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The COVID-19 pandemic has taught us many things, from adjusting to living in quarantine, home-schooling our kids, to working from home. Arguably one of the most important things that we have learned is how important being financially stable is. Like many of these lessons learned, we have been more reactive than proactive in our approach.
That’s why now is the time to start creating a personal budget and sticking to it. A simple monthly budget is all you need to begin working on smart financial goals like building an emergency fund. Let’s put the power of your finances in your hands for 2022, so you can be in control of your financial future.
How to Start Budgeting
Creating a personal budget may sound pretty simple, but there’s a bit of legwork you must do first. We’ll outline the key steps below.
Figure Out Your Monthly Income
Figuring out your monthly income could be easy if you hold one job to receive the regular paycheck to figure out your after-tax income. Make sure you look at your paystub to account for what comes out for deductions like health insurance and 401(k) savings. It will give you a bigger view of where your savings and expenses are going.
If you have a side gig, a part-time job, or make irregular income, you’ll want to estimate how much you expect to make each month. Estimate your other income by reviewing your last six months’ side income. That way, it’s less likely you’ll fall short a month, and having more money in your budget is never a bad thing!
Get Realistic on Your Spending
To learn how to start budgeting and sticking to it, you need to have a realistic view of your expenses. Otherwise, you’ll find it impossible to cut down on things like spending $350 on groceries when you spend over $700 a month.
Write down all your expenses each month, including the necessities like mortgage/rent, car insurance, gas, groceries, utilities, etc. You’ll also need to account for credit card bill payments or other loan payments you have to make each month. Finally, extras like a gym membership, cable or streaming service, and eating out. Look over your bank and credit card statements three to six months ago to use real numbers when estimating your expenses.
Decide on Your Financial Goals
Determining what financial goals you wish to accomplish through budgeting is incredibly important. Smart financial goals give you a purpose that you are reminded of. This method is especially helpful when you’re having trouble with sticking to your budget. Make sure that you use the S.M.A.R.T. approach when creating your goals: Specific, Measurable, Achievable, Realistic, and Time-Bound.
Here’s an example of S.M.A.R.T.’s financial goal: “I plan to set up at 401(k) at my new job that contributes 10% next week. Another example is, “I will pay down my credit card debt to $0 in the next 15 months.” These examples are specific, measurable, and time-bound. They are attainable and realistic as long as it’s possible to achieve your current state of income.
Choose a Budgeting Method
The best budget planner is the one that works for you. A budget will cover all the things you need, a good deal of your wants, and leave room to save for the future. We’ll cover some of the most popular types of budgets in the next section.
Once you’ve chosen the best budget planner for you and your family, you must track your progress. Use a notebook that you carry around, a spreadsheet on your computer, or an app on your phone. The medium you use doesn’t matter; it just has to be the best way to suit your needs.
While these budgeting methods cater towards monthly planning, you can take it a step further to do yearly budgeting. Looking ahead a year takes more effort, but yearly budgeting could be useful if you’ve accurately predicted your expenses using previous information. For those of you who are starting, try budgeting on a monthly basis to get accustomed to budgeting first.
Budgeting Systems to Consider
Who knew that a simple monthly budget could be so powerful! Its strength lies in choosing the budgeting system that makes it easier for you to follow. The 50 30 20 budget rule, envelope system wallet, and zero-based budget are solid budgeting systems choices. Learn more about each of them below.
50 30 20 Budget Rule
With this budgeting system, you take your take-home income and divide it into three categories: 50 percent for needs, 30 percent for wants, and 20 percent for savings and debt repayment. Your needs are the necessities that you must spend each month. It covers costs including housing, food, transportation, insurance, the minimum loan payments, child care, and basic utilities.
Wants are things that you don’t need to get by living or working. They are things that may bring us “fun” in our lives, like travel, entertainment, dining out, and monthly subscriptions. Finally, the last bucket is what you are putting away for the future and paying down debt. Any debt payments above the minimum amount and savings goals like retirement or growing an emergency fund are found here.
Envelope System Wallet
The envelope system relies on using actual cash and physical envelopes for your monthly spending. Using real money has been shown to have a psychological effect on people to discourage spending. You will create spending categories and limits for things that may include:
- Dining out
- Pet care
- Health and grooming
The categories that you create all depend on your specific situation. Determine what a reasonable limit each month is for each of these categories. This is where your homework on reviewing your expenditures over the last several months will come in handy. You label each envelope with each category and limit, then place the cash within each of them. When you run out of cash in an envelope, you must wait until the following month to spend in that category again.
Now there are some variations to this method. For example, if you get the payment weekly, you could record the amount from each paycheck that should be in that envelope for that period. It’s also possible to use another budgeting method on top of the envelope system. You could use the budgeting rules from the 50 30 20 and apply it to this method.
The goal of this budget is to completely “use up” your income. Every dollar is allocated towards your expenses, savings, and debt payments so that when you subtract your income from your expenditures, it equals zero at the end of the month.
Here’s an example of how this could look:
Monthly income: $4,000
- Mortgage $1000
- Groceries $350
- Dining out $100
- Bills $200
- Gas $150
- Entertainment $250
- Emergency fund $200
- Travel fund $150
- Credit card payments $300
- Retirement $300
The amount remaining $0
How to Avoid Common Budgeting Mistakes
People return to their bad habits when they can’t stick to or make their budget work. Here are some of the most common mistakes that people make when it comes to budgeting:
- Don’t have a budget. You can’t just “wing it” when it comes to your budget. Not understanding how much your spending can put blinders on how much money you could be saving. Not having a plan makes it more likely that you aren’t saving enough for important financial goals and puts you closer to experiencing a financial problem.
- Not tracking your spending. Not keeping track of your expenses through the months makes it more likely that you overspend or fail to meet a financial goal.
- Leaving out things. Even the $12.99 Netflix subscription needs to be accounted for. Small, forgotten things on the budget can add up and make your budget inaccurate. Even if it is a one-time cost like a graduation gift, you need to account for things that weren’t in your budget scope to help plan better in the future.
- Assuming you have set monthly bills. Your cell phone, cable, and other expenses that you think are fixed could be renegotiated, reduced, or offered cheaper at a competitor. Stop overpaying by calling up your provider and asking them how to reduce your bill or shop around the competition to find a better deal.
- Taking budgeting as a solo task. When you have a spouse, you both need to be on-board with the budget and be working as a team. Talk openly about your finances and make it a couple’s activity to work on the budget together. You’ll avoid unnecessary fights and keep from overspending or getting off track.