How to Create (and Stick to) a Budget
In the past 3 months, I’ve been super interested in personal finance. After I hit the one year mark of having a steady income I realized that I wasn’t utilizing my money the best that I could. I live at home so I don’t have the big monthly expenses such as rent and utilities, that many others do. This allows me to use the majority of my paycheck on whatever I want to. I noticed that in the past 6-9 months I had gotten into the habit of just spending money on whatever I wanted, not really taking into consideration my short term and long term financial goals.
So around October I happened upon a Dave Ramsay YouTube clip and spent the entire day watching clips of his radio show, where people call in to ask for his financial advice. This piqued my interest and inspired me to start learning more about budgeting and managing my money more effectively. The next day I stopped by Barnes and Noble and purchased a book titled “I Will Teach You To Be Rich” by Ramit Sethi (I’ll refer to it as IWTYTBR from now on).
This book is one of my best purchases of 2019. It’s a six-week guide that takes you through debt payoff, credit cards, investing, conscious spending, and much more. What I really love about this book is that Sethi isn’t trying to make everyone follow the same rules in order to reach a generalized “rich life”. Instead, he asks the reader to define what living a “rich life” looks like to them and then manage your money to allow you to get to that goal. This book has allowed me to learn a lot more about the world of personal finances while also allowing me to implement changes to my routine that’ll help me reach my goals.
Today I’m going to share the steps I took to create a budget, a few budgeting methods out there, the budgeting method I use, how I stick to my budget, and general tips on how you can start better managing your money.
STEPS TO CREATE A BUDGET
#1: Understand your current financial situation
The first thing you need to do when creating a budget is to understand what your current financial situation is. I recommend printing off the past 3-6 months of your bank/credit card statements and analyze your income and spending habits.
#2: Calculate your average monthly income and expenses
Once you’ve accessed your bank/credit card statements, you’ll need to calculate two important numbers: your average monthly income and average monthly expenses. Go month by month and total up your income and expenses of that month. Then average your income for those months and your expenses for those months. This will give you your average monthly income and average monthly expenses.
Ideally, your income should be larger than your expenses. If that’s not the case, you either need to increase your income or decrease your expenses.
#3: Categorize your expenses
Now you’ll want to divide your expenses into two categories: necessary and optional.
Necessary expenses (also known as non-negotiables) are things that you have to pay. This includes things such as rent, utilities, debt, car payments, insurance, phone, gas, and groceries. Optional expenses are things that are nice to have but not imperative. These could be subscriptions, shopping, dining out, drinking, and entertainment.
When your taking note of your expenses be sure to make a list of when these bills are due (what date they’re withdrawn from your account). We’ll use these dates later when specifying your budget by paycheck.
#4: Determine your savings goals
Once you have your expenses categorized, you’ll want to take a moment and reflect on what your general goals are and what part your finances play into them. You might want to travel a lot, or buy a car or maybe you want to move. Whatever they may be, determine the amount of money it will take and how long you need to accomplish those goals. This will allow you to create specific dollar amounts for each paycheck or month in order to get started on growing your savings to reach your target.
Note: This is only applicable if your income is larger than your expenses.
#5: Pick a budgeting method and stick to it
The next section goes over some budgeting methods I find helpful. This isn’t an exhaustive list so find a method (or methods) that work for you, implement them into your daily routine and watch your money start working for you.
BUDGETING METHODS
Budgeting methods are systems/guidelines that people use in order to budget their money. There’s no right or wrong budget method, you just have to find one that works for you. You can even use a combination of a few methods based on what you’re trying to accomplish.
50/30/20 Rule:
This is a super popular technique where you designate 50% of your take-home pay to fixed/necessary expenses, 30% to spending, and 20% to savings. I’ve also seen variations where you swap the amount for spending and savings to 30% savings and 20% spending, depending on your goals.
The Conscious Spending Plan:
The Conscious Spending Plan is a method that was shared in IWTYTBR. It breaks down your finances into four categories and suggests how much of your paycheck should be allocated to each. Here’s the breakdown:
Fixed Costs: 50-60% (Rent, utilities, debt, etc.)
Investments: 10% (401K, Roth IRA, etc.)
Savings Goals: 5-10% (Vacations, gifts, house down payment, cash for unexpected expenses)
Guilt-Free Spending Money: 20-35% (dining out, shopping, movies, etc.)
Paycheck Budgeting:
This method is super simple and can easily be used with other techniques. Basically you separate your budget by the two paychecks you get in a month. You then itemize every expense you have based on the day of the month that it is withdrawn from your account. This allows you to ensure that you always have money in your account for those necessary expenses and then you can base your savings withdrawals around them.
The Envelope System:
I would describe this method as supplemental since it only applies to your spending money. With this method, you withdraw the amount of money you’ve budgeted to spending in cash from the bank either monthly or every other week. You then create envelopes for the different categories that make up your spending such as groceries, gas, shopping and dining out. Then whenever you plan to spend money you can only use the amount of cash that is in the envelope for that category.
The point of this technique is that when money is on a card it’s easier to swipe without much thought. When you physically see the cash you have to spend, it forces you to scrutinize each purchase. Also, it’s easier to notice when you run out of money in an envelope (budget category) which can be super helpful if you struggle with staying within budget normally.
Sinking Funds:
A sinking fund is a method of saving where you save a little each month on the path to a larger goal. These goals are short term goals such as Christmas gifts, car maintenance, or vacation planning. You can create actual savings accounts or create envelopes, but regardless of your medium, you allocate a specific amount that you put away each month which is determined by the timing of your goal and your available funds.
For example, if you want to save $300 by the end of November for Christmas gifts you can save $14 each paycheck to reach that goal.
There are many other budgeting methods and maybe you’ll create your own, but these are the methods that I’ve heard a lot about and found the most useful.
HOW I BUDGET MY MONEY
I personally use a combination of three budgeting methods: the conscious spending plan, paycheck budgeting, and sinking funds. When I created my budget I took my average monthly income and average monthly expenses and I determined my financial goals. I’m very focused on saving currently so I began by determining the savings goals/sinking funds that I want to focus on this year. My sinking funds include Emergency, Moving, Travel, Car Maintenance/Payoff, Beauty, and Devices, just to name a few.
Once I determined what goals I wanted to save for, I created my Conscious Spending Plan. My current breakdown is:
Fixed Costs: ~50%
Investments: 0%
Savings Goals: ~37%
Guilt-Free Spending Money: ~12%
I know my percentages are way off from the guidelines, but they reflect what my financial goals are at this time.
Next, I used my conscious spending plan to create my budget by each paycheck. This final budget tells me when my necessary expenses are being withdrawn from my account along with how much excess income is left over after these transactions. This gives me peace of mind to know that I’ll always have enough money in my checking account to cover all my expenses.
Lastly, I plan out and automate deposits into my sinking funds based on how much excess income is left in my paycheck budget. Some sinking funds deposits come out of my first paycheck while others come out of my second paycheck.
HOW I STICK TO MY BUDGET (HELPFUL TIPS)
Check on your progress
In my last post, I shared that I use the Erin Condren Petite Planner system which includes the Budget Book. Each month I track my sinking funds, spending, and debts within this book and it’s a super helpful resource for keeping up with my progress.
Also, the Budget Book is available outside of the complete planner and it’s linked here.
Automate your savings
Set up your accounts so that every time you get paid, money is transferred to your savings/sinking funds automatically. If you wait and rely on yourself to remember to manually initiate that transfer, the likelihood of it happening is much lower. Do yourself a favor and just automate those transfers so you don’t have to worry about it.
Use apps for easier access
I commonly use apps so I can easily keep tabs on my finances. My favorites are Mint, Every Dollar, and my bank/credit card account apps. I’ve also heard that the Acorns app is really good for no-stress investing.
Well, we’re finally at the end. I shared a lot of information in this post that I hope is helpful in your budgeting journey. Please ask any questions you have in the comments and let me know if you like content about finances. Don’t forget to share this post with anyone you believe could benefit from it and thanks for your support!
