If you want to get rich, you have to get your finances in order. Budgeting will help you do this. Budgeting needs careful planning, and your budget can help you get started. For many people, budgeting is not any fun. It means constraints or lack of or even punishment.
Personally, I prefer the word “plan” to the word “budget” because it is not as limiting. But creating budget categories is important to your financial success. Have you ever heard the phrase “failing to plan is like planning to fail”? If you don’t plan ahead of time, you will never succeed.
Budgeting doesn’t have to be difficult or complicated. In fact, there are many advantages. All you need to do is make your own plan. And this means searching for the best budget strategies and budget categories. In this blog article, you will learn all about budgeting and how to win at it!
Part 1: Finding the right budget method for you
Some very good reasons exist for budgeting. It can help you manage your finances, track your expenses, and teach you to manage your money – and not have it manage you! It’s a crucial step in helping you build wealth.
Having money enables you to live a carefree life without fear for the future. “Later” almost never does. By paying for things today rather than saving up for the future, you can experience life to the fullest.
I could save $100,000 in only three years by creating a budget and following it. Just think of what you can achieve with a little forethought.
Budgeting can often be an emotional task, but if you can objectively view your funds as a device for making financial decisions, it will be much easier to plan your money. Once you have decided what your priorities are, your budget should correspond to those objectives.
How do you create a budget? There are a variety of different budgeting methods you can use. You can decide which method works best for you by deciding on a format that works well with your way of life. Trust me, even if you do not want to budget, there’s a fashion available for you!
Finding the right method is challenging because not everybody processes information the same way. You may prefer one of these methods or a mix of some of them. You may budget every week or on a monthly basis or budget biweekly.
The most important thing to do is to just get it done. If one does not work, try another one. As such, here are four different budget plans that you can try out.
Budget Method 1: Budgeting with the envelope or cash system
This budget-based system is easy-to-use. Subtract your expenses from your income and allocate each amount to an envelope. These envelopes are your categories.
By using money, you can also follow your budget. Studies show that you spend less by spending with cash than when paying with plastic card or electronic transfer. But you don’t have to spend your Envelopes for all expenses.
You can keep track of your expenses in virtual envelopes that you track using a budget worksheet or an app. Then, put money for your smaller expenditures and daily transactions in physical envelopes.
The money envelope system works best for categories that you frequently overspend on. Items like your clothing, food, eating out, fun, kids’ expenses, etc. are examples. It should be simple to monitor and follow so that it does not become overwhelming.
Learn how to get started using the cash envelope system, and be sure to read through our reviews of the best cash envelope wallets.
Budget Method 2: Budgeting using percentage breakouts
Another way to cut costs is to divide your income into percentages, then divide your expenditures and savings accordingly. The most common ratio is 50/30/20.
Note that these percentages are not set in stone. This is YOUR budget and can choose to spend more or less on any particular category. You can spend savings or debt repayment in one area and put more into another.
So, for instance, you can choose a 35/30/35 breakdown, a 35/35/40 breakdown, or even a 25/25/50 breakdown. The goal is to set percentage breakdowns that are meaningful to you.
Just be cautious about how much of your income you are spending on housing. A good rule of thumb is to keep housing costs below 30% of your income. Otherwise, you will not be able to save and spend as much on your goals, such as being debt-free and becoming financially independent.
Using a budget worksheet or a pre-made budget template (get our spreadsheet here!) is handy for this method. Budgeting using a budget template or worksheet allows you to see where your money is going. It is much easier to manage your money on a monthly basis.
Other commonly used percentage systems include the 70-20-10 budget, the 30-30-30-10 budget, the 80-20 rule, and the 60-30-10 rule!
Budget Method 3: The reverse budgeting approach
Reverse budgeting is the opposite of most budgetary approaches wherein you deduct your expenses from your monthly income.
This method of budgeting enables you to focus on a single objective, such as paying off a certain amount of debt or saving money every month, in addition to paying your bills.
As long as you meet your monthly goal and pay your bills without exceeding your income, you are free to spend your money as you please.
Budget Method #4: Zero-based budgeting
An alternative to budgeting is zero-based budgeting. This is the approach of Dave Ramsey, which he recommends. Basically, a zero-based budget is setting priorities for every dollar in your budget.
So instead of having $X remaining at the end of the month, you have $0 left on paper. When you’re planning out your budget, you include everything you can think of in your budget to make certain that every penny has a use.
You probably won’t have any money left at the end of the month because you’ve allocated different savings plans to your budget. This method allows you to be conscientious with every penny so that you save what is left.
Budgeting using a spreadsheet vs. an app
Spreadsheets or applications? Which do you prefer? Whichever method you choose, it should be simple to use, secure, and take your financial situation into account. Some people prefer spreadsheets because they can keep track of their money better; they do not have to worry about banking accounts or their private information. Using a budget worksheet enables them to get really close to their totals.
Love budgeting with a spreadsheet, but are concerned about being unable to access it when you are away? Google Drive is free and enables you to upload your spreadsheet to your device for convenient access on your mobile device.
Apps make it very simple to budget, particularly if you have connected your bank accounts to them. Most apps have high cybersecurity levels.
Sometimes there can be delays in processing transaction updates. Some apps are not as user-friendly in terms of categorizing transactions, and this can require a bit of setup on your part.
Everything else is really straightforward. You will receive notifications for transactions as they happen and will just need to check on your account regularly. This will ensure that you stay in budget and on schedule.
Whether you choose a spreadsheet budget or an app, you can set up your budget to reflect any of these budgeting methods. Good examples include our example of a budget.
Part 2: Budget categories to use
In order to successfully budget, you need to know where your money goes each month. Only then can you create a plan for managing your spending. This is where budget categories come into play.
Budget category #1: Money for your future self, emergency fund, and debt
Always pay yourself first before you pay your bills or do any shopping. Your future self and your emergency savings accounts should be prioritized. Always be sure to pay your utilities and groceries from your paycheck before anything else. No ifs, no maybes. Just do it.
Planning for the future ensures that you can live your retirement on your own, and you do not have to depend on the government and your children to help you.
Having an emergency savings account also gives you a buffer should the monsoon arrive, allowing you to use your emergency savings instead of a credit card or loan.
You can also include money to pay off any outstanding debt in this category or include it in a sub-category (e.g. your debts, car loan, student loans, etc.) because it is vital that you pay off your debts as soon as possible so you can focus on building wealth.
Budget category #2: Your essentials and needs
Next would be your needs and requirements – the things you need in order to live. This does not include funds for shopping or getting your nails done – these are not requirements.
Things like your housing costs (mortgage or rent), transportation, and food are all included here.
Budget category #3: Your other money and life goals
This would include any money you are saving outside of your retirement account, such as your midterm savings and investments for the next 10 to 15 years, business savings, saving for a home purchase, college savings, and so on.
I recommend creating separate accounts for each of your different goals. I have automated deposits set up for different goals, and it has been helpful for me to stay on top of my savings!
Budget category #4: Everything else
Your discretionary income would be lost on purchases, eating out, entertainment, travel, and other typical expenses that you would ordinarily make.
Budget category percentages
For each of these categories, below is a basic guideline of how your money will be allocated:
Keep in mind that you can alter these to your liking. Remember that your budget is a plan for managing your resources so you can build wealth.
What if you are focused on paying off debt?
If you have debt, you should make budgeting a priority by paying as much as you can afford toward it every month. This means that you should reduce the amounts you contribute to various budget categories/buckets and reallocate the difference to paying off your outstanding debt as quickly as possible.
If you allocate your income into these buckets and then monitor your expenditures against the buckets often (once a week at a minimum – I like monitoring my spending every day), you will be well on your way to budgeting effectively.
Just like with finances, adhering to your plan demands discipline. Having a companion who can hold you accountable is a very good idea if you are having trouble staying on track. Ask for assistance from a friend. We all need a cheerleader from time to time.
Part 3: How to stick to a budget
Budgeting doesn’t have to be terrifying and stressful. Once you get the hang of it, it gets easier and easier each month. These simple steps will simplify the process and help you stick to your budget.
1. Call it something fun
Call your budget something that you like and that motivates you to keep up with it. Who says it must have that name? Give it a nickname and a personality. The word budget is boring.
2. Create a budget in advance of each month
Making a budget ahead of time of the month means you start the new month with a plan and you are no longer scrambling to figure out what to do.
Create your budget a few days prior to the start of the month. This gives you time to plan things out and set a budget for the coming month.
Establishing a budget allows you to plan your finances for several months at a time. You can even make a monthly budget for nearly a year at a time.
3. Don’t assume every month will be the same
Each month should be prepared for independently. No two months will be the same fiscally, so you ought to prepare for things like one-off expenses or travel expenses, event plans, and so on. This is precisely why it is critical to create a monthly budget.
Likewise, budgeting for life-changing events also necessitates some extra attention. Whether it’s a new child or you’ve paid off debt, sometimes you need to take a closer look at your monthly budget to accommodate those changes as necessary.
4. Base your budget on your projected income for that month
If you get paid once a month, twice a month, or every two weeks, budget your income based on that anticipated payment so that you have a good idea of how much you need to spend.
Be aware that if you receive a check every other week, then there will be a month when you receive three checks. So plan accordingly.
On the other hand, if you are on a tight budget, you may have some troubles getting it right from the start. You’ll have to be even more vigilant with tracking your expenditures and estimating your income, but you can do this!
5. Pay your expenses before splurging
This means that you should pay for your necessities, debts, and goals and (savings and investments) before doing any splurging or miscellaneous spending.
You don’t want to find out that you overspent on expenses that are not necessary and do not have a way to pay your bills.
Nevertheless, it’s perfectly alright to splurge. Just be sure you are building your splurges into your budget so you can enjoy them without guilt.
Tracking your transactions can help you stay within your budget and keep track of how you spend your money. You can use a spending journal, spreadsheet, or automated app or site to keep track of your savingss.
If you are new to budgeting, it is a good idea to track your transactions and check in with your budget every morning. It will only take a few minutes and it will enable you to stay within your budget. You’re also developing the habit of checking on your budget often.
Leverage a budget method that works for you!
Budgets don’t have to be complicated or a chore. Whatever method you choose, how you budget comes down to your preferences.
Like any art form, budgeting requires time and patience to master. It can take several months to truly understand what is and is not working. This means testing out budget methods, creating your budget categories, and identifying your monetarily stable locations.
If you fall, brush yourself off and recover your footing. Apply what you learned in last month’s budgeting exercise to this month’s. If you need hands-on budget counseling, that is also acceptable.
The key is to keep moving forward and just when it gets difficult.