In this article, I share key tips, tricks, and resources to help you with creating a budget that works, so you can take control of your finances and achieve your financial goals.
Introduction to Creating a Budget that Works
Creating a budget is the foundation of financial stability. As I mentioned in my last article, How to Save $100k in 3 Years, having a budget is a critical component to increase your savings fast, and that’s why I’m sharing everything you need to know about budgeting here. Budgeting guides your spending and saving habits, helping you achieve your financial goals. It’s a key component to seeing what your savings could look like vs. living paycheck to paycheck. Whether you’re trying to save for a vacation or home, pay off debt, or build an emergency fund, a well-constructed budget is key. Today, I will walk you through all the things you need to know on creating a budget that actually works.
Understanding your income is a critical part to creating a budget
The first step in creating a budget is understanding your income. This includes not only your salary from your 9-5 job but also any side hustle income, bonuses, and other sources of revenue.
- Track Your Main Income: If you don’t already receive checks from your company, use tools like the SmartAsset Paycheck Calculator to understand your take-home pay after taxes. This gives you a clear picture of how much money you actually have to work with.
- Track all other income sources: Any freelance work, equity, bonuses, and passive income such as dividends or rental income. Do not rely on this money when it comes to budgeting. This is all extra and dare I say unreliable income. Think about this as the cherry on top. I can assure you, if you expect a bonus or a “fat equity payout” you could be setting yourself up for serious trouble.
Categorizing Your Expenses
Next, categorize your expenses. This helps you see where your money is going and identify areas where you can cut back.
- Fixed Expenses: These are recurring monthly expenses such as rent/mortgage, utilities, insurance, your phone / wifi and loan payments. These are usually non-negotiable but can sometimes be reduced through refinancing or switching providers.
- Phone: The going rate for a verizon phone bill is about $120 a month. To easily cut back on this expense, try calling your phone provider and tell them you are switching services. Verizon specifically has other services you can utilize that are on the same network, but substantially cheaper, check out Visible that is only $25 a month. If you aren’t interested in that option, you can always go back to your parents plan and pay them for your portion.
- Wifi: Try calling your provider and asking for a discount. A lot of times, companies will reduce your rate if you just ask
- Mortgage/Insurance: When it comes to your mortgage and insurance, you need to shop around before you lock into a rate or policy. For mortgages, if you get a quote, then use that to get another, and another, you can save yourself upwards of $85k over the course of your mortgage. For insurance, do the same.
- Variable Expenses: These include groceries, dining out, entertainment, shopping and other discretionary spending. These are the areas where you can typically find savings. I find that where people go wrong with variable expenses is that they care WAY too much about what other people think. When you are keeping up with the Jones, you are going to live like the Jones and that means living paycheck to paycheck.
- Spend where you want to: After you break out the types of spending you do, focus on the areas that bring you true joy. Just because you have a budget doesn’t mean you can’t spend money on clothes. The purpose of a budget is to give you the freedom to spend where you want and to help you cut back on the rest. If you don’t like fancy cars, don’t drive one.
- Cut subscriptions: Don’t pay for Disney+ if you use it once a year.
- Groceries: Plan your meals, create a list, and stick to that list. Do not go to the expensive grocery stores, but instead opt for trader joes or Aldi.
- Dining Out: Look for less expensive options or try to go out during happy hour. Save major cash but skipping out on drinks.
- Entertainment: Opt for free activities. Go for a walk or a free museum.
- Delete the Amazon App: Need I say more?
- Savings and Investments: Allocate a portion of your income to savings accounts, retirement accounts, and other investments. This ensures you’re setting aside money for future needs and goals.
- Saving for retirement: Roth 401k and 401k: The first place to start is with 401k and more importantly Roth 401k contributions. If you don’t take advantage of a 401k match, you are instantly losing out on company benefits (catch our article here that explains more on company benefits. https://reysup.com/company-benefits-explained/) The reason why you should invest in a Roth 401K is because you pay taxes on the way in and not on the way out. To put it simply, tax free gains on your money.
- What to invest in: I personally follow Dave Ramsey’s advice. That is to invest in growth and income, growth, aggressive growth, and international mutual funds.
Setting Financial Goals
Having clear financial goals makes creating a budget have a purpose and helps you stay motivated.
- Short-Term Goals: These might include saving for a vacation, building an emergency fund, or paying off a small debt. Short-term goals are typically achievable within a year. The benefit of having short term goals is that they keep you motivated to keep going. It’s also a much more satisfying purchase than buying a bunch of shit you don’t need on Amazon.
- Long-Term Goals: These include buying a home, funding your children’s education, or retiring early. Long-term goals require more planning and discipline.
Creating Your Budget
Now that you know your income, expenses, and financial goals, it’s time to start creating a budget.
- Use the 50/30/20 Rule: This simple budgeting method allocates 50% of your income to needs (rent, utilities, groceries), 30% to wants (dining out, entertainment), and 20% to savings and debt repayment.
- Use Budgeting Tools: There are many tools available to help you manage your budget. Apps like Mint, YNAB (You Need a Budget), and Credit Karma can simplify the process. Alternatively, you can use a simple Google Sheet to track your income and expenses.
- Automate Savings: Set up automatic transfers to your savings and investment accounts. This ensures you’re consistently saving without having to think about it.
Monitoring and Adjusting Your Budget
A budget is not a set-it-and-forget-it tool. Regularly monitoring and adjusting your budget is crucial to its success.
- Review Monthly: At the end of each month, review your budget to see where you met your goals and where you fell short. Adjust your spending categories as needed. A lot of credit cards make this simple and allow you to export your spending into a simple excel spreadsheet.
- Be Flexible: Life changes, and so should your budget. If you get a raise, adjust your savings goals. If you have an unexpected expense, reallocate funds from other categories to cover it.
Tips for Sticking to Creating a Budget
Sticking to a budget can be challenging, but these tips can help you stay on track:
- Use Cash for Discretionary Spending: Withdraw cash for categories like dining out and entertainment. When the cash is gone, you know you’ve reached your limit for the month.
- Limit Credit Card Use: While credit cards can be useful, they can also lead to overspending. Use one credit card for tracking expenses and pay it off weekly or bi-weekly to avoid accumulating debt.
- Plan for Unexpected Expenses: Always have a buffer in your budget for unexpected expenses. This prevents you from dipping into savings when surprises arise.
Conclusion
Creating a budget that works is all about understanding your income, categorizing your expenses, setting financial goals, and consistently monitoring and adjusting your spending. With discipline and commitment, you can take control of your finances and achieve your financial goals. If you have any questions or need further guidance, feel free to leave a comment below. Until next time!
