The first thing people bring up when it comes to finances is the idea to create a budget. But you may be wondering how to create and budget, and …why is a budget important in the first place?
It’s easy to use this method in one of my free budget templates or on an Excel spreadsheet.
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What is a Budget?
A budget is a spending plan based on your income and expenses over a period of time.
It is simply a way to keep track of the money coming in and where it is going to. Budgeting and creating a plan for your money allows you to control how it is being spent.
Why is a Budget Important?
When keeping track of your income and expenses with a budget, it ensures that you don’t overspend money you don’t have and go into debt.
It can help you identify the areas that you’re spending too much and allow you to fix them. When following a budget, you can focus your spending on what is important to you.
You can also see the importance of having a budget when it comes to saving money and paying off debt. Here is a breakdown of the many advantages of budgeting:
Advantages of Budgeting
- Allows you to have control over your finances and feel less stress.
- Helps you keep track of your spending in order to reach your saving goals.
- Ensures you don’t spend money you do not have.
- Helps you avoid having to pay bills late and the extra fees that come along with it.
- Highlights your bad habits and the areas that you are overspending in.
- Allows you to save and prepare for unfortunate events by having emergency savings.
- Enables you to avoid going into debt.
How to Create a Budget
Creating a budget can be very simple. The first budget I ever made was done in the notes app on my phone! This simple budget is a great introduction to a life of frugality for those starting out.
The basic steps to creating a budget are to:
- Calculate your total after-tax income from all sources.
- Set a savings goal. Decide how much you would like to save every month and take out that amount first.
- List all of your expenses. Figure out where your money is spent and subtract that.
- Adjust your spending. If there is not enough money to cover your expenses, find ways to lower it or increase your income.
- Stick to the plan. As you go through every month, track your progress to avoid overspending.
How much should you save monthly?
I loosely follow the 50/30/20 budget rule: 50% on needs, 30% on wants, and 20% on savings.
I aim to save 20% of my income; however, I don’t stick to a specific amount for needs and wants.
But, if you can only save $50 dollars per month, it’s still a great start. Slow and steady wins the race!
What is the best way to track your expenses?
There are different ways you can see where your money is going.
You can: check your bank statement, use an app like Mint, keep track of all your receipts over a month, or (in my case) do all three!
How do I adjust my budget?
If you’re spending more than you make, you’ll have to make some adjustments to balance your budget.
Prioritize what is important to you by determining your needs and wants.
Needs are the things that you require to survive. When deciding, think… “Can I live without this?” For me, they included things like rent, utilities, insurance, internet, a car, etc.
However, some wants can seem like they are needed. For instance, you might want more space in your home than is actually necessary. Or, while you do need clothes, you don’t need to buy new ones every month.
You can always find ways to cut everyday expenses: Find better deals at cellphone companies, shop around for cheaper car insurance, skip out on that brand new car and find a used one, etc.
Calculate the cost of your needs and use the money leftover to figure out which “wants” you can afford.
Wants are things that you desire, but don’t require. This includes groceries, getting hair cuts, entertainment, subscription plans, etc.
Some things don’t fit easily into a category. While food is necessary for survival, the specifics of what is bought are easy to adjust. Ex: Food and water are needed, but expensive cuts of meat or gallons of juice are not.
Related: Learn how I keep my grocery budget at $200/mo for two while eating healthy.
Balance your budget by determining what can be trimmed out.
I also always put a miscellaneous amount for irregularly bought items.
And ta-da! That is how you create a simple budget.
Budget plan sample:
|Monthly Income: |
20% of Income
$3,500 – $700 = $2,800 for Needs
$150 Car + Apartment Insurance
$300 Car Payment
$2800 – $1850 = $950 for Wants
$160 Gas (Car)
$40 Internet Tv
$200 Misc Items (household, personal, etc)
$950 – $900 = $50 leftover
(More to save! It is good to
keep this for additional emergency savings.)
Utilize this method with my free budget printables to gain control of your finances!
Stick to it! Budgeting Methods:
There are various methods to help you stay on track with our budget. Whatever way you choose, find something that works for you.
You might also find these tips for how to live on a budget useful.
Create Separate Bank Accounts
One way that helped me stick to this budget is to have two separate bank accounts.
After every payday, I transferred the amount for my bills and savings into my second bank account. This ensured that I always had enough to pay my bills and would not “accidentally” spend it. I set up all my bills on auto-pay so they’d be paid on time.
I also have some bills on my credit card and set it to be fully paid off each month. This helped me increase my credit score!
Envelope System With Cash
The envelope budgeting method is great for those who need to visually keep track of their expenses.
You do this by withdrawing cash, and adding the predetermined amount into separate envelopes for each category. Once the money in the envelope is gone, that’s it for the month!
You might also find that it works best for you to combine these methods.
For bills, you can separate that money into another account and pay them electronically. Then for everyday spending, categorize those amounts into envelopes and pay with cash.