Budgeting can be a buzzkill at times. However, you cannot self-medicate every day regardless of how much money is in your bank account.
That is, unless you’re struggling to get the next paycheck, never see a dent in your debt, and don’t have anything saved for emergencies.
Budgeting doesn’t look too bad now, does it?
Creating a budget – and sticking to it – could finally give you the financial freedom that everyone else seems to have already figured out. And it doesn’t have to be an exhausting process.
How to budget in 4 easy steps
Start your path to controlling your personal finances by taking a little time to prepare and learn how to budget in the way that makes most sense for your lifestyle. We’ve laid out exactly what you need to do in four easy steps.
Step 1: Know How Much You Make and Spend
Before you can create a budget that will work, you need to know your numbers. We usually like to focus on a monthly budget as most bills are due once a month.
First log into your bank account online and get the bank statements for the last few months. While you’re at it, get your credit card statements too.
By exporting your bank statements to a spreadsheet or using highlighter pens over printed bank statements, you can spot patterns in your income, spending, and saving habits.
How to calculate your monthly income
First, write down your monthly income.
This should be your take-away pay for the month – your net income. That’s the money you make, minus deductions for taxes, Medicare, Social Security, health insurance contributions, and transfers to retirement accounts like your 401 (k) or Roth IRA.
This part is easy if you have a full time employee job. If you’re paid by commissions, work hourly, or have some other irregular income (such as freelancing), use the last six months average to get a rough idea. Self-employed budgeters can benefit from taking a step back every quarter to review their income.
Here are some Budgeting tips to manage your money when you are not making the same amount month to month.
But don’t just stop at calculating your monthly income. Add extra cash from your sideline jobs, child support payments, recurring bonuses or scholarships, and financial aid payments – include it all.
How to calculate your monthly expenses
Your next step is the painful part: it’s time to keep a log of your monthly expenses.
Start with your regular fixed expenses, including rent or mortgage, utilities, car payment, auto insurance, credit card payment, student loan, cell phone bill, internet, cable TV, and other monthly subscriptions like Netflix or Spotify.
Don’t forget to include monthly but recurring expenses like vehicle registration fees, credit card fees, HOA fees, membership fees, and annual subscription renewals. To add these non-monthly but recurring expenses to your monthly budget, add up the total cost for a year and divide that number by 12 to find out how much it costs each month.
“You could have a separate bank account for your annual expenses,” said Bridget Todd, COO of The financial gym. “Then when the bills come in, you don’t have to adjust your expenses. It’s like saving for Christmas shopping all year round.
From here you want to add up your variable and discretionary expenses. Analyze your spending habits. How much do you spend on non-fixed-cost necessities like groceries and clothing? What about the amount of money you spend on unnecessary things like eating out and drinking with friends?
For a complete picture, organize your expenses in Budget categories. For example, movies, concerts and museum visits can be entertainment. Your gym membership, yoga membership, and drop-in rate for that one CrossFit class can all fall under fitness.
Look at a few months of statements to get an average for that part too. This will give you a more accurate picture of your finances.
Step 2: set your financial goals
If you are to be successful at this budgeting game you need to have an idea of what you want to achieve.
It can be a simple short term savings goal, like building a humble one Emergency fund or finance a vacation with your college friends. Or it can be long term, like learning the budget so you can pay off your mortgage early or your child can go to college with no student loan debt. And do not forget Financing your retirement – no matter how far you are from this milestone.
Set yourself a goal and make it a motivational goal – your financial plan could be the only thing stopping you from using your credit cards to indulge in pointless retail therapy this weekend.
Next, arrange your priorities – in the truest sense of the word. Write them down in least important order to get an idea of where you want your money to go.
Your priorities may not be properly set the first time, and that’s fine. It is difficult to choose one option over another. If the first list doesn’t work well, you can always revise it. Make some adjustments to find a balance between “fun” and “responsible” spending.
If you see areas where your spending is not in line with your financial goals, now is the time to fix that by setting a new budget that aligns more of your income with your top priorities.
You can go a step further by mixing financial goals with personal goals. For example, if you swear to cook more at home, you can spend less on restaurant meals and stick to healthier foods.
Step 3: find your preferred budgeting method
Once you have a complete picture of your finances, it is time to choose the budgeting method that works best for you. There are many different budgeting methods to choose from.
ONE Zero-based budget is a budget plan where you determine where every dollar of your income goes each month. If you take your income and subtract all planned expenses, savings transfers, and debt payments, you should end up with zero.
With the 50/30/20 budget planYou spend 50% of your income on essential expenses, 30% on fun, and 20% on financial goals like saving, investing, or paying off debts. You don’t have to be precise about how much to spend on transportation or take away – as long as you stay within the appropriate percentages.
Cash handling system
Followers of Cash handling system Fill the envelopes with money to match their spending restrictions on any variable expenses like groceries or entertainment. Once the envelopes are empty, you will need to pause your spending until the end of the month or whenever it is time to replenish your envelopes.
Bare bones budget
ONE Bare bones budget only takes into account your most important needs. It’s great for those on a low income or for those trying to cut the fat off their budget so they can pile cash for an emergency fund, other savings, or debt settlement.
Bullet Journal Budget
Use a Bullet Journal Budget to creatively keep track of where your money is going. You have the option to customize your budget to your liking and make it attractive so you don’t mind sitting down to manage your money.
Kakeibo is a long standing Japanese budgeting method that incorporates mindfulness into a basic budget book. You keep track of your expenses using just four simple budget categories: needs, wants, culture, and unexpected / additional expenses.
With the Calendar budget method You use an up-to-date calendar to write down when you get paid, when your bills are due, and when you spend money. At the end of each day, write down your remaining balance.
Half payment method
The half payment method helps reduce the stress of paying monthly recurring bills. You schedule half of your regular bills a month early so that you don’t have to be financially burdened when the bills actually come due.
The paycheck budget ignores the typical rules for creating a budget to cover your expenses for a month. Instead, plan every time you get paid – whether weekly, bi-weekly, or bi-monthly.
Even after you’ve chosen your preferred budgeting method, don’t be afraid to flex it a little to suit your financial situation. You can include various aspects of different budgeting methods in your personal budget. For inspiration, learn how Kumiko Love from The budget mothercombined three budgeting methods to form them Budget-by-Paycheck method.
Step 4: find the best budgeting tools for you
You are not alone in this quest for a budget for your money. There are a few tools that can help.
Automate your budget
By automating the budgeting process, you can focus on your priorities by sending the money where it’s needed before you have the chance to blow it up on the fly.
On the income side, this can mean that the automatic deposit for your paycheck is split between your checking and savings accounts.
In the Expenses column, you can set up automatic payment for recurring regular expenses such as your car payment or mortgage to avoid those dreaded late fees. If your due dates don’t match your cash flow situation, you can call a lender or company and ask them to adjust the date.
While budgeting by hand works great, your smartphone can optimize it. A budgeting app is designed to take some of the money management work off your plate.
Many apps will sync with your bank account, automatically categorize your spending and show you at a glance how much you can responsibly spend before your next payday.
Other apps require you to enter your expenses manually. However, they can give you insights into your spending habits and ways you can save money without analyzing month-long bank statements.
Although some apps charge monthly or yearly fees, you can start with a free trial to see if it’s worth the money.
Don’t let setbacks discourage you
If your first attempt at budgeting seems like a flop, don’t feel bad. Karabaic from Oh My Dollar! Likes to remind customers that the first month you start setting up your budget, you’ll forget about things.
“That’s okay. You just get better information,” she said every month as you remember the expenses. “The third month is when, if you’re still doing, you feel like you’re on budget to be responsible. “
Keywords there: if you still do.
Chances are that you are reducing your budget in one of two ways: you set yourself unrealistic constraints and fail to meet them, or you forget to keep up with your budgeting method and give up.
Make sure you include some Fun spending money in your budget so that your budget doesn’t feel so restrictive. You may need to recruit one Responsible partner – A friend to share your money goals with and who will remind you to be consistent with your budgeting.
If you don’t have someone in your life to act as a responsible partner, you can connect with like-minded people and get some budgeting tips from members of The Penny Hoarder Community.
Remember that creating a budget is not a one-time event. Keep an eye on your plan as your goals and life change. Earning a raise, losing a job, getting married, having kids, starting a business – each of these life changes requires you to review and recalibrate your budget in order to stay on track to meet your goals and your life too Life.
Other budgeting resources
Desiree Stennett (@desi_stennett) is a former employee of the Penny Hoarder. Senior writer Nicole Dow, former contributor Lisa Rowan, and freelance contributor Kevin Mack contributed to this post.
The central theses
- To get a clear picture of your expenses, analyze the expenses for several months.
- Setting a financial goal is one of the most important steps to successfully budgeting your money.
- There are innumerable budgeting methods. When you find one that works for you, the rules can be tweaked to suit your situation.
- Use a smartphone app to streamline your budgeting process.
This article originally appeared on www.thepennyhoarder.com