Budgeting can seem like an overwhelming or tedious task; however, it is an important piece of a solid financial plan. You cannot plan for your future through saving and investing without understanding your current financial situation, including your income and expenses. A solid budget is the key to building a strong financial foundation to achieve your goals.
A budget does not have to be a strict and intricate process. The best budgeting solution is different for everyone. If you know you do not have the time or energy to follow a precise, written out budget, don’t create one. If you trust yourself to only spend within your means and goals, then you can easily implement a relaxed and flexible budget. There are a lot of options in-between these methods, so don’t be afraid to try several different budgeting strategies to find the best fit for you.
To get started, determine your exact monthly take-home pay and allocate your expenses between essential (rent, bills, groceries, etc.) and non-essential (dining out, entertainment, shopping, etc.). Once you understand these numbers, you can start to create your savings and debt management goals, such as building an emergency fund, contributing to your workplace retirement plan, and/or paying off loans. Consider trying one of these popular budgeting approaches:
· 50/30/20 – Spend 50% of your after-tax income on needs (housing, utilities, insurance, groceries, and minimum debt payments), 30% on wants (entertainment, eating out, shopping, and vacations), and save 20% toward your emergency fund, investing, retirement, and extra debt repayments. This can be a great place to start, but you may need to adjust the percentages to fit your personal financial situation.
· Spending First – Plan your spending each month and save any money that is left over. This may be an easy option if you are earning much more than you are spending, but it could be too open-ended of a solution for individuals that need more structure.
· Pay Yourself First – Prioritize your savings first, and then, pay necessary expenses. You may need to make sacrifices in certain spending categories to fully fund your savings goals.
· Envelope System – Only withdraw the cash needed to cover all upcoming expenses and allocate to different labeled expense envelopes. This strategy may be difficult for some bills, such as rent and utilities, which may need to be paid online or via a debit/credit card.
· Zero-Based Budgeting – Take the amount you earn each month and allocate every dollar to a specific category. The key is to ensure every dollar has a purpose in your budget. This allows you to be very intentional about your spending and saving. It may take a few months to determine the accurate allocation for all of your funds, so make adjustments as needed.
Remember, budgeting doesn’t have to be set in stone and can be modified as often as needed to fit your current lifestyle. The more flexible you are, the easier it will be to stick to your plan. It may be helpful to use a budgeting application, such as YNAB, PocketGuard, Personal Capital, or Goodbudget. Many of these apps conveniently connect directly to your bank, investment, and loan accounts, which can save you a lot of data-entry time and show reports of your spending and saving trends. You can even use a spreadsheet or checklist to stick to your goals. The most important thing is to get started. You can do it!