To make a budget that works, you need to know where you want to go and then work backwards. Set SMART financial goals, know what your fixed costs are, and keep track of how you spend money now so you know where to cut back tomorrow.
Most people think that budgeting means cutting back on spending so that they can save money for a long-term goal. Everything feels very... vague.
But good budgeting isn't about putting limits on yourself or thinking in hypotheticals. It's about putting your money toward what's important. You want to spend less money on things that aren't important to you and have more money for things that are.
Also, as life gets more expensive, staying on top of your finances will make sure you have enough money to pay your bills, have fun, and save for the future.
Once you're used to making a budget, you'll:
- Plan for the future so you won't feel as worried about what's going to happen.
- Spend more money on the things that are important to you.
- Stop spending your time and money on things you don't care about.
- Plan for that dream vacation, house, etc.
- Take charge of your life more.
If you have been trying to figure out how to better manage your money, we can help.
1. Set budgeting goals for yourself
Let's be honest: most of us can't just save money because we want to. If we don't have a reason to save, budgeting will feel pointless.
Why is it a good idea to set goals for your budget?
- Putting money away for a trip.
- paying off debts already owed.
- Putting money away for a house.
- Plan for retirement so you don't have to work for the rest of your life.
Budgeting will be easier if you have clear goals. If you know what you want to do, you're more likely to stick to it.
SMART goal setting is something you've probably heard of, and it's a good idea to use it when making your budget:
What do you want to save money for?
- Measurable. How much do you need to save each time you get paid?
- Achievable. Is this financial goal even possible, or is it just a dream?
- Realistic. Can you reach this goal with the money you have right now?
- Time-bound. When do you plan to reach this goal?
You want to set your financial priorities while still being realistic enough that you won't give up when an unexpected expense comes up.
Once you know why you want to save money or make a budget, you can move on to the next step.
2. Know what your fixed costs are
Before you can start budgeting your money, you need to know what your fixed expenses are. This way, you'll always know how much money you have to pay out every month, no matter how much money you bring in.
Some of your fixed monthly expenses could be:
- Rent or mortgage.
- Utilities.
- Insurance.
- Loan payments (student loans, auto loans, etc.).
- Minimum payments on credit cards.
Most important is that last point. First, you need to figure out how much you want to save, invest, or pay off debt with. If you're putting some money away but still paying high interest on debt or saving for a trip but don't have any money in case of an emergency, you're not really getting ahead financially.
Once you know what your fixed costs are, you can figure out what's left. This is your "money to spend." You can spend this money on whatever makes your heart sing: takeout, wine, travel, etc.
Do the following to find out what's left:
- Add up all of your fixed monthly costs.
- Find out how much money you get each month.
- Take your take-home pay and subtract your fixed costs.
Of course, if something big happens (like getting sick or needing to fix your car), you might have to spend money on that instead of doing fun things. That's terrible, but it's also why you should always have some money set aside for emergencies.
3. Keep track of your money.
If you want to get better at budgeting, you need to know where your money is going.
Most of your fixed costs will stay about the same every month. But your variable costs will always change because they depend on how you spend your money (lifestyle, eating out versus cooking, and so on).
We have to keep track of our spending so we can see exactly how much our variable costs are costing us.
For one month, keep track of what you spend without changing how you buy things. Then, at the end of the month, look at where your money went.
After a month of keeping track of your spending, look back to see where your money went and where you can cut back. We all have money leaks that can be fixed if we look at how we spend our money in a realistic way.
Don't forget that you don't have to give up everything. You just need to work on getting rid of the things you bought that don't fit with the goals and values you set in Step 1.
How can you keep track of what you spend?
- A spreadsheet from the past.
- Apps for budgeting.
- Your bank card.
Since everything is digital now, it makes sense that you can also budget your money digitally. Sure, you can use a spreadsheet from the past (and you may prefer the accountability of manually tracking everything). But if you want something more technological, choose an app.
Budgeting apps track and analyze your spending so you don't have to keep track of it yourself to make sure you stay on track. This, in turn, can make it easier for you to see where your money is going and what changes you can make to improve your cash flow.
Mint is one of our favorite budgeting apps. It links to all your financial accounts so you can keep track of how much you spend. You can set financial goals with the Mint app, and it will send you updates and reports to show you how far you've come.
You could also use a credit card, which is another digital method that is even more automated. But be careful: you shouldn't do this unless you know for sure that you can pay off your credit card balance in full every month.
Putting all of your purchases on your card makes it easy to keep track of how much you spend. You can have your fixed costs charged automatically to your credit card and keep track of all of your other spending in one place.
4. Embrace Frugal Living
One of the most important things to do when making a budget is to learn how to live cheaply. This will help you reach your financial goals without making you feel like you can't do anything.
What are some real-world ways to live on less money?
- More meals should be made at home.
- Find ways to spend less on groceries.
- Keep an eye out for discounts and special offers.
- Look for free events in your area so you don't have to spend a lot of money on fun.
- Think about getting rid of one fixed cost that you don't use that often.
- Find ways to bank that are free or cost little.
- Don't waste money in the usual ways (late fees, lottery tickets, impulse purchases, and food that will end up in the trash).
Based on how you spent your money in Step 3, you should be able to see where you can be more thrifty so you can keep working toward the financial goals we set earlier.
5. Pick a way to make a budget
Running the numbers and keeping track of your spending is great because it makes it easier to reach your SMART goals. When you know how much money is coming in and going out, you can better plan how to spend it.
There are many ways to make a budget, but the 50/30/20 method is one of the most common. Here's how it breaks down:
- Fixed costs take up 50% of your income (rent, mortgage, groceries, etc.).
- Spend 30% of your income on wants and how you want to live (fun and entertainment, dining out).
- Use 20% of your income to pay off debt and save.
Your income might not fit this model, though. If your rent takes up half of your income, it will be hard to do anything else.
But that doesn't mean you should completely stop trying to reach your financial goals. There are lots of other ways to make a budget, even some unusual ones, so use the one that works best for you.
Plan ahead with an app like YNAB
As we've already said, if you have a goal in mind, you'll be more likely to stick to your budget. Because of this, you should always plan ahead.
Choose a budgeting app that lets you estimate how long it will take you to reach your goal based on how much money you have now. You put in your expenses, your income, and your goals, and then the budgeting app tells you how long it would take to save up for a certain goal.
One app that works well for this is YNAB. Like Mint, YNAB connects directly to your bank account, which makes it a great way to keep track of what you buy and see where your money is going.
With the YNAB method, you give each dollar a "job" and then make changes as needed between paychecks or other money coming in. At the top of your YNAB screen, the "To Be Budgeted" box shows you how much money has come into your account but hasn't been put to work yet. The goal is to keep TBB at $0.00 at all times.
Even though YNAB connects to your bank account, you don't just see your current balance like you would on your bank statement or banking app. Instead, YNAB takes your available balance and subtracts any transactions you've recorded, like the jobs you've paid for with your money, even if they haven't hit your bank account yet. This shows you your "working balance," which is how much money you actually have. If you use your working balance instead of the total amount in your bank account to decide what to spend, you won't spend more than you have.
In conclusion
The main point of this article is that budgets that don't have a goal won't work. If we don't have a good reason to stick with them, we won't.
Instead, give your budgeting a reason. Whether you're saving for a one-time trip or your retirement, your budget goals should reflect what's important to you.
Then, make a plan for how you will spend your money based on how your fixed expenses, income, and financial goals compare. Get rid of anything that won't help you reach your goals or isn't important.
Lastly, use an app or spreadsheet to keep track of your money and keep planning ahead, with a flexible approach that lets you change your spending as your bank account grows.
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