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Have you found yourself Googling how to budget money for beginners? How to make a monthly budget? Give me examples of a good budget.
The reason why I am writing this blog post about how to budget is exactly that I was YOU, 20 months ago.
It suddenly hit me that I had no idea where my money was going, I found myself living paycheck to paycheck.
Never really heard of a budget, what they are used for or why even bother to create one, thinking they were just too restrictive, a waste of time, and no value add activity.
But if you want and need to take control of your money, spending, and earnings, I think a budget is the best way to go about this, at least at the beginning of your money management journey.
I started mine 18 months ago after over-researching everything I could and realizing that all that research was going to do me no good if I did not just start to implement.
WHAT IS A BUDGET
According to Investopedia, a budget estimates revenue and expenses over a specified future period and is usually compiled and re-evaluated periodically.
Essentially you are evaluating what money is coming in (income) and what money is going out (expenses, bills, etc).
Budgeting can be as simple as tracking all the money you spend on essentials every month like water, electricity, rent, car payments, etc. And having an understanding of how much money you earn and how much is the difference between what comes in and what goes out.
A budget is a financial planning tool that gives you a grip over how much money you need to survive and thrive monthly.
WHY DO YOU NEED A BUDGET?
It does not matter if you are barely scraping by, bathing yourself with hundred-dollar bills, or having a little extra every month.
Having a budget benefits everyone, it is the first step towards achieving your personal financial goals and planning for your future.
The reason why you need a budget is that it helps you have a clear view of where your money is going, it helps you understand where your money needs to go to achieve your goals and also pay down your debt faster or retire comfortably.
Also think of a budget as a way to prepare you to make more money in the future, because rumor has it that if you can’t manage $100USD you won’t be able to manage $10,000USD.
A budget, contrary to popular belief (I thought that too) does not need to be restrictive, or a punishment for you spending money.
4 THINGS I REALIZED WHEN I CREATED A BUDGET FOR THE FIRST TIME
I carry money traumas – I come from a third-world country, where my parents had to decide if they should pay rent or buy food. And so growing up, money was always this source of stress and oftentimes not talked about enough, because my parents had a lot of shame for not having enough to provide the life they envisioned for their children. So when I started working and making my own money, all I knew was spending.
Although my parents were not big shoppers or spenders they were responsible with money, they just didn’t make enough of it, and so my mentality around money was “I would never have enough money, so might as well spend whatever I make, because what is the point of even working and earning this money.
It is not until I had a realization that I won’t be thing young forever, and there will come a time when I won’t be able to work and earn real-time money, and so I started to think about how can I save enough so that when the time comes, I can still pay for my expenses.
Debt is not bad – I have almost 100K in debt (composed of student loans, personal loans, and a 401K withdrawal), yes, that sounds bad, BUT I needed that money to take me out of a bad situation due to the pandemic.
Also, debt can help you build credit, which is something you need to be an adult, to have an apartment rented, buy or lease a car, and get certain jobs. And so I built a pretty strong credit score that helped me buy a house at 23yrs old.
So, yes, I wish I did not have a personal loan to pay back and I wish I never had to make that withdrawal out of my 401K, but it saved me years of interest rate payments, and most importantly it saved me from a serious mental breakdown.
My relationship with money – I never knew I was an emotional spender or an impulsive one. It Was not until the budget creation came in and saved my life. It sounds dramatic I know, but it is true.
Creating a budget forced me to see the reality as to why I was living paycheck to paycheck, the truth is I was making myself believe I just was not making enough to live in the city I live in.
It was a hard pill to swallow when I realized that I was just spending more than I was making and that is the dumped of financial ruin.
And so thankful because I stopped ignoring the facts and decided to face the fear to just take a look at the real numbers through a budget is when I was able to get myself on track to making better decisions when it comes to my money.
HOW TO CREATE A BUDGET
Creating a budget can be as simple as writing down all your expenses on a notebook or piece of paper, you can also print out your bank statements and highlight the monthly bills and mark your calendar for when those bills need to be paid.
There are also plenty of free online resources like digital downloads to help you get started on budgeting.
Also, there are plenty of online apps that can help you automate the budget process by tracking your expenses by connecting your bank account to the app. (I am still testing out a few so that I can write a post about the best ones and their cons and pros.)
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TYPES OF BUDGETS TO GET YOU STARTED AS A BEGINNER
If you are looking to start budgeting is probably because you have major financial goals you want to achieve in 2022.
And this blog post is going to help you to do the most important part of your goal, and that is to START.
I saw this analogy about exercising and budgeting as I was doing research for this video and it goes:
“Some people lift weights in the gym as their exercise of choice, while others might prefer Yoga or Pilates, none of these strategies for physical exercise is necessarily superior to the other, but they are similar methods for working towards a healthy lifestyle.”
And so that is a great analogy because we all have different ways of doing things and the same goes with your finances.
Yes, there are best practices, to go about paying off debt, or saving more money but there is no strategy better than the other because essentially you need to do what is best for you and what works best for your specific needs and situation.
So with that out of the way, let’s start with the first type of budgeting method, and this is the one I am currently using.
The main idea here is to give every dollar that comes with a job, a purpose, a meaning. It does not mean you are going to spend every dollar, but it means you know where all the money is going to be allocated.
You are going to assign a job to each of those dollars, to pay bills, to be saved, to pay off debt. And the reason for this method is so that you don’t spend money on things that are carefully planned and you don’t spend carelessly.
The way to create a budget with the zero-based method in mind is to start with your monthly after-taxes income and write out the necessary first, non-negotiable bills, like rent, transportation, minimum debt payments, groceries, and utilities. Whatever is left over should be assigned to savings, financial goals, and entertainment.
To have this work it is best to assign an exact amount of money to each category of spending, instead of just saying “fun spending” you should write out “dining out”, instead of “subscriptions” you can name it “Spotify, Netflix”, etc.
Right now my main goal is to build out my emergency fund, so after all of my needs are paid for, I allocate almost everything that is left over towards my savings. By the way, if you are interested in knowing how I saved 10K in three months be sure to subscribe and hit the notifications button so that you don’t miss that video coming up.
Now, let’s talk about the pros and cons of this method and who it is best for.
- It makes you think intentionally about where your money is going
- It helps you with saving money goals
- Helps you spend less on things you don’t want or need
- It can be time-consuming and tiring *no worries, keep watching because I will give you some ideas on how you can automate this to make it easier
Who is it for, mostly for people who have ambitious savings goals, or need to pay off debt fast? OR if you are the person who always goes “where did my money go” every time you get paid.
50/30/20 RULE BUDGETING OR PROPORTIONAL
Here you are going to divide your monthly income into three main categories those are:
Need – things you need to survive, like shelter, food, etc and that allocation is often around 50% of your income
Wants – essentially the things you don’t need but would be nice to have like a designer handbag, going out to eat at a restaurant, entertainment in general, this category will make up for roughly 30% of your income
Savings – or debt payment, will depend on your financial goals, but the savings here will include 401K contributions, an emergency fund, investments, or payment of debt.
This is also easier to calculate with your after-tax take-home pay.
- This puts a real number and perspective on your savings goals.
- It makes it easier for first-time budgeters and often it’s the easiest way to stick to a budget when you have tried other methods before.
- It does not leave room to identify a problem area (you could be overspending in certain areas and not know it with this method)
- It does now provide a framework to support your financial goals because it is more a big picture overview as opposed to focusing on details
Line-Item or Tracking Budget
The idea here is to itemize all of your spent dollars, to write out and track every dollar spent and this helps you keep track of your expenses.
This is a great way to start and have this evolve into a more robust and goals-driven budget. So the way to do this is by building out a spreadsheet on excel or google sheets. My preference is google sheets because you can take that anywhere and access the editable form, you can also use third-party vendors like YNAB (you need a budget) or True Bill.
These apps can be used both on phones and desktops and they also have cool features of predicting future expenditure based on how much you’ve spent in the past on similar items or activities. The True bill app is great because it reminds you of upcoming future subscriptions.
I used a form of this budgeting method when I first started creating a budget. I did this manually, at the end of each day I will sit and write out what I spent on each day. I take little notes, like cancel this for next month, or one-off expense, or even better the days I did not spend at all would be such good days, my heart would be so happy and my mind would say YES you did it.
- Great for beginners, it is an easy and super intuitive way to track your money
- This is a great way to get your mindset in the right place
- AWESOME way to set financial goals because in a way it forces you to be realistic about your spending
- Not great for irregular expenses which might require much more maintenance adjusting and tracking
- It can be extremely difficult to keep up because it can be time consuming
- It sets a lot of emphasis on spending and not so much on other important aspects of financial goals and literacy
This is by far the most restrictive budgeting method I have tried, this is the most hands-on way to get a handle on overspending.
It is also a physical way to handle money because you are taking money and placing the physical dollars into an envelope, at doing this method, I realize the following:
- It does not work for all bills
- It was annoying having to go to the bank to take money out
- I hate the smell of money and it was hard to handle that as I was placing/counting the dollars
But, I also discovered there are electronic ways to use the envelope method and that is to open different bank accounts for different bucket spending, so the cons I just mentioned went out the window.
The great thing about this method is that it is restrictive for reason, it will seriously get you only to spend what you allocate because the main way to make this work is to have an estimated amount of dollars based on the previous spending and you will place that into a bucket (aka envelope, aka bank account). Once that allocated money runs out you are DONE, you can’t or I guess should not take money from elsewhere to spend more on that category.
- You tend to spend less when you use cash OR when you have a firm set amount for each thing you want to spend money on
- It is a more realistic way to see where your money is going and how to be more conscious about the value of that money
- All of the cons I mentioned earlier
- It can be restrictively aggressive for first timers
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This type of budget flows with your needs, goals, and specific situation. This is great for people that have variable income and lots of variable expenses.
So when you are a freelancer, contractor, or business owner, your income can be unpredictable, variable, and ever-changing, this is most likely going to be the best budget option if you fall under any of these categories.
People using this type of method will need to be good planners, because since it is a flexible way to spend, save and pay bills it will require some strategic planning ahead of the month so that you don’t end up having to take on debt on those months that you did not bring as many sales, or maybe your client is delayed on payment.
- Great for coping with ambiguity
- It allows you to continuingly make changes in your finances as it makes sense for your ever-changing income
- It feels less restrictive and therefore makes you want to stick to it longer
- It is hard to fully understand what you can and can’t afford which can put you on the path to taking on debt
- It requires you to think ahead and plan for those lower months by saving more for those unexpected expenses
- There is more complex accounting involved and required
Those are the main or most commonly used budgets that can help you get started in establishing one yourself.
Starting with a budget is the first step to achieving your financial goals. But it is not the end and can sometimes come with lots of complications and challenges.
Remember that you might have to overcome some mindset blockers and limiting beliefs about money before you can become a successful budgeter. But also remember that you should not feel ashamed and try not to be judgemental towards your current financial situation because we are all on a different path but in a way are all in this together.
I am sure that you have made it this far in the video you are super serious about your financial health and future, so I would like to invite you to subscribe and stick around because in the next video we are going to unpack actionable tips on how to set your financial goals and stick to them in 2022.
Until the next post I hope this one serves you, I will see you back here at the same place, same time, and don’t forget to drop your questions and suggestions below by typing a comment or simply head over to the contact tab and shoot me a message directly into my inbox.