Does the thought of budgeting make you squirm?
If so, you’re in good company. Two out of three Americans say they don’t know how much money they spent in the last month.
It doesn’t have to be this way. A budget is really just an estimate of how much money you’re earning and spending. It’s a simple concept with clear rewards, including being able to put more money toward whatever it is you care about. Creating a budget is also easier than ever, thanks to the many free resources available online.
Try to budget for everything
Obviously, your budget should include your major expenses. But small expenses add up quickly, too. Try to be as comprehensive as possible in tracking your spending — that means everything from rent and tuition payments to little things like coffee and Uber rides.
If you really hate the idea of budgeting, instead of getting into the nitty gritty, it can be a great start to just look at the big picture of your budget and see what you are spending on
Pro tip: The cost of paid subscriptions (like gym memberships, a Netflix account, etc.) is easy to underestimate, especially when you’re subscribed to several different services. The average American spends $237 on subscriptions each month, a recent study found. Be sure to include these ongoing costs in your budget.
How to structure your budget
To get started, total your expenses from previous months as a baseline for predicting your future monthly expenses. There are plenty of resources available, like worksheets, tools and apps, that can make budgeting easier.
Once all your expenses have been categorized and totaled, consider your monthly income and how much you would like to allocate toward savings each month.
Everyone’s situation is different. And so there are many ways to structure your budget. The old rule has always been the 50/30/20 budget rule: Spend 50 percent of your monthly income on needs, 30 percent on wants, and save the remaining 20 percent. What’s great about this system is that it doesn’t require you to give up too many of the “wants” you love most! But the downside to this is that for many people, their needs account for more than 50 percent of their income, which definitely cuts into the wants, and sometimes even savings. When you look at your spending from the previous month, you should be able to roughly estimate how much of your money goes toward needs. With whatever is leftover, use that to break into wants and savings.
For example, if you see that 80 percent of your budget is spent on needs, you can still spend 15 percent on wants and 5 percent on savings. The important thing is to create mindfulness so that you know where your money is going and what you want to do about it. Once you get comfortable saving a little bit, it’ll be easier to increase it as the months go on.
The key to a successful budget is knowing yourself and being realistic about the lifestyle you’d like to have.
Saving for a goal
A solid budget can help you cut out wasteful spending, meet your short- and long-term financial goals and save for a rainy day. Even if you don’t currently have many long-term financial goals, you might eventually want to buy a house or start a family. Saving now allows for more flexibility later.
Regardless of your goals, everyone should have an emergency fund. If you don’t have one, that’s OK. As long as you start saving up soon, you’ll get there! Setting money aside before you need it will help you stay afloat in uncertain times. Living through a global pandemic is a stark reminder that layoffs and medical emergencies can strike without warning.
You can start small in saving for an emergency fund, but financial experts recommend stashing between three and six months of your income. You can tweak this so that it’s three to six months of your spending budget (that includes all necessities), but either way, it’s going to be a large sum of money that is liquid, which means that it’s cash in a bank account you can easily access. Emergency funds should not be investments in the stock market, where you can potentially lose money, or in CDs, where you can’t access it easily.
With the right tools and strategies, budgeting can put you on the path toward financial freedom. Ultimately, living within or even below your means now will provide greater stability later down the line.
As Mark Cuban puts it, “It doesn’t matter where you live. It doesn’t matter how you live. It doesn’t matter what car you drive. It doesn’t matter what kind of clothes you wear. The cheaper you can live, the greater your options.”