Budgeting isn’t that difficult, but research shows that most of us don’t do it. A Gallup poll found that only one in three Americans come up with a detailed monthly budget.
Which is unfortunate because a budget is the best way to ensure that you have money to spend on the things that are important to you. Budgeting can help you stay out of debt, plan for retirement, and take that vacation you’ve been dreaming about.
I’m guessing the aversion to budgeting comes down to one main factor — budgeting is kind of boring. Much like exercising and flossing your teeth, you know you should budget, but it’s just so hard to put into practice.
So if you’ve tried and failed to stick to a strict budget, no worries. This article will outline seven easy steps you can take to come up with a budget and actually stick with it for the long haul.
Before you put your budget together, you need to decide what budgeting system you’ll follow. The budgeting system you choose will depend on what you value and your financial goals.
For instance, is your primary goal to decrease your monthly spending and get out of debt? Or do you want to prioritize saving more money for retirement every month?
Whatever your goals, there is a budgeting system that can work for you. Here are two popular options many people turn to:
Zero-based budgeting: A zero-based budget is an approach popularized by financial expert Dave Ramsey. When you come up with a zero-based budget, every dollar of your income is assigned a “job.” Some of your money will go to savings, personal expenses, and debt. If you set up your budget correctly, there shouldn’t be any money left over after the budget is complete.
A 50-30-20 budget: With this type of budget, 50% of your income goes toward needs like rent, food, and debt payments. Once your needs are taken care of, 30% of your money is set aside for discretionary spendings, like taking trips or eating out. The final 20% of your budget goes toward savings.
Zero-based budgeting can help you avoid overspending and ensure that all of your budgeting needs are covered. But this strategy is too restrictive for some people, so if you fall into this camp, the 50-30-20 budget may be a better option for you.
The easiest way to budget is by signing up for a budgeting app. The right app makes coming up with a budget quick, easy, and more accurate.
Most budgeting apps connect to your bank account and pull all of your transactions so you can categorize them. Doing this will show you how well you’re sticking to your budget and if you’re close to going over in certain areas.
If you’re new to using budgeting apps, here are a few good choices:
You Need a Budget (YNAB): At $84 per year, YNAB is the most expensive option on this list, though the company does offer a free 34-day trial. YNAB syncs to your bank account and automatically imports your transactions. And the company provides extensive resources to help you learn how to use the software.
Mint: Mint is one of the most popular budgeting apps available. The app is free, though the in-app advertisements are a deal-breaker for some people. You can use Mint to budget, set up bill payment reminders, and track your investments.
Simplifi by Quicken: Simplifi comes with a personalized spending plan and provides updates throughout the month for how much you have left to spend. The app will also track your monthly bills and notify you if you’re paying for subscriptions that you aren’t using.
The first step to come up with a budget is to calculate your monthly income. And if you’re a salaried employee, this step may be easy for you. Add up your pay stubs for that month, and you have your monthly income.
But this step is more challenging for anyone who is self-employed, relies heavily on commission, or has multiple streams of income. In this case, you should add up how much money you’ve brought in over the past six months.
Once you’ve added up your six-month earnings, divide that number by six. This gives you the average monthly earnings that you can budget from.
The next step is to add up your necessary monthly expenses, which are the expenses that don’t change on a month-to-month basis. These essential expenses will serve as the baseline for your budget.
For instance, your mortgage, car payment, and income insurance probably stay the same every month. Other expenses, like your phone bill and utility payments, may vary slightly but likely remain within the same range.
Next, you’ll outline how much you plan to save and invest each month. Don’t skip this step and assume that you’ll save whatever is “leftover” at the end of the month. If you want to reach financial independence, you have to make a habit of paying yourself first.
How much you save every month will depend on your financial goals. For instance, if you’re focused on paying down debt, you may choose not to save as much for the time being. Or, if you’re working to build up a six-month emergency fund, you may be trying to save as much as possible.
Add your savings goal to your budget, and consider it a fixed expense. Resist the urge to scale this number back if things get tight financially — prioritizing your savings is the best way to reach your financial goals.
Once you’ve accounted for your necessary expenses and savings, you can include your discretionary spending. These items are wants, not needs, and are expenses you could cut out if a financial emergency struck.
For instance, Netflix, eating out, and entertainment would all be discretionary expenses. You want to stay within your budget, but it’s also important to be realistic when calculating your monthly expenses.
If you’re in the habit of eating out multiple times a week, don’t suddenly decide to quit cold turkey in the name of saving money. You’ll likely end up blowing your budget and overspending.
Creating your budget is only the first step — you also need to track your spending throughout the month. I recommend logging into your budgeting software every day around the same time and categorizing your expenses.
Doing this will feel tedious at first, but over time, it will become a habit. And when you track your spending every day, it will only take a few minutes to complete. If you only do this once a week or once a month, it may feel overwhelming, and you’ll feel tempted to skip it.
And set aside some time at the end of the month to review your budget. How well did you stick to your budgeting categories? Were there any areas you overspent? Reviewing your progress is the best way to find areas you can improve.
Budgeting gets a bad rap, but it’s the best way to ensure you reach your financial goals. A budget is simply a plan for your money and a way to prioritize the expenses that matter to you.
Here are a few tips to help you successfully stick with budgeting:
Stick to a schedule: The best way to stick with budgeting is to make it a habit. Come up with a schedule for creating your budget, tracking your expenses, and reviewing your budget at the end of the month. Over time, it will become something you don’t even have to think about.
Expect to be bad at it in the beginning: Your early budgets may not be pretty, and you probably won’t stick to every spending category exactly. That’s completely normal! Budgeting is a skill like anything else, and you’ll get better at it over time.
Add in a buffer: It’s a good idea to add in a “miscellaneous” category for unexpected expenses that come up throughout the month. That way, if you suddenly have to pay for an unplanned vet bill, it doesn’t throw off your entire budget.
Make it a family affair: If you’re married, then take the time to review your budget as a couple every month. Reviewing your finances together will ensure that you and your spouse are on the same page financially and work toward similar goals.
Budgeting doesn’t have to be difficult, and it doesn’t have to cause unnecessary stress in your life. It may feel challenging at first, but once you get the hang of it, you’ll probably find that budgeting makes your life much easier.
Regardless of which system or budgeting app you use, the important thing is that you stick with it. Over time, you’ll have a financial framework you can use to make your money work for you.