Budgeting is crucial for financial success. For many, it’s a word surrounded in fear. It sounds restrictive when you put a dollar amount on your spending, but it’s the only way to reach financial freedom.
The money you bring in each month needs a ‘job.’ Assigning each dollar a job helps you see where your money goes, where you need to spend less, and where you stand with your savings.
Budgeting may mean sacrificing a little bit, but it doesn’t have to be punitive. You’ll learn where your money goes, where you should cut back, and how you can maximize your savings for the future.
Choose a Plan
First, you must figure out how you will allocate your money. We suggest the 50/30/20 plan. It’s simple:
- 50% of your take-home pay covers your necessities (bills, food, etc.)
- 30% of your take-home pay covers your ‘wants’ or non-essential items (entertainment, shopping, etc.)
- 20% of your take-home pay covers debt repayment and savings (emergency fund and retirement)
You can adjust the percentages as you need to, as not everyone has the same income. If your bills take up more than 50% of your income, for example, adjust the other two categories, but make it a goal to decrease your bills or increase your income to reach that 50% point.
Remember, your take-home pay is the money you bring home after taxes and any other deductions, such as insurance and union dues.
Create a Budget
This step is important. You must write your plan down. There’s power in making it ‘real’ when you put pencil to paper or even create an electronic spreadsheet. Either way, give every dollar a job and stick to the family budget. Revisit the budget weekly or even daily if you must.
Seeing where each dollar must go really opens your eyes. You’ll see where you are spending. Some categories may shock you. It’s not until you have everything in one place that you see the big picture. You may want to make adjustments after seeing just how much you spend.
Don’t worry, you can adjust along the way. Don’t think just because you wrote it down that it has to stay that way, but be mindful. Ask yourself: why are you making adjustments? Are you sticking within your plan? Are you saving? That’s one of the most important factors.
Track Your Spending
Most people don’t enjoy this, but you have to track your spending. This means every single dollar that you spend. The good news is that there’s an abundance of apps and services that can make this easy. If you are a pencil and paper type person, just make sure you jot down every dollar you spend every day. If you keep paper receipts, you can just tally everything up at the end of the day. No matter how you choose to do it, be consistent – don’t cheat.
Apps like TrueBill can help make it easier to get a handle on your spending by managing subscriptions, lower your bills, and optimize your spending
At the end of each month, see where you landed. Are you on budget? Did every dollar spent have a purpose? Were all of your needs/wants/savings goals met? If not, figure out where you came up short. Did you go on a shopping spree? Did you eat out too much? Was there a bill you had to pay that you didn’t realize was coming up?
Re-evaluate where you stand each month. Figure out what changes you need to make by looking at what worked and what didn’t. Don’t beat yourself up for any mistakes or shortcomings. Use it as a lesson and move forward. Set achievable goals for the next month and reward yourself when you achieve them and stick within the family budget.
Pay Yourself Automatically
Many people struggle with the ability to save. They wait until they’ve paid every bill and spent everything they wanted on their ‘wants.’ At the end of the month, they typically come up short, putting nothing in savings.
The easiest way to avoid that is to automate your savings. If you have direct deposit, it’s simple. Redirect a portion of your earnings to your savings account every month. Alternatively, most bank accounts will let you set up a recurring transfer from your checking to your savings. If you are worried about what this will do to your budget, start small. Remember, your ultimate goal is 20% of your income. You can divide that 20% up however you want, though.
Prioritize Paying Down Debt
If you have debts, we suggest putting at least a portion of that 20% toward your debt. No amount of interest you can earn on savings or even returns on investments will outpace the interest you’ll pay on credit card debt. If you don’t have debts, put the entire 20% (or whatever percent you can) into your savings account. Once you have an emergency fund with at least 3 – 6 months’ worth of income in it, go ahead and open an IRA or contribute to your 401K. Max out your contributions there and if you still have money left, consider investing in stocks or bonds.
Give Yourself Grace
Most importantly, give yourself grace as you work through your family budget. Remember, it’s a work in progress. It may remain the same for a few months and then suddenly need a shift due to unexpected expenses or new goals.
The key is to stay consistent and try to achieve the 50/30/20 goal when you create a budget. Your future self will thank you for the sacrifices you made when you have money to cover your emergencies or can live your retirement just how you planned.