You may have already heard how critical a budget can be to your overall financial goals.
Kyle Enright, the President at Achieve Lending, said, “When you build a budget, you have a future financial goal you’re looking to reach. This can be anything from saving enough for a downpayment for a home to paying off a large debt. Then after those goals are reached, it’s on to the next one.”
The key comes from building one and then sticking to it.
What encompasses an actual budget?
It’s really organizing your finances, from money that comes in (i.e. salary and income) and the money that goes out (i.e. your common expenses).
Douglas Boneparth, the President of Bone Fide Wealth based in New York City, said it’s also a way to help you identify your spending and how you handle money. The simplest budget will be on a monthly basis and coincide with your monthly income. Once you get the overall picture of your funds you can refine them based on the needs and goals you have.
Is it hard to make a budget?
Enright states that your first budget should revolve around your ultimate goals in the near term and long term.
“You want to keep at it, meaning keep adjusting the budget monthly and annually. It will help to discipline you to reach those goals,” says Enright.
Understand your total money coming in
Now that you have the fundamentals on making a budget and possibly a goal in mind, we look at the first part, which is the positive aspect of your budget, the money you get.
Enright states that you should “factor in all net incomes, which are the monies you receive from your paycheck (after all deductions), and any other types of passive or side hustle incomes. This is what you are working with.”
Categorize and track expenses
From there, you’ll start tracking where the money goes, which is your spending.
Enright helps by adding, “You want to try to categorize every expense and if they are fixed or variable.”
Fixed expenses are those costs that are hard to reduce, such as your monthly car or rent, or other items, such as those student loan payments. Variable expenses then fall into necessary expenses such as food and gas and other items such as medicine.
Then you want to factor in your ongoing debts, such as your credit card debts, annual subscriptions, or premiums for your insurance.
Start to change your spending
Now that you have the overall picture of your budget, it’s time to see where you can adjust and potentially reduce some items.
Kerrie Saephanh, who is a founder at Mindful Budget, says. “For those starting out you want to split your costs into three buckets which is known as the 50-30-20 strategy.”
That means 50% on your needs, 30% on what you may want and at the very least 20% tucked away for a rainy day. You can slightly adjust these based on your individual preference but this is a good starting ratio.
Enright also adds, “You may be living in high-cost areas where your needs bucket will be higher due to higher price in rental accommodations, for example.”
A certified Financial Advisor who is also a Professor at Curtis L. Gerrish School of Business, Michael Collins, slightly enhances that ratio, where the needs come down to 40%, and then there are six other parts to break down at 10% intervals; these are clothing, food, entertainment, transportation, savings, and random miscellaneous costs.
Constantly review the budget
Don’t just make a budget; stick to it and never update it. You want to ensure that you’re always on track and sticking to your goals. This comes from better savings habits and reduced spending habits.
Enright recommends that there should be, at the very least, a monthly review, but early on, they should really be weekly.
“For couples, you want to work together and have the budget reviews together. Always make sure to parse out some time for this and adjust accordingly.” He adds.
Use technology to help you budget
Numerous apps out there help to connect with your bank accounts and track your spending.
Collins adds, “You can utilize these tools not only to track your spending but also to develop goals and get notifications, such as hitting a goal or overspending for the week.”
They don’t cost money, and Saephanh even goes out to recommend Mint, which is one of the best in the industry. Once you make a budget and stick to it on Mint, she recommends starting to use “You Need a Budget” or YNAB, which is much more sophisticated.
“It may take some time to get used to YNAB, but once you do, you’ll start to really clearly see how your money is spent and what you need to do.” says Saephanh.
Final ways to stay the course
“Keeping up with what you set out when you made a budget is the true test. It’s akin to building a new healthy habit, so make sure you’re ready for it.” Says Saephanh, who adds to start small and not just slash costs everywhere from day one.
- Automate your savings and payments – use those banking features to ensure that you’re always making on-time payments to debts and consistently saving.
- Calculate savings as an actual expense – don’t have savings somewhere outside of your costs. Enright even states you should put it in your budget like you would put utilities as a bill. He says, “When you equate savings to whatever is left, it turns out to be smaller than it can be.”
- Technology should be simple – that means using budgeting apps that are easy for you as an individual. Enright adds, “Choose something you will use.” At the same time, Saephanah says to put that app front and center on your phone.
- Return to cash – This will make you feel your money leave your hands, which is sometimes hard to do with a debit card. Just remember to track those costs somewhere manually still.
- Be Accountable – Saephanh even says to “make a budget with a friend, or go to other communities and make sure you have a support system so you can succeed.”
In the end, make sure you work with a budget that’s aligned with how you operate and is something that works for you.