How to budget

How to Budget

When learning how to budget, understand there is no one size fits all. And this is precisely what makes the “best” budgeting technique such a heated debate. The goal of this article is to give you a set of diverse tips on how to budget so you can choose what works best for you.

The best advice is to be aware of all the tools and methods out there and then find a budget to fit your personality and lifestyle.

Learning how to budget is useless if you absolutely dread doing it. Read all the tips on how to budget and then find something that you can see yourself doing each month!

Definition of Budgeting

A budget is defined as “an estimated prediction of your income vs expenses over a defined period of time.”

Budgets are predictions because life is going to throw curve balls along the way. Look at 2020 and you get the point!

How to Budget?

In the most simplistic of terms, this is How You Budget:

  • Step 1: Find out your after-tax income for the month.
  • Step 2: Calculate/Predict your expenses for the month.
  • Step 3: Compare the two values at the end of the month.

If you spend more than you make, that’s bad, you have a budget deficit.

If you make more than you spend, that’s good, you have a budget surplus.

Okay, at this point your thinking this page is a waste of my time, so lets get into some deeper tips on how to budget!

What is Successful Budgeting?

If your monthly expenses are less than your monthly income you are winning in terms of budgeting, right? Well, sort of.

The “real deal” successful budgets are achieved by setting financial and personal goals and meeting those targets through good money management!

Budgeting has no one size fits all because everyone has different goals in life! Some want to retire early, some want to travel or live it up while they are young, and others desire a financially comfortable retirement.

There isn’t one right way to live, therefore there isn’t one right way on how to budget. Successful budgeting occurs when you are able to achieve both your personal and financial goals set forth by proper management of your finances.

6 Different Budgeting Methods to Fit Your Style

There are plenty of different budgeting methods out there, your objective is to match one to your tastes.

Lets jump right into some of the more popular and common budgeting techniques:

Zero-Based Budgeting

The idea behind zero-based budgeting is to have a remaining balance of zero dollars at the end of the month. You accomplish this by calculating your income for the month and assigning every dollar a job in your budget.

By the end of the month, your income minus expenses should equal zero dollars. However, that doesn’t mean you literally spend every last penny until nothing is left!

Instead, a certain amount of dollars will be assigned different categories. Some will go to a savings or emergency fund, some may go toward your IRA or 401k, and others will be assigned to pay for the normal monthly expenses( groceries, utilities, rent/mortgage, online shopping, etc). 

Zero-based budgeting works because it makes you allocate a certain amount of money toward different areas in your budget. Spending more in one category throws off your budget because the extra dollars spent were already assigned for another purpose.

When done honestly, zero based budgeting keeps you on track to meet all your goals set at the beginning of each month!

Who is Zero Based Budgeting Good For?

The budgeter who needs that strict and organized routine.

Zero based budgeting is great for people who love a strict regimen and thrive off of super organized planning! You may be the ultra-organized type already or you may be looking for a method that forces this type of strict routine upon you.

Giving all your money a job is time consuming work, but it guarantees that every dollar will be going toward something that is useful in your budget.

Zero based budgeting is also a surprisingly great budget for those in a very healthy financial state. Sometimes when your income is more than you are spending each month, dollars start to accumulate in a low-interest checking accounts.

Assigning a purpose for your budget surplus dollars forces one to look at the best option for the extra money. Most times you will discover that funneling that money into different investments will benefit you far greater than letting it sit idle in a checking account. 

50-30-20 Rule

Learning how to budget with the 50/30/20 budgeting method is a very popular method. It separates your expenses into three categories. Needs, Wants, and Savings/Debt.

To budget using this formula you will need to calculate your after-tax income for the month. Next, write down all your anticipated expenses for the month. And then, separate those expenses into three categories by the following rules:

Needs: Expenses you cannot live or work without. 

Expenses in this category include rent/mortgage, groceries, utilities, health care, transportation for work, childcare, basic clothing, and minimum payments on any debts owed.

Wants: Expenses that are considered extra. Normally these expenses add to your quality of life, but aren’t deemed completely necessary. 

Expenses in this category may include, but are not limited to Internet Plans, Cell Phone Plans, Monthly Subscriptions (i.e. Netflix, Amazon Prime, Costco), Vacations, Luxury Items (i.e. Clothes, Shoes, Jewelery),Dining Out, Entertainment, Travel.

Saving/Debt Repayment: The savings and debts category is meant for setting money aside for the future and paying off any loans or debts owed. 

Expenses in this category may include contribution for 401(k)s, Traditional IRAs, Roth IRAs, Emergency Funds, CDs, Money Markets 

It will also include any money that goes toward debts beyond Minimum Payments on Credit Card, Student Loans, Car Payments, etc.

50/30/20 Budget Calculations

Using your after-tax income as a starting point, divvy up that value into percentages. 50% of your income should be going towards Needs, 30% is allocated for Wants, and 20% is set aside for Savings/Debt Repayment.

Compare what your expenses in each category are for the month and make adjustments to fall within the budget’s guidelines.

Who is 50/30/20 Budgeting Good For?

For the budgeter who is just starting out, wants to keep things simple, but needs a little guidance in each category

This is an ideal starter budget for those completely new to budgeting. It keeps things simple with only three categories to worry about. It can also be useful for those that have been frustrated by overly complicated budgeting techniques in the past.

The 50/30/20 Rule is great because it gives some guidance as to how much money to allocate toward the three big categories. 

This is an awesome technique for those that have budgeted in the past, but have trouble recognizing the particular areas where they are going off-track. The 50/30/20 budget easily highlights if you are spending too much or saving too little with your monthly budget percentages.

Envelope Budgeting System

The envelope budget system divides your monthly expenses up into different categories. Each category is then assigned an envelope.

Next, cash is placed into each envelope at a value determined by your monthly budget. 

Throughout the month, expenses in that category can only be paid using the cash inside of that group’s envelope. Once the money for that category is gone, no more money can be spent toward those expenses.

Cash cannot be taken from other envelopes because it is assigned for different purposes. For example, the emergency fund savings envelope cannot be used if you ran out of money in your dining out envelope!

If money from an envelope is left over at the end of the month, you can choose to roll it over for that category next month or put it toward savings and debt repayment.

Who is Envelope Budgeting Good For?

The budgeter that tends to overspend or fall off-track as the month goes by.

This method is great for those who tend to swipe their credit card and think of the ramifications later. It makes you put physical hands on dollars to remove them from the envelope. This makes you more aware of how much the purchase is costing you and also how much money is remaining.

If you are somebody gets super-motivated for budgeting, but then as the month drags on you tend to drift off budget, this may be the system for you. Once your money is gone there is no more money for you to “drift” from.

Although this budget is meant to be used with cash, there are apps where you can assign virtual envelopes so that credit cards and online payments can be used. It defeats some of the purpose of the envelope budgeting system, but is a good compromise if you can stay disciplined enough. 

Reverse Budgeting

Reverse budgeting is a method that is meant to prioritize your savings goals. The financial world likes to refer to this budget as the “pay-yourself-first” budget.

At the beginning of each month, determine how much money you want to save toward retirement, an emergency fund, or some other types of savings account. Set aside that amount of money right from the start. 

It could be any amount, but shooting for a 20% savings rate would be a good goal.

The rest of the of your income left over is used to cover all other expenses throughout the month. 

Pretty simple right! 

Be realistic with your savings goals based on your monthly income. You will still have expenses for necessities that cannot be avoided like rent, food, and transportation. 

There is nothing wrong if you need to start at 5 or 10%. Simply set a short-term financial goal of increasing your savings rate and slowly work toward that 20%.

Who is Reverse Budgeting Good for?

For the budgeter with laser focus on savings/debt, but who doesn’t feel like tracking every detail.

Reverse budgeting is obviously good for someone who wants to take an aggressive stance towards their savings goals. This person may be willing to sacrifice some of the creature comforts in the “Wants” categories in order to take larger strides toward savings.

Reverse budgeting also takes away some of the temptation toward splurging on expensive impulse buys and then realizing you don’t have enough money left over to reach your savings goals.

Setting up automatic contributions or withdrawals into retirement/savings accounts will make Reverse Budgeting even easier! Your savings has essentially been taken care of from the start and then you just need to make sure you do not run out of money throughout the course of the month with your other expenses.

Value-Based Budgeting

Value-based budgeting is a technique that prioritizes the expenses in how to budget your money into areas that you deem more valuable in life. Each person has a different opinion on what matters most to them.

In value-based budgeting, you list out expenses or experiences that you find most valuable in your life. You then prioritize your budget around fulfilling those more valued items.

Examples of Value Budgeting Include Money Set Aside for:

  • Daily Starbucks run
  • Savings for a future house down-payment
  • Creating an emergency fund
  • Saving for an annual vacation 
  • Organic food choices

Unfortunately, even with value budgeting you still need to dedicate a portion of your income towards necessities such as housing, transportation, and groceries. But as long as you deem the other expenses as valuable to your happiness, it should have a dedicated spot in your budget!

For example, if your morning coffee from Starbucks wakes you up, puts a smile on your face, and preps you to absolutely rock your day, then you might want to properly allocate money for it each month!

The same goes for early retirement goals, vacation funds, emergency funds, etc. The things you find most important in your life need to have money set aside so that you can reach these goals whether they be personal or financial.

Who is Value Based Budgeting For?

The budgeter not living paycheck-to-paycheck and wants to experience life to the fullest, but also has financial goals in mind.

Value-based Budgeting is perfect for the person who knows exactly what they want in life. This person knows what makes them happy and has tremendous foresight into where they want their life to head.

Value based budgeting is for those that dream big and know that if they put their money towards their ambitions, they will be happier in the long term. 

This type of budgeting is a lot easier for those with a little cushion in their monthly expenses. It allows for some expense splurges as long as you can justify the value they add to your life.

Value budgeting is super flexible and can be great for those wanting to reach goals at much quicker rates. This type of approach gives you the opportunity to put any amount of money towards categories you deem important enough.

If you value retiring by 40, by all means funnel your monthly budget towards reaching that goal! This budget gives choices and you are in the drivers seat!

60% Solution Budget

The 60% Solution was created by Richard Jenkins, an author/editor at MSN Money. 

In the 60% Solution, he talks about your budget consisting of 60% “committed expenses.” These include rent/mortgage, transportation costs, utilities, groceries, insurance, basic clothing, etc.

“Committed expenses” don’t necessarily have to be like the “Needs” category in the 50/30/20 Rule where expenses must be items you cannot live without. Instead, items in this category can include some more discretionary expenses like gym memberships, phone plans, music lessons, etc.

The remaining 40% of your budget will be split up into four categories: 

  • 10% for Retirement Accounts: This is money going into a 401k, IRA, Roth, or other similar accounts.
  • 10% for Long-Term Savings: This is money used for large dollar purchases such as new vehicles.
  • 10% For Short-Term Savings: This used to feed and grow an emergency fund for unplanned expenses. At least 6 months of income is recommended to be safely supported. This can go towards unplanned car maintenance, medical bills, etc.
  • 10% Fun Money: This money to be used for whatever you see fit. Keep it within the 10%!

The above categories were made up by Jenkins who has stated the percentages are not set in stone. Instead percentage variations can be tailored to fit your specific needs and goals. In other words, it’s up to you!

Who is the 60% Solution Budget Good For?

The budgeter who doesn’t like category expense tracking, but needs direction on where to allocate their monthly income.

The 60% Solution is similar to the 50/30/20 budget because it is an extremely helpful method for those new to budgeting. It spells things out by assigning percentages to the major categories of financial health. 

This budget is a little more specific than the 50-30-20 method which can help you from feeling overwhelmed by lack of direction.

If you are someone that needs a little guidance on how much to spend toward financial goals, then this is the budget you should be using. It is also useful because as you get better at budgeting, it gives you the flexibility to start changing category percentages based on your evolving goals.

For example, if your emergency fund is full, increase your retirement percentage from 10% up to 20%.

Budgeting Tools

Once you have found a budgeting technique that you feel comfortable with, the next step would be to combine the method with some budgeting tools.

Budgeting tools are aids that make the tracking process of your monthly income and expenses a little easier on you.

Best Budgeting Apps

If you haven’t been using the countless budgeting apps available then you are late to the party. Many of them have desktop and mobile versions to keep budget synchronization extremely easy. Some are free and others have monthly fees.

Here’s a List of the Best Budgeting Apps:

Mint: 

Cost: Free

Mint is brought to you by Intuit, the same owners of TurboTax. Mint has been a top-notch budgeting app for quite some time and they continue to improve their platform.

The app synchs with your banking, credit cards, and investment accounts to give you a great financial health snapshot. The app automatically classifies purchases into categories which allows you to set budget alerts on spending.

One very important feature that Mint offers is Free Credit Score and Credit Monitoring services. Theres a lot of value in this app for the right price of FREE!

YNAB

Cost: $84 per year or $11.99 per month (12 Months free for students)

You Need A Budget or YNAB, which it is commonly referred to as, is a paid budgeting platform. 

YNAB has an almost a cult-like following with a Facebook fanbase! One reason for this type of enthusiasm is because the YNAB approach is almost guaranteed to work if you stick with their strict method.

YNAB uses the zero-based budgeting system that gives a job to every dollar you make. The app also lets you synch your accounts for a more automated approach much like Mint.

The appeal about YNAB it is more of a learning platform with an integrated budgeting tracker. Their website even boasts, “On average, new budgeters save $600 in their first two months and more than $6,000 their first year.”

Im not normally a fan of paid budgeting apps, but with testimony like that who wouldn’t want to give it a shot!

EveryDollar 

Cost: Free or $129.99 per year for EveryDollar Plus

Ever hear of Dave Ramsey? Well if not, he is basically the Heavyweight King of Budgeting in the financial world. He’s written books and has his famous Dave Ramsey’s 7 Baby Steps!

His app, EveryDollar, was introduced to help his audience track their budgets. EveryDollar, much like YNAB, is a budgeting app set up for the Zero-based budgeting technique.

Unfortunately, the free version of EveryDollar does not allow automatic synchronization of your accounts. Instead you must make manual entries for each expense. One benefit of this is you become very in-tune with your purchases throughout the month.

In order to get those perks, you must upgrade to EveryDollar Plus.

Dave Ramsey is so well known because his methods have been proven by so many successful cases of people following his instruction.

Read his blog to get great financial tips and download EveryDollar to get your budget on track like the millions that already have!

GoodBudget

Cost: Free or $7 per month / $60 annually

GoodBudget uses the envelope budgeting method. However, instead of actual envelopes with cash, GoodBudget adapts to the 21st century and makes use of virtual envelopes.

You no longer have to worry about carry around envelopes full of cash. Phew!

The free app limits you to 10 envelopes and one user. If you pay to upgrade, you get unlimited envelopes and are able to use the app with family members so that your budgeting is on the same page.

Goodbudget doesn’t synch with your bank accounts or cards which can make budgeting a little more time consuming. However, you are guaranteed to be more aware with your spending by manual entry.

Mvelopes

Cost: $6 Basic, $10 Premier, $19 Plus

Mvelopes is once again another Zero based budgeting system that uses virtual envelopes much like Goodbudget.

The difference with Mvelopes is that they have synchronization abilities with all your accounts and cards. Paying the Premier or Plus tier levels get you tools and support for budgeting and can even allow you opportunity to to speak with a “budget coach” on a quarterly basis.

Mvelopes is more of a learning platform with budget tracking similar to YNAB. You’ll get more direction than Goodbudget, but will be paying a monthly fee for the advice.

Wally

Cost: Free

Wally is a great traditional budgeting app. It lets you set budget limits, track income and spending, and set financial goals.

The layout is fun with great icons and metrics visuals for easy to understand tracking.

The app is free and allows you to synch with banks and credit cards, making Wally a great choice for traditional expense tracking.  

Wally is a very underrated budgeting app! Check it out.

Personal Capital

Cost: Free or Fee based for investment advice.

Personal Capital is a little different than the previous apps. Instead of having a mission of budgeting, Personal Capital, is used for an overall net-worth tracker.  

Although the free app is meant to track net-worth, you can seek investment advice for a fee which is where they make their money.

Personal Capital is all around tracker that can show Net Worth, Transactions, Cash Flow, Budgeting, and Investment analysis. 

The free app can synch with all your accounts and cards to give you a great up to date look at your finances.  The budgeting portion isn’t quite as user or option friendly like the apps above, but with all the Free features offered I didn’t want to leave it off the list.

Budgeting Templates

Although apps have taken over in many aspects of our lives, personal monthly budgeting templates still have their perks.

Monthly budgeting templates such as those made in Microsoft Excel, Google Sheets, and Numbers allow for almost limitless customization.

This is great for scenarios where you’ve found that great mobile app for budgeting, but you wish it had that extra feature! This is where customizing a budget template can work in your favor.

Budgeting Templates: Pre-Made or Build Your Own

Money in Excel, a new budgeting template for Microsoft Excel, allows you to actually synch your bank accounts to your spreadsheet! You need to have a Microsoft 365 account for this to be possible, but it’s a cool feature!

Scouring Pintrest will allow you to search for free and paid templates that are pre-made. Some are better than others, but it takes the DIY out of the equation.

And finally, programs like Excel, Numbers, and Google Sheets allow you to design exactly what you need for budgeting or modify one of their existing templates.

The drawback here is that you will most likely not have the ability to synch credit cards and bank accounts unless you get super creative! However, manual entry is not such a bad thing because it puts you totally in-tune with your spending!

Creating Budgeting Templates in Excel remains quite simple.

  1. The basic concept is to create an input cell for your monthly income.
  2. Next, group expenses in likewise categories
  3. At the bottom of each category column, create a cell that adds up all the values.
  4. The totals from each category column should be added together and then subtracted from your monthly income 
  5. Analyze your difference. If you have gone negative, look for areas to cut expenses. If you have a budget surplus, either pay high-interest debts or put more towards savings!

If this all seems too complicated, download your monthly 50-30-20 Rule of Budgeting Excel Template.

Define Your Goals Before Your Budget

There is definitely more to life than money. Shit, financial sites are not supposed to say that! Its true though, you will drive yourself completely mad thinking only about dollar signs. Ask me how I know!

Before making a budget, try the following:

Write out these four statements:

  • My short-term financial goal is…
  • My long-term financial goal is…
  • My short-term personal goal is…
  • My long-term personal goal is…

You can have multiple goals for the statements above, but as a starting point get at least one each.  

When I say write out, I mean gather your thoughts and physically write them down on paper!

Why?

Psychology professor Dr. Gail Matthews, at the Dominican University in California, led a study on goal-setting with nearly 270 participants. The results? You are 42 percent more likely to achieve your goals if you write them down.

Pretty neat!

Write these goals down and review them regularly. When you start incorporating expenses into budgeting, ensure you are keeping these goals in mind! Adjust your budget if you start to see your goals slipping away each month.

Budget Example with a Combined Short-Term Personal Goal

Example: You have a personal goal of losing weight and getting in shape by summer. However, you decide to buy a new pair of sunglasses because they “look great and are on sale.” Unfortunately you no longer have the money for a monthly gym membership.

At the end of the month, your income vs. expenses come out even. Do you consider this a successful budget?

Financially maybe you can call it a win, but you chose to prioritize your money away from your weight loss goal. Buying the sunglasses was a conscious decision which ultimately lead to you not being able to fulfill your short-term personal goal.

It doesn’t mean that you are a failure, it simply means you failed at taking the appropriate steps toward achieving some of the goals you set forth.

The great thing about learning how to budget is that you always get another chance! 

We usually only think of the money-side of budgeting. Once you realize it has a tremendous impact on achieving your personal goals as well, you start to see why learning how to budget successfully is so important!

How to Budget Review 

  1. Understand there is not one “correct” way on how to budget
  2. Physically write-down your short and long-term financial and personal goals before creating a budget.
  3. Find a budgeting technique that won’t be a hassle to use on a monthly basis. And one that fits your tastes. Budgets will not work if you use them inconsistently.
  4. Use a budgeting app that pairs well with the budgeting method you decide on.
  5. If more detailed approach is needed, think about creating your own Budgeting Template in Excel.
  6. Be honest with your expenses! Leaving out purchases is only hurting you.
  7. Learning how to budget can be Frustrating, but it gets easier with practice, usually taking 2-4 months to get comfortable with.

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