Don’t let the word budgeting scare you. Too many of us think a budget is restricting, but that’s not the case. Setting up a budget gives you financial freedom, and more importantly, peace. It’s like giving your money a roadmap. It needs to know where to go and the only way is with a thought-out budget.
Use these steps to budget without feeling restricted.
1. Determine your monthly income
You can’t budget until you know your total income. Gather all income documentation from any sources. For example, if you have a side hustle or receive child support/alimony include these numbers in your income.
2. List your monthly expenses
To determine your monthly expenses pull your bank statements from the last 12 months. If you use credit cards, pull those statements too.
Write down each expense including monthly, semi-annual, and annual expenses. Include every expense, such as gifts, annual fees, real estate taxes, and car maintenance.
3. Categorize your monthly expenses
Take your list of expenses and categorize them by fixed and variable expenses. Fixed expenses are anything necessary to live – housing, transportation, groceries, and medical expenses, are good examples.
Variable expenses are the categories you can play with if you find you’re coming up short. For example, you have to pay your mortgage to have a place to live, but you don’t have to have money to eat out several times a week if money is tight.
4. Choose a budgeting method
You can budget however you want, but if you prefer to follow a specific program, here are the top budgeting plans:
- 50/30/20 budget – Allocate 50% of your income to your fixed expenses, 30% to variable expenses, and 20% to savings/debt payoff. Budgeting this way gives you guidelines. You’ll quickly see if your fixed expenses are too high or if you overspend on ‘other expenses.’ Making your expenses fit into these parameters ensures you have money to save for emergencies or pay off debt.
- Zero-based budget – This budget gives every dollar a ‘job.’ At the end of the month, your checking account should be at $0, but only because you assigned every dollar a job including paying bills, funding your variable expenses, funding an emergency account, saving for retirement, or paying off credit card debt.
- Envelope method – If you like to use cash versus a credit/debit card, the envelope method keeps you on track. After listing out your expenses by category, assign a budget to each category and create an envelope for it. Fill each envelope with the allotted cash each month. Once you spend the cash in the envelope, you’re done spending in that category for the month.
5. Choose a method to track your spending
After setting up a budget, you need to track it, without tracking you won’t know if you’re sticking to the budget.
There’s no right or wrong way to track your spending – the right method is the one you’ll use. Here are a few common ways most people track their budgets:
- Budgeting app – Choose from a variety of budgeting apps available from free apps like Mint to subscription-based apps like You Need a Budget.
- Spreadsheet – If you’re a numbers person and love spreadsheets, set up a budget on Excel or Google Sheets and track your spending. The key is you have to manually enter every transaction so make sure you’re capable of this (and will do it).
- Pen and paper – If you aren’t a computer person and prefer pen and paper, that works too. But like tracking with a spreadsheet, you must be good about updating it daily.
6. Be flexible
The final step is all about giving yourself grace. It’s okay if you set up a budget and it doesn’t work. Consider it a bit of trial and error when you start. Nothing is perfect and even after you’re at it for a while, life may change. You may change jobs, lose a job, or have an unexpected expense.
It’s okay if things go topsy turvy because when you have a budget, you’re aware and can make changes fast.
Learn How to Create your Budget
The right budget is the one you’ll use and feel good about. Budgeting shouldn’t feel restrictive or like a chore. It should feel empowering because it gives you control of your money – you know where you stand, what needs changing, and how well you’re saving for emergencies, rainy days, and the future.