How to Create a Budget That Works for You
Whether you're saving for retirement or planning a vacation, creating an effective budget is a great way to save money and avoid overspending. With a budget in hand, you'll have more control over your assets and can effectively track progress for any financial planning goals you've set. Below is a comprehensive guide that will help you create a budget that works for you.
Different Budget Strategies and Plans to Consider
The key to an effective budget is to create custom budgeting solutions that are based on proven budget strategies. Before you begin developing a budget, identify what you spend your money on and which areas need attention. You can look at your latest credit card and bank statements to gain a better understanding of how much you spend every month and which items can be cut from your future expenses.
Once you have a good idea of what your spending habits are, you can start searching for the right budgeting technique. There are numerous budget strategies at your disposal, which include everything from the 50/30/20 technique to the pay-yourself-first budget.
The envelope strategy allows you to budget everything with a focus on cash. With this budgeting technique, you use a separate envelope for every major spending category. You'll then withdraw the amount of cash you need to fill every envelope.
Let's say that you set aside $550 every month for groceries. When you go to the store, you'll take the cash that's in your envelope and spend it on the groceries you need. If you run out of cash in a single envelope, you can't spend additional cash for that month without removing some from another envelope. If you've been using your credit card too often, the envelope strategy is a great way to use cash and pay down debt.
Among the most commonly used budget strategies is the 50/30/20 budget, which has you place 50% toward necessary expenses, 30% toward discretionary expenses, and 20% toward savings and debt payments. For instance, any credit card debt you have would be part of the 20%. On the other hand, your monthly mortgage payment would fall under necessary expenses.
The best aspect of this technique is that you don't need to carefully track your expenses. However, the one issue is that it's not the best strategy if you want to save a large sum of money or if you have a considerable amount of debt. You can alter this plan to suit your needs. For instance, you could choose to put 20% of your income toward discretionary expenses and 30% toward savings and debt payments.
The pay-yourself-first technique is centered around debt repayment and savings. You'll put aside a portion of your weekly or bi-monthly paycheck for your debt and savings payments. The remainder of your cash can be spent in any way you see fit. By focusing on paying off debt and saving money, you'll reach your financial goals sooner than you would with other budgeting plans.
Even though this budget strategy revolves around savings and debt, you should still prioritize your primary bills and expenses, which include your house and car payments. The main advantage of using this technique is that it's not as easy to overspend.
The zero-based budgeting technique involves a simple equation of "Income - Expenses = Zero". If you earn the same income every month, you'll benefit the most from using this budget strategy. Once you've calculated the monthly income you bring in, add up all your savings and monthly spending to equal the income amount.
Make sure your expenses are properly planned out to avoid taking cash from another spending category. If you forget to take a sizable expense into account, your budget could become poorly managed. You should only adopt this strategy if you already have ample experience with budgeting. Set aside some extra cash or an emergency fund in case of an unplanned expense.
Let's say you earn $5,000 every month from your main job and any side business you have. Your goal will be to make sure your expenses and savings align with your income. Use the following as an example:
- Housing - $1,500
- Utilities - $400
- Savings - $1,000
- Debt payments - $600
- Groceries - $550
- Entertainment - $100
- Dining out - $250
- Clothing - $100
- Medical - $100
- Miscellaneous - $400
- Total - $5,000
Adjust Spending to Remain on Budget
If you currently spend more money than you'd like, focus on reducing your expenses if you want your budget to work. The first things you should remove from your monthly spending are the items you want but don't need. Let's say you eat out around two to three times every week. By going to the restaurant around 50% less often each month, you should save a considerable sum of money.
You could also reduce your monthly costs by making changes to some of your fixed expenses. For instance, you may be able to lower your auto insurance rate by switching to a new insurance provider. Consider all your options before finalizing your budget. One you have a budget taken care of and have saved some money, you should try and grow your savings by making investments in your future. Hiring an advisor such as Attentive Investments is a great move as they can help you grow your wealth, so your money works for you.
Review Your Budget on a Regular Basis
Once you've set your preferred budget, review it regularly to make sure you aren't spending too much each month. You should also alter your budget if you get a raise or experience changes to your income level.
It will likely take you a few months to become used to your new budget. Over time, however, the practice of following your budget will turn into a habit that's easier to stick to. If you find that your budgeting method isn't working, don't hesitate to look for other budget strategies that might suit you better. With the right budget in place, you should eventually notice an improvement in your financial health. If you need help figuring out what budget works for you, Attentive Investments can help you get on track.