’s explore two commonly used rules:

1. The 50/20/30 Rule:

The 50/20/30 rule suggests dividing your after-tax income into three categories:

• 50% for Needs: Allocate roughly 50% of your income to cover essential needs such as housing, utilities, transportation, groceries, and healthcare.
• 20% for Savings and Debt Repayment: Set aside 20% of your income to build savings, pay down debts, and contribute to retirement accounts or other financial goals.
• 30% for Wants: Reserve around 30% of your income for discretionary spending, which includes non-essential expenses like dining out, entertainment, vacations, and shopping.

It’s important to note that these percentages are general guidelines and can be adjusted to suit your specific circumstances. For instance, if you have significant debt, you may need to allocate more than 20% of your income towards debt repayment.

Example:

Let’s say your monthly income after taxes is $4000. Based on the 50/20/30 rule:

• $2000 (50%) would be allocated to needs, such as rent, utilities, transportation, groceries, and healthcare.
• $800 (20%) would be set aside for savings, debt repayment, and investments.
• $1200 (30%) would be available for discretionary spending on wants like dining out, entertainment, and shopping.

2. The 70% Rule:

The 70% rule takes a different approach, suggesting that you live on 70% of your income while saving and investing the remaining 30%. This rule emphasizes prioritizing savings and investments over discretionary spending.

Example:

Using the same $4000 monthly income as before, under the 70% rule:

• You would live on $2800 (70%) for your needs and wants.
• The remaining $1200 (30%) would be allocated towards savings, investments, and debt repayment.

These budgeting rules provide a starting point for structuring your budget, but it’s important to customize them based on your unique circumstances and financial goals.

 If you find that these rules don’t align with your needs, feel free to adjust the percentages accordingly.

Remember, your budget should reflect your priorities and help you achieve your financial independence.

Creating Your First Budget: A Beginner’s Guide

With the necessary information at hand, you’re now prepared to create your first budget. This isn’t a simple number-crunching exercise; it’s the tangible embodiment of your financial objectives and strategy.

A budget isn’t merely about fiscal discipline – it’s a commitment to your financial health and future prosperity. Let’s break it down into a series of manageable steps:

1. Identify your income sources

Start by listing all your income sources. This could include your salary, rental income, dividends, or side gig income. For example, if you earn $4000 monthly from your job and $500 from a side gig, your total monthly income is $4500.

2. List your fixed and variable expenses

Next, identify and list all your fixed expenses, such as rent or mortgage payments, utilities, internet, and car payments. Then, list your variable expenses like groceries, entertainment, eating out, and personal care.

For example, if your rent is $1500, car payment is $200, utilities total $300, and you spend around $500 on groceries and $200 on eating out, your total monthly expenses would be $2700.

3. Set your financial goals

Financial goals give your budget a purpose. You might want to save for a vacation, a house, or an emergency fund, or pay off a debt. Decide on your goals and how much you want to contribute to them each month.

For instance, you might want to save $300 per month for an upcoming vacation and $200 per month to build an emergency fund.

4. Subtract your expenses and savings from your income

Subtract your total expenses and savings goals from your income to see if your budget balances. If you’re spending more than you earn, you’ll need to adjust your expenses. If you have money left over, you can allocate it to your savings or other goals.

In our example, if you subtract your total expenses ($2700) and savings goals ($500) from your income ($4500), you’re left with $1300. This surplus can be used to accelerate your savings, pay off debt, or invest.

5. Make adjustments as needed

A budget isn’t a static document; it’s a dynamic tool that adapts with you. Review your budget regularly, and adjust as necessary to reflect changes in your income, expenses, or goals.

Remember, a budget is a roadmap guiding you to your financial goals. By accurately calculating your income, spending responsibly, and adjusting as necessary, you can navigate your way to financial stability and success.

Implementing Your Budget Plan

Turning your budget plan into reality is where you start truly flexing your financial muscles. It’s one thing to create a budget, but learning how to budget successfully involves sticking to that plan.

Patience is key here; remember, Rome wasn’t built in a day, and neither will your financial fortress be.

Sticking to Your Budget

Consistency is vital when it comes to budgeting. Sticking to your budget may feel like trying to climb Mount Everest at first, but with time, it becomes a natural part of your financial routine. Here are a few tips to help:

• Create a realistic budget: Don’t make a budget that’s too restrictive; this often leads to frustration and giving up.
• Prioritize your spending: Focus on needs over wants.
• Establish an emergency fund: This provides a buffer for unexpected expenses, reducing the likelihood of derailing your budget.

Remember, successful budgeting isn’t about perfection; it’s about making consistent progress.

Reviewing and Adjusting Your Budget

A budget isn’t a static document; it’s a dynamic tool that changes as your financial circumstances evolve.

This flexibility is key to learning how to budget efficiently. Regular reviews and adjustments will help align your budget with your current financial state and future goals.

The Importance of Savings and Investments

Savings and investments are your financial growth catalysts. They’re what propels your wealth upward over time.

Whether you’re budgeting to save for an emergency fund, a vacation, or investing for retirement, your budget should always account for savings and investments.

According to a Federal Reserve report, only 53% of adults could cover a $400 emergency expense using savings. Regular savings and investments can ensure you don’t fall into this statistic.

A Contrarian View: Do You Really Need a Budget?

While we’ve discussed the benefits of budgeting, it’s important to acknowledge the other side of the coin.

Some argue that if you’re disciplined about your spending and saving habits, you might not need a strict budget.

However, the truth is, the majority of us need some form of structured plan to manage our finances effectively.

It’s no wonder that studies show those who maintain a budget report feeling more in control, more secure, and happier about their finances.

Learning How to Budget Can Lead to Financial Independence

There’s immense power and freedom that stems from managing your money effectively. By understanding how to budget, you gain the tools to shape your financial future.

This guide has provided the steps, and now it’s up to you to walk the path. Forge ahead with determination and command over your finances, and remember, the best time to start is now. Your financial future is in your hands.

 Additional Resources:

• Learn Where All Your Money Goes and Fix Budget Leaks  by Paula Pant of thebalance.com
• Everything You Need To Know About Budgeting: How To Create a Budget You Can Live With by Will Healy of gobankingrates.com
• 4 Surprising Advantages to Budgeting  by Paula Pant of thebalance.com
• These 5 Budgeting Myths are Total BS. So Stop Using Them as Excuses  by Tom Gordon of thepennyhoarder.com
• 3 Reasons You Should Stop Budgeting By The Month  by Nick True of mappedoutmoney.com
• 5 Best Budget Apps for 2020  by Josh Smith of gottabemobile.com.  Select one or two (or three) that you think might keep you motivated for a few months of budget familiarity.
• How to Hold a Budget Meeting  by FrugalChicLife on YouTube

Take Action:  

1. During your first two months of active budgeting, record your thoughts, feelings, surprises, and challenges. It won’t all be roses but you will likely find that with time it becomes habit and increasingly empowering.  Sending an e-mail to yourself with an easy to recall subject line like “Johnny’s Budget Experiment Week 2” will prove useful in the future as you reflect on your progress towards Financial Independence. Whether you inevitably stick to it or not, learning how to budget will reveal some information about your finances and yourself that will prove beneficial on your FI journey.

Quote:

“A budget is telling your money where to go instead of wondering where it went.” – John C. Maxwell