Set Your First Budget

When it comes to your money, setting a budget is probably one of the most important steps to keeping more of your money each and every month.  So, it’s time to sit back and get comfortable with your first budget!

Now, there are tons of different strategies out there for how to budget and how to make the most of your money.  Some of them are more hands-on than others, but the most important thing here is that you do not wait to have a lot of money in order to start budgeting.  If you only have ten dollars a month, then you need to account for every one of those ten dollars.  Where they’re coming from and where they’re going.  Then, what you want to do with them.  But first, let’s do a quick basic definition of a budget.  A budget is simply an estimate of your income (the amount of money you’re bringing in and have available to spend, save, or invest) and your expenses (all the things that you need to spend money on ).  It can be as simple as a piece of paper split into two columns where you jot down all of your paychecks gifts and so on in one column and all of your bills purchases grocery costs and so on in the other.  Or it can be  more complicated than that.  It can also automated through various apps and programs that help sort your budget for you.

Just as there are many different ways to track the nuts and bolts of a budget, there are also many different philosophical approaches to budgeting.  Some people approach budgeting with a straightforward pay yourself first strategy, where they set aside money first thing every month to be saved before sorting out all of the other money into different categories.  Others practice zero based budgeting, where every single dollar is assigned a category, with nothing left over at the end of the month.  These strategies are a bit more involved but they can easily be mastered once you’ve gotten used to the basics of understanding your budget.

If you aren’t sure of where to start with budgeting try keeping a money diary by writing down every purchase that you make for a given period of time.  This will help you start to understand your spending patterns so you can get an idea of how much money you want to dedicate to each category, as well as some of the things that you probably want to cut out  completely.  Regardless of your individual strategy, the most basic thing to keep in mind about a budget is that your expenses should not exceed your income.  You literally want to finish every month in the black, meaning that you have money left over to save or invest.

Now, if you’re spending more than you’re bringing in, that means you’re in the red for the month.  You’ve spent more than you’ve earned and you may still owe that money on a credit card or to someone you might have borrowed it from.   The most traditional budget there is is a simple list of the money coming in compared with a list of the money going out.  You record your income and assign it and your expenses in a category things like housing, utilities, student loans, paychecks, gifts, etc.

There are many ways to budget your income depending on how hands-on or hands off you want to be.  Some people swear by the old-school Google sheets method, of which there are plenty of examples, such as the financial diet.  But others prefer various apps which will help you to automate the categorization and analysis of all of your different spending and income.  Others still prefer to use a literal pen and paper because they find that actually writing these things out and doing the calculations themselves helps keep them accountable and very aware of every single line in their budget.  Again, no matter which method you picked you’ll generally have some basic categories of expenses that you’ll need to track, such as rent, internet or cell service, food, etc.  From there, you can drill it down even further if you’re trying to see exactly where your money goes.  These categories are then assigned an amount per month.  Your spending may vary month to month, but the idea is to never exceed the amount in any given category.  This helps keep you under budget overall.

Another strategy is called the envelope method, where you literally take a stack of envelopes labeled with your expense categories and put the money for each category in the envelope.  Then, whatever money you put in each of those envelopes is the only money you can use for that category that month.  The envelope method is obviously rather labor-intensive, but many people do find it very helpful to totally realign how they think about money and start fresh on a very accountable budget.  (Keep in mind that for big recurring expenses,  such as your rent or utilities, you may not want to keep them in envelopes.  You may want to just simply automate those bills, so the money comes out of your checking account and you don’t have as much cash on hand all the time.

Another popular budgeting method is the 50 30 20 rule.  The bare bones of this method is that 50% of your income should go to necessities, 30% goes to things that you want, and 20% goes to savings or paying off debt.  Some people do prefer to swap those last two so 20% is going to your wants and 30% to savings or debt payoff.  This is a very effective way for many people to budget because it’s a zero-sum budget, meaning that every single dollar is allocated.  It can be a bit inflexible because, for example, you may live in a place where it’s not realistic for your total necessary purchases each month to fall under 50% of your take-home pay.  In New York, for instance, you’d have to be earning quite a lot in order for that to be the case.

Perhaps the most difficult part of budgeting, especially if you’re someone who has a tendency to slip into that treat yourself mentality or confuse things that are nice to have with things that are necessary to have, is understanding the difference between necessary and unnecessary expenses.  The main thing is that you have to be super honest with yourself.  What are the basics that you need to get by each month?  There should be a basic minimum grocery bill, things like your rent or mortgage, basic utilities, internet, cell phone, etc.  Once you have identified in a very honest and clear way what your absolute necessary expenses are, those need to be taken out of your budget first and foremost by subtracting this amount from your monthly income.  This gives you a clear number of what you have left over for everything else and that everything else has to represent both your unnecessary expenses and your savings / debt repayment / investing.  Now, don’t get me wrong, unnecessary expenses doesn’t mean you will never buy or pay for these things.  It simply means that when push comes to shove, they do not absolutely need to be included in your monthly budget.  Things like going out to dinner with your friends, subscriptions and gym memberships, fitness classes, hobbies, coffees, and that kind of stuff can be categorized as unnecessary even if most months you end up paying for them anyway.

Again remember that whatever is left over in your budget after subtracting your absolute necessary expenses are going to be competing for space.  The more of those unnecessary expenses that you’re paying for each month, the less that you’ll have to go to savings, investments, or paying off bills, so make each dollar count.

Of course, the best way to get a really clear picture of what your actual necessary versus unnecessary expenses are is to get really good about tracking your own spending and getting a very clear picture of your lifestyle and what it costs to live it.  This is part of the reason why one of our first tips on this topic was to start with something like a money diary or writing down everything you spend on for a month or so.  Often when we’re setting out a budget for the first time, especially if we really want to cut back or save a lot, we have a tendency to wildly underestimate how much we realistically spend on certain categories each month.  It’s much better to make a realistic budget from which you can slowly start to chip away than to try to radically alter your spending in a way that doesn’t match up with your lifestyle.  If you do that, you’ll inevitably fail at the budget stop trying altogether.  Understanding how much you tend to spend at the grocery store every month, as well as doing a very clear inventory of which of your more regular bills you could probably cut back on versus the ones that need to remain the same, is extremely important for setting a realistic budget.  For example, you may be someone who uses your cell phone all the time for both work and personal use, so for you it’s much more important to just go ahead and pay for that more expensive unlimited monthly plan than to try and radically lower your monthly cell phone bill to a point where you constantly end up having to pay overages each month.

With a very clear record of your spending and analysis of your lifestyle, you will be able to paint a very clear portrait of unnecessary versus necessary and identify the places in which you can start to make meaningful changes without radically altering your lifestyle or setting yourself up for failure.  Remember, you don’t have to have an incredibly strict budget in order to get control over your money!  Sometimes you’re going to spend money on frivolous things or make mistakes or buy something that you might regret, but that’s okay.  What is important is having a very clear understanding of what is coming in and what is going out.

It’s also okay to experiment with different methods of budgeting so that you can get a feel for what works best for you and what’s more sustainable for you in the long run.  The power of a budget is in having control over your money and, at the very least, even if you’re currently spending more than you make, at least you have a very clear mental picture of what’s happening and what needs to happen in order for you to be in the black again.  Remember, no matter how little you may be taking in each month, it is never too early to start budgeting. Waiting until you’re rich to have a budget is like waiting until you’re married to start dating.

Simplest Envelope Budgeting System Ever

Ever heard of the envelope budgeting system?  If not, you’re one of the few.  Truthfully, the system works!  It takes time.  It takes commitment.  And it takes everyone in your household.  But it does work.  Can it change your life?  YES, but only if you’re willing to work at it.  So, let’s get started.

Rather than think about the really big financial decisions in your life, the envelope method focuses on the little, daily financial decisions in your life.  Tiny little spending decisions.  Like whether to have that morning coffee or that energy drink from the local convenience store.  As strange as it sounds, that’s where you can really save the most money!  And that’s the easiest place to start.

What is the envelope method?  Generally, you take several envelopes, assign each one a category (such as grocery, gas, clothing, etc.), and then assign each a dollar amount based on the amount of money that you have in your budget for that category.  Then, when you get paid, you actually put that much cash in the envelope.  Yeah, that’s right, CASH.  No debit card, no credit card, just cash.

So, what are some typical categories?  Groceries, gas, clothing, entertainment, etc.  Notice that I didn’t put housing, auto loans, credit card bills, utilities, and other types of fixed debt on the list?  That’s because you really can’t change those bills.  Yes, you can try and save on utilities (and you should), but you’re still going to have to pay them.  So, how should you handle those bills?  It’s actually fairly simple – set them up on autopay.  Take them out of the budget at the very beginning.

Instead of trying to stuff those obligations into your envelopes, simply take them off the top.  Pay the bills when you get paid.  Then, use the envelope method to budget what’s left.  Believe me, it makes it so much easier to see what you’ve got to work with!  And from there, be realistic.  Don’t set your grocery budget at $50 a week when you know you’re going to spend $100 a week.  And likewise, don’t put too much into your entertainment budget if you know you’ll really only spend half or three fourths of that amount.  Be realistic.  Look at your budget over the past several months and see what you actually spent, as well as where you could save some, and then use those numbers to start.  You can always adjust them later, but be honest with yourself.

Now, sit down and make up your envelopes, with all the categories, budget numbers written on the front, etc.  And then, once you have your envelopes set up, set up one more.  Call it Miscellaneous, Other, or whatever you want to, but set aside a little bit of “mad” money for those times when you have an unexpected expense or for when you just need to buy something for yourself.  Even though you may not think you need this last envelope, trust me and do it anyway.  You’ll be glad you did later on.

Okay, sounds pretty good so far, right?  Now, here’s where our method is just a little bit different.  You notice that I said we’re budgeting from paycheck to paycheck, right?  Unlike the traditional “envelope” method where you budget for the entire month, we do ours from paycheck to paycheck because, if you have a full month’s worth of money in your envelope, you’re more apt to go spend your entire budget all at once, and then you’d have nothing to live on for the rest of the month, right?   That’s why we do paycheck to paycheck.  And you might even want to break it down a little further… day to day even on some expenses.  Remember, it’s easier to save a little bit every day than it is to try and save a huge amount every month.  So, break your spending down into whatever increments work best for you – you don’t have to do everything the way everyone else does it.  Make adjustments so that it works for you, and then stick to it.  It takes a while, but keep at it.

As you learn to save a little here and there, you’ll find that you might have a little left in your envelopes at the end of the month.  And that’s where the saving comes in… take that little bit of money here and there and put it aside, in a cashbox, in a piggy bank, or even in another envelope.   As it adds up, you can decide whether you want to take half of it and put it toward an extra payment or two on a bill or if you want to treat yourself to something special or even if you just want to watch it add up over time.  Whatever you decide, it’s yours to spend or save as you see fit.  Trust me, you’ll quickly figure this part out – and you’ll soon start working twice as hard to ensure that the money that you have left at the end of the month keeps growing as much as possible.  It’s highly addictive once you get the hang of it and you’ll find yourself saving money in ways and places you never thought possible.