Congratulations! You’ve decided to create a budget, the first step towards taking control of your finances and ensuring that your money works to help you achieve your goals. Now, of course, comes the hard part: where to begin?
The budgeting process can be overwhelming, especially when you’re just getting started. There are many different systems and structures out there, and choosing the one that works best for you can be the difference between success and frustration. Most budgets, however, feature three key components: a specific method for allocating your income, a timeline that helps you manage your spending, and a tracking system that allows you to monitor your progress.
Allocate Your Income
When you really break it down, a budget has one job: telling your money where to go. Each and every time you prepare your budget, you’re taking your income and giving it a purpose, assigning it to be used towards categories that, hopefully, will help you achieve your goals. It can be tricky to determine how to prioritize these goals, especially at first, but there are several popular methods that aim to make these decisions easier.
Personally, I utilize a zero-based budget, a method in which all of your expenses are equivalent to all of your income, ensuring that every dollar you bring in has a purpose. This system is especially useful for people finding “extra” money getting squandered on unnecessary purchases, as it encourages you to distribute any surplus towards your debt payoff and savings items.
Similar to the zero-based budget, another popular allocation method is the 50/30/20 budget, which suggests using fifty percent of your income for necessary expenses (such as housing and food), thirty percent for discretionary expenses (clothing and entertainment), and twenty percent for savings and debt payoff. A somewhat looser guideline is the 80/20 budget, which puts eighty percent towards spending and twenty percent towards savings and debt. These systems may be useful for people struggling to distinguish needs from wants.
Know Your Timeline
In addition to allocating your income, a successful budget also operates on a specific schedule. I prefer to budget monthly, meaning I plan how I’ll allocate my expected income at the beginning of each month, making adjustments and tweaks as necessary. Other people prefer budgeting by paycheck, allocating their full paycheck each and every time they get paid.
When it comes to budgeting, shorter timelines are often preferable to longer ones. While it’s possible to budget quarterly or annually, there’s more opportunity for money to fall through the cracks and slip-ups to occur when you’re not checking in with yourself as frequently.
Track Your Spending
I’ve said it before, and I’ll say it again: budgeting can give you a boatload of information. As a record of your spending, your budget can help you determine your priorities—but only if you can ensure that your budget accurately tracks your outgoing expenses.
In my own budget, I track how much I spend on my monthly bills, but I also monitor my spending on discretionary expenses. I save receipts and log every purchase I make in a spending tracker, which comes together to create a larger picture of how I’m using my money. This process is important in holding me accountable as I progress towards my financial goals.
But if the idea of logging every single receipt isn’t appealing, there are still ways you can monitor your spending in various categories to help tighten and refine your budget. The cash envelope system involves keeping designated envelopes for each of your spending categories (groceries, clothing, etc.) and filling them up with a specific amount of cash each time you prepare your budget. When the money is gone, you freeze your spending in that category until you’re able to replenish. This system is helpful for people who may struggle with overspending, especially in specific categories.
When it comes to budgeting, there is no right or wrong method, so long as you’re finding your budget to be effective. And remember: a budget isn’t set in stone! Just as you should feel comfortable adjusting your budget’s numbers, you should also feel comfortable adjusting its structure.
Big City, Small Budget 