Are you fed up with overspending each month? Do you struggle to save money?
If you don’t already budget, now is the perfect time to start.
Budgeting is on the rise as a result of the pandemic. In a recent survey of more than 1,000 Americans, 80% said they have a budget.
This figure was only 68% in 2019.
Budgeting 101: the guide
So whether planning where your money goes is new to you or you haven’t found a budget plan that works for you yet, simply follow our budgeting guide to creating and sticking to a monthly budget and start improving your personal finances.
What is a budget?
A budget is a plan for how to manage and spend your money over a certain amount of time.
A budget is based on your income and outgoings.
Why should you budget?
It’s very important to know the answer to this question before you start a budget.
A budget will tell you what you spend your money on and help you understand your spending habits, both good and bad.
A budget will also make saving possible. If you don’t know how much money you have coming in compared to going out, how can you put any aside?
Signs that you need to start budgeting
Everyone should have a budget, but it’s even more important for people who:
- Struggle to pay their bills.
- Have high balances on their credit cards.
- Constantly overspend or buy lots of non-essential items.
- Worry about money.
Budget like a pro
Setting up a personal budget is pretty easy when you know how. Here’s how to make a budget.
A carefully considered budget shouldn’t be rushed. You’ll need various bits of recent paperwork including:
- At least three months’ bank statements.
- Credit card bills.
- Copies of household bills.
- Payslips or other documents that detail your income.
Total your income
The next step is to make a note of your regular monthly income after tax, student loan repayments or any pension contributions.
This may just be the figure on your payslip, or if you have more than one source of income, add them all up and write down the total.
If you are a freelancer, use an average of the past three months’ earnings so that you know approximately how much money you will be bringing in.
Add up your essential spending
Go through your bank statements in detail to find out how much of your monthly income goes on areas that are considered essential.
Examples of essential spending include:
- Utility bills.
- Debt repayments.
- Car repayments, insurance and fuel.
Now look at your non-essential spending
Non-essential expenditure accounts for things you want rather than need, for example:
- Eating out.
Take away your total expenditure from your income
If your essential and non-essential totals equal more than your income, it’s time to start reducing your outgoings.
Start by going through your non-essential spending list and cutting out the areas that are costing you the most.
If your income is higher than your expenditure, you’ve highlighted how much disposable income you have that can be saved or used to pay off debt.
It’s still a good idea to cut down on your non-essential spending areas to maximize your savings efforts.
Decide on a realistic figure for each of your spending categories and how much you will put aside for savings each month: this is your budget.
Choose a budget period
To make your goals achievable, you need to know how long it will take to reach them.
If you don’t put a time period on your goals, you’re more likely to spend the money elsewhere.
Choose a budget plan that you can stick to
Now you’ve got your budget sorted, it’s time to put some strategies in place to make sure you stick to it.
Help keep your spending in check with a budget plan.
There are lots of different ones to try.
Here are a few of the most effective plans to choose from.
50/20/30 plan: this is the most popular type of budget plan. It’s simple and it works. All you need to do is allocate 50% of your income for needs, 30% on wants and 20% for savings or debt repayment.
Zero-based budgeting plan: if you prefer a hands-on approach to budgeting, this plan is for you. Assign every dollar you earn to a budget category such as mortgage, food, social and saving. At the end of the month, if you have funds left over in a category, roll it over to the next month or put it into a different one.
Pay yourself first budget plan: with this method, simply decide how much you want to allocate to your savings goals, and every dollar that’s left over can be spent however you like.
The envelope system: this tried-and-tested budgeting method has helped people eliminate debt and curb bad spending habits. Each of your spending categories is represented by an envelope. You then fill each envelope with the exact cash you need to spend on that area. For example, if you spend $400 a month on your grocery shop, place $400 in that envelope. Once you’ve spent all of the money in that envelope you can’t spend anymore that month. Studies have shown that using cash helps prevent bad spending habits.
Monitor your progress
A key part of budgeting 101 is to continually track your progress.
Keeping an eye on your carefully considered budget will help prevent you from falling back into old financial habits.
Dedicate some time at the end of each week to look back at your plan, spending and savings progress and make adjustments if needed.
By recording every financial transaction you are taking complete control over your finances.
Set new goals
Every time you reach a goal, remember to set a new one.
Have you successfully cleared your debt through saving hard?
Maybe it’s now time to work towards that down payment on a house.
This technique helps you maintain your savings efforts because you always have something to aim towards.
Use the right tools for you
If you like using your phone for everything, download a budgeting app to help keep your spending on track.
If you prefer to write everything down, grab a pen and paper and make a note of everything you spend.
Whatever method you choose to use, documenting your finances will help you organize them effectively and help you gain confidence with your financial decisions.
Here are a few popular budgeting software and apps to consider:
- Mint is a popular online budgeting tool that allows you to automatically sync and categorize your transactions.
- Savology will analyze your finances and provide a personalized plan with actionable steps that help you reach your financial goals.
- Tiller Money uses spreadsheets to help you create a budget that’s right for you. You can even personalize your spreadsheet by choosing from a range of pre-built templates.
- Qapital is an app that uses a clever “Round Up” feature that rounds up every purchase you make to the nearest dollar and automatically saves the difference.
Prevent bad habits from derailing your savings efforts
Hopefully, our budgeting 101 guide has helped get you on the right path to financial success.
A simple budgeting plan will work wonders for your personal finances. Stop wondering where your money is going each month and start taking control to track it. Want to learn more about budgeting? Keep up to date with the latest advice on our blog.