Creating a budget has the same thrill level as getting an impacted a wisdom tooth removed. For some, the wisdom tooth might even be preferable. But a budget will prevent that “where did all my money go?” feeling and subsequently help you build wealth.
Fortunately, there are multiple ways to budget so you can find one that suits your personality. But first, you need to learn the building blocks of a budget.
What you need
- Figure out how much money is coming in each month
- Tally up your monthly expenses including: rent (or mortgage), groceries, transportation expenses, debt repayment (credit cards and/or student loans), cell phone bill, utilities and your “fun fund.”
- Set a percentage of money you save each month.
- Subtract your monthly expenses and set savings from your monthly income to determine how much wiggle room you have each month
These steps are the foundation of budgeting. Next, you need to figure out which style of budgeting is right for you.
Types of budgeting
The penny tracker
A budget extraordinaire subscribes to the penny tracking lifestyle. Every item he or she buys is meticulously tracked, totaled and compared against an allotted budget.
The penny tracker will create itemized lines of how much can be spent per month on specific categories, ie: food, rent, bills, and entertainment.
All the money a penny tracker spends is carefully written down (or monitored through an online service).
For example, if Tammy has $300 allocated for food each month, she’ll write down all the money she spends on groceries, morning lattes and going out to eat. Each time she spends money on food, Tammy writes it down and then subtracts it from her budget to see how much is left for her to spend.
The beauty of this method is the ability to see where all of your money is going. There is never a surprise about the sudden drop in a bank account or a particularly high credit card bill. It keeps accountability high and also helps plug leaks in a budget.
By tracking each penny you spend, you’ll be able to see if you’re consistently throwing cash at a non-essential purchase that could be put elsewhere, like debt repayment or saving up for a large purchase.
If you don’t want to be a penny tracker for life, you should still take a month to track all of your spending. This exercise will help illuminate any trouble areas you may have and keep you from wondering, “where did all my money go?”
The “leftovers” spender
A slightly more practical style of budgeting, the “leftovers” spender subscribes to the mentality of paying him or herself first, taking care of all the bills and then using the remaining money at his or her own discretion.
Save it, spend it, do what have you because it’s the “leftovers” in your budget.
It looks something like this:
Sam earns $2,200 a month (after taxes and a 401(k) contribution).
Each month he owes:
- $800 for rent
- Approximately $120 for utilities
- $65 for his phone bill
- $250 for student loans
- $250 for car insurance and gas
- $300 towards savings
- $200 to groceries
$215 is leftover each month. This means Sam can use that $215 towards entertainment or pad a different area of his budget, perhaps food, or throw money towards debt repayment or savings.
This style of budgeting keeps people from feeling the need to constantly track every penny and keep rigid tabs on their spending, but it still can prevent overspending by simply being aware of how much you have to spend.
The 50/30/20 Rule or the Envelope Method
It’s a common rule of personal finance, but the 50/30/20 rule is similar to the leftover spender mentality. You allocate 50% of your budget towards fixed expenses (all those delightful bills), 30% towards saving or other financial goals and the spare 20% towards flexible categories (which might include groceries because the cost fluctuate). Some experts might say 30% for “fun/flexible” spending with 20% towards savings and debt repayments.
Regardless, it's a method which distributes your income towards various categories and it's up to you to monitor your spending to ensure your 20% flexible spending doesn't really turn into 50% of your monthly pay.
The envelope method uses a similar strategy and is not meant to be taken literally.
Instead, it’s a mentality similar to the 50/30/20 rule in which you allocate a specific amount of your budget to certain expenses (or saving goals).
If you do take the envelop method literally, keep your cash in a locked safe box in your home and recognize you’ll be losing money on interest by not keeping your funds in the bank.
Tracking your money doesn’t have to mean whipping out pen and paper to jot down a note to yourself, nor does it mean tallying up all the receipts you have stored in your wallet.
Instead, you can use apps or online tools to help monitor your budget. Popular tools like Mint.com, a free service which allows you to sync credit cards and bank accounts with your profile, help keep track of your spending automatically. Mint provides a weekly email update with an overview on your spending habits. If you spend cash, you’ll have to proactively add in what you spent.
You can also try your hand with apps like Level Money, Budget Ease or Prosper Daily. Plenty more exist, so if one doesn’t appeal to you then move on to try something else.
Or, just kick it old school and track your money with pen, paper and a spreadsheet.
Budgeting saves you money
Without any sort of budget, it's easy to let yourself slip into debt, rack up a large credit card bill or stop saving for the future. Budgets may not be the most enjoyable task, but they're an important part of financial health -- consider them the broccoli of personal finance.
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