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According to a study that interviewed 1,034 people with a 7-figure net worth or higher, 82% of millionaires admitted that they have a budget at all times to help them achieve their long-term and short-term goals.
Compare this to 34% of middle-class individuals, and only 9% of those living below the poverty line and you can see that budgeting is obviously part of the recipe to being financially successful.
Create a Budget! Why Is Budgeting Important?
The process of becoming financially independent is not a quick job. In fact, it may take quite a while to reach a level of stability you feel good about. While you are on this journey, the first, and most important part of it, will be budgeting. Having and working with your budget can directly lead to becoming financially secure.
Think of budgeting as a way to become more efficient with your spending, rather than a limit of what you can and cannot spend. Setting up hard limitations when it comes to your money is a good way to not follow through with it, so boundaries should be attainable and make sense to your lifestyle. It’s also a great way to notice your spending patterns, and adjust those accordingly.
To keep it short, budgeting is a tool that can help you achieve your goals, both long term and short term. Budgeting is not a quick-fix solution that will let you retire early because you stopped going to Starbucks every morning.
How to Start Your Budget! Create a Budget
To begin budgeting, you should probably have a good idea of what it will look like. A budget is a summary of your income and expected expenses for a particular period of time. Your budgeting plan can be individualized to fit your exact needs, so use our tips below as a guideline when creating your budgeting plan.
Let’s start by gathering all of your financial statements, to get an overview of your salary for each month. A month-by-month basis for your budgeting is a great way to see your income and outcome amounts and organize them in a way that makes the most sense to you. Starting with your monthly average will give you the proper starting point when comparing your finances.
Remember when logging your income, that you need to be looking at your income after taxes have been taken out. There is no point of budgeting with money you don’t have access to. If you have any other kinds of automatic deductions, include those as well. These can be 401K retirement plan contributions, insurance premiums, and anything else that you or your employer takes out of your check before that direct deposit hits.
Be sure to also include any kind of secondary income here as well. You want your starting point of your budget to exactly reflect what your finances look like each and every month. For those of you that may have variable income throughout the calendar year, we recommend using the lowest-earning month and use this as your baseline. If you budget for the absolute least amount of income possible, what’s left over is excess money. Budgeting in the reverse order can lead to deficits during the months you make less than others.
One good way to automatically keep track of this is by using the Personal Capital app. The app automatically links up with your bank accounts and investment accounts, and condenses that information all into one screen.
We have written a more detailed description below of why everyone should use the Personal Capital app but you can Download The Personal Capital App For FREE today, or keep on reading below for more information!
Create a Budget with your Monthly Expenses
Now that we have your starting income amount, we will start subtracting the expenses you have throughout the month. First, you should solely focus on your mandatory expenses. Still not sure what’s considered an “expected expense?” We’ve listed some of the most common mandatory expenses that individuals pay every month:
- Rent and Mortgage payments
- Car payments, or any transportation costs if you do not have a vehicle of your own
- Insurance – health, car, homeowners, life
- Bills and Utilities – electricity, water, sewage, gas (keep in mind these will look different for everyone, and it’s also important to keep in mind we are only talking about the absolute necessary bills at this point)
- Groceries – you have to eat (if your grocery budget is constantly fluctuating, you can also use this article as a guideline for creating a budget specifically for your grocery spending, but for now just get an average amount)
- Child care expenses – daycare, nanny, schooling fees
- Minimum debt repayment – if you currently have any debt, make sure you are including the minimum payment requirements in your monthly expenses total
Create a Budget and Avoid Non-Essential Spending
After the essentials are paid for each month, you will also need to account for the additional spending in your budget. This can include streaming services that require a monthly payment, shopping, leisure activities, dining out, and anything else that you are able to live without, but just don’t want to.
If coming up with this number seems difficult, you can use the last two to three months of bank statements and get the average you spend on each category. This is one of the best ways to get an accurate estimate of your non-essential spending habits that may yield irregular results each month.
Create a Budget and Income Ratio
Now that you have all those numbers out of the way, you can start to look at your income ratio, or how your income compares to your spending and create a budget. If your answer results in more income than expenses, then you are in a good place to work on savings. This is a great place to be if you are looking to prioritize the excess of your budget. You can put it towards retirement savings, paying off credit cards, and many other things.
On the other hand, if your spending is exceeding your monthly income limit, you have found the first place to start fixing your budget. People in this situation typically have a lot of credit card debt that allows them to spend more than they have, and that should be your primary focus moving forward.
Create a Budget and Make Adjustments
We are finally at the point of the budgeting process to create a budget where you can start fixing any problems you may have with your finances and create a budget. A good goal to aim for is to have your income and expense columns to be essentially equal. This shows that all of your income is accounted for and you are properly budgeting for a specific short-term or long-term goal.
Odds are, most of you are not satisfied with your spending and saving habits, which is where utilizing a budgeting plan can be a helpful guideline moving forward. We’ve listed the top plans/ rules that will help you improve your overall budget, as well as stay on top of your finances.
The easiest budgeting tool is utilizing the 50-30-20 rule. It lays out a specific guideline for each aspect of your expenses, savings, and spending, making it a top pick for those just starting out in their financial journey.
50% “Needs & Essentials”
First and foremost, your budget should account for 50% of your must have spending. When you created your first list of monthly expenses that are essential, how did it rank up percentage wise in comparison to your overall income? Consider anything you cannot live without each month and any financial payment obligations in this category. Keep in mind that if you have credit card debt, you should be including the minimum payment amounts for each month.
The next portion of your budget should be allocated to your needs, or that non-essential spending list we worked on in the beginning, for a total of 30% of your budget. This category will cover things like your unlimited data phone plan, Starbucks coffee trips, and streaming services that you pay each month. You may be surprised that you are spending more on your wants than you should be to become financially stable. It’s important to remember that your wants are not technically the same thing as extravagances. These will look different to everyone, so make sure your list accurately represents your spending.
The final 20% of your budget should remain for savings and repaying debts. While the 30% rule in regards to your wants is the maximum amount, your savings percentage of 20% is just a minimum. The more you allocate to savings, the quicker you can move towards financial independence, just by utilizing your budget. Whether you are saving for retirement, an emergency fund, or even your child’s college savings, savings overall should account for 20% minimum of your entire budget. Remember the minimum payment on credit card debt we mentioned for the needs portion of your budget? If you are paying any additional amount other than the minimum, that will end up in this category. Any extra payments can be considered savings and debt repayment.
For those that may have an issue with frivolous spending, a rigid plan like the Envelope system may be the plan that works better for you. This is a cash based approach, and gives you a visual way to see your spending and savings, without having to track every one of your expenses and receipts. How it works is you create a separate envelope for each category of your spending, and place the cash for the month in each of them. How you separate them should depend on how much you need to spend in each category.
Setting a spending limit for each expense category will limit you to just spend the cash that is in that particular envelope. Once your envelope is empty for that category, there is simply no more spending of that type of item for the remainder of the month.
The envelope system is great for those of us that need a visual representation and tangible way to view our spending habits. Sometimes having your money presented on your phone may be helpful, but not everyone can get a good grasp this way. Having a specific amount of spendable cash for a certain category keeps you only spending for what you need, and what you can cover.
Meticulous planners that tend to overspend prefer the zero-based budget because it makes monitoring your spending super simple and clear. This method makes you justify each and every expenses so you utilize all of your budget each month. Working with your money this way shows you the exact amounts you are spending, which keeps you aware of how much of your money is coming in and going out.
It’s a great way to prevent yourself from spending what you don’t have, because you can’t spend anymore once you reach a $0 total. We recommend utilizing a budgeting app to keep track of your expenses if you are planning on going the zero-based budget route. There are some that even sync up with your debit and credit cards, and automatically organize your expenses into categories for easier tracking.
Track Your Expenses With Budgeting Apps
If you’ve had trouble setting a budget in the past, you may benefit from giving it another shot with the help of a budgeting app. One of the easiest and most efficient ways to track your expenses is making use of a budgeting app.
Even if you’ve never tried to budget before, having an app that does all of the heavy lifting for you is nothing short of amazing.
Below are the top budgeting apps you should look into it to create a budget:
Our top budgeting app to manage your cash flow and track your monthly spending is Personal Capital. This app is essentially your one-stop shop of managing your finances.
The free version of Personal Capital is being used by millions of consumers looking to have a better understanding of their finances. Not only does this app aggregate all of your finances into one place, but they’ve also got an easy-to-use investment and retirement manager option.
If you have an investment or retirement portfolio of $100,000 or more, Personal Capital has an amazing wealth management program that, at 0.89% management fee, is much cheaper than any other managed wealth programs on the market today.
Personal Capital is our favorite budgeting app, and our favorite wealth-management app. We recommend all of our readers try Personal Capital for free as you won’t be disappointed.
The Mint app is often known as the OG of personal budgeting apps. Mint was around long before smartphones and apps had even hit the market, so these guys certainly know what they’re doing when it comes to helping you track your finances and stick to a budget.
Like other apps mentioned here, Mint automatically syncs itself with your checking accounts, savings accounts, credit cards, loans, and other financial accounts to give you an overhead view of all of your money coming in and going out.
Mint has been in the budgeting world long before many other budgeting programs were even dreamt of. They’re a great choice for those that don’t have much activity in their accounts but still want to take control.
YNAB stands for You Need A Budget. Not only do they help you monitor the money you have coming in, and the money you’ve got going out, but they also help you identify and attack the root cause behind your financial distress (And the reasons you need a budget!)
YNAB safely and easily imports all of your transactional data from bank accounts and credit cards into one screen that helps you keep track of everything that you’ve got going on with your finances.
From here you can assign each and every dollar as having a job. That’s the main point of YNAB, ensuring that every dollar you spend has a job and a reason that it is being spent. One of our favorite YNAB features is how they help you anticipate any upcoming overspending or potential bank overdrafts. This can be a lifesaver depending on what kind of financial situation that you’re currently in.
If you have ever done any sort of research on paying off debt, budgeting, or investing then you’ve likely come across finance guru Dave Ramsay’s website. Dave took the science behind other budgeting apps, mixed it with his financial expertise, and the end result was the Every Dollar app.
The budgeting app relies on the Ramsay principles of Baby Steps To Budgeting in order to help you track your income and properly plan out your expenses ahead of time in a way that lets you have as effective of a budget as possible
Fine Tune Your Budget By Paying Off Debt
One of the best ways to fine tune your budget is by paying off debt so you can have more breathing room for your wants, needs, and savings obligations. There are three methods for paying off debt that every beginning budgeter needs to learn. We have outlined them below:
You know how when you roll a snowball down a hill it picks up more and more snow, thus growing larger in size? That’s the premise behind the debt snowball. Lay out all of your monthly debt obligations from smallest to largest amounts owed. Pay the absolute minimum monthly payments on all of your debts except for the one that you owe the least amount on.
For that smallest debt, you should pay as much as possible on it. Once that debt has been paid off, take the amount you were paying on it and add it to the minimum monthly payment on the second smallest debt. Over time your monthly debt payments snowball into a size so big that you will be able to knock out even the biggest debts very quickly.
Similar to the debt snowball, the debt avalanche involves making the bare minimum payments on every debt except for one. Rather than paying off the debt that you owe the least on, you pay on the debt that has the highest interest rate. Once that has been paid off, you move over to the debt with the next highest rate.
The results from the debt avalanche are not as quick as from the debt snowball, but this method can actually save you much more money in the long run as you knock out the higher interest rates first.
This method of paying off debt is less for those who are in over their heads and need a fast solution, and more so about those who simply want to do a little bit extra wherever possible. A snowflake by itself is very small and almost unnoticeable, but a bunch of snowflakes together can make a huge impact.
Throughout your daily routine look for ways you can save money, regardless of how small it may be. If you normally get a large coffee on the way to work every morning, spring for a medium next time. This might only save $1.20 or so, but with 20 workdays in the month, that adds up to a few hundred bucks out of the year.
These tiny savings are your snowflakes. If you can find just a couple throughout your daily or weekly routine then you will probably be saving a few thousand dollars extra. The idea is to put these tiny savings towards your debt every month.
Create a Budget Because Budgeting Is Very Effective!
One of the very best things you can do for yourself is a plan for your future financially, create a budget, and one of the easiest ways to do that is with right financial planning. Budgeting can seem overwhelming at first, especially if you’ve never done it before. Tt he important thing is to simply get started. The second most important thing is to have the discipline to stick to your budget!
We want to remind our readers again how the Personal Capital app is changing the lives of nearly 5.2 million people. If you’re new to budgeting, we highly recommend downloading their app. Download Personal Capital Today!