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.