Let’s say that you wanted to start budgeting because at the end of each month you’re left with no money or less in your checking account. You try really hard to save money but for some reason it seems like it’s almost impossible to do that. How exactly can you break this cycle?
Well, this is the ultimate guide to budgeting your money, it’s the article that I personally wish that I had years ago when I first started managing my money.
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What Happens If You Don’t Budget
The first point is actually asking yourself this very important question, what happens to your money if you don’t budget? If you don’t budget your money disappears, it vanishes into thin air like steam, unless you’re once of those hardcore frugal people that refuses to spend money.
But even then you still have bills, you still have groceries, there are things in life that just simply cost money that you can’t really avoid unless you just go live off of the land. And if you’re a human, then you have wants and desires. I mean, come on, like there are things in life that you just want, like you don’t need a new pair of sneakers or you don’t need a new apple watch in order to survive, but you want that thing.
There’s nothing wrong with those things, but how can you take all that spending and put it together in an organized cohesive budget that allows you to buy things that you want and just enjoy life while still also making progress towards your future.
How Do You Stick With Budgeting?
How do you stick with budgeting, like how do you actually stay consistent? We as humans are driven by emotion, even if you think you’re a logical person, you probably are. I’m a pretty logical person but a lot of your decisions are still based off of emotions.
The real trick with budgeting and you’re not likely going to see this in any other budgeting or financial planning article. But the real trick is to actually tap into those emotions, and we’re going to use those emotions in a productive way to help us budget.
Let’s take a look at two different scenarios
In the first scenario, you start budgeting because you randomly thought to yourself one day “I need to start budgeting”, and so you start budgeting. In the second scenario your goal is to start budgeting so that you can pay all your bills on time and still have money left over to start saving toward a down payment on a home for your family. One with a backyard, a dog, and plenty of space for your kids to run around.
Looking at these two scenarios which one do you think is going to yield better results?
Personally, I would find it easier to stick with budgeting long term. If you said the second scenario, then you’re right.
In the first scenario you would go to the app store or the google play store, you would download a budgeting app hoping that it was somehow going to magically help you to stay consistent with budgeting. But after a few days or a few weeks, to no surprise you would stop budgeting.
In the second scenario, the one where you imagined a better future for yourself and your family, you had goals, you had ambitions, you had a reason as to why you wanted to start budgeting in the first place. There are things that you have imagined before that you think would be great like having a house, a new car, going on that vacation, or retiring with a few hundred thousand dollars or a few million dollars in your bank account.
Think about your goal write it down in your financial planner and use that as your motivation to get you toward where you want to go.
Know Your Income
If you have no idea how much money you’re actually bringing in each month then it’s going to be impossible to know how much money you can afford to spend. The first thing you should do is go to your bank account, open up your bank statements and see how much money you are receiving every single month so that you can use that as the foundation for your budget.
And so as you can see above, I have this hypothetical budget right now, you can budgeting book on amazon. What I’m about to do here is very important so it’s critical that you pay attention.
Let’s say that you work a job, a w-2 job, or perhaps you’re self-employed you run a business or you’re a freelancer whatever the case is. Let’s just say for simplicity that you make three thousand dollars per month, that’s thirty six thousand dollars per year. However, one mistake that I see a lot of people making is not factoring in taxes. But understand that you have to factor that in when you’re budgeting, because you don’t want to say that you’re making more money when actually you’re making less money because of taxes.
You also have to factor in other things like dental insurance, health insurance, is your company automatically deducting those benefits from your paycheck? What you need to put in the income box on your budget is exactly how much money you’re bringing in every month after taxes and after all the expenses.
Also, if you have a side hustle, if you have a side business or something that you’re doing outside of your primary income source to make extra money then you want to include that in this box as well.
Know Your Expenses
Figure out how much you’re spending on average for the last three months. You can do this by consolidating all of your credit card statements and bank statements and adding them up and taking an average of the three months. You can also use an app like Mint, YNAB, and Truebill that goes onto your phone, you’ll just connect your bank account or your credit card to any of the apps and they automatically track it for you.
There’s a downside to actually using those apps which is sometimes if you have too many credit cards or too many bank accounts, it can get a little bit confused and it’s really hard to get a solid financial picture, especially if you use cash or a lot Venmo transactions.
If you’re a super granular type person or you’re really type A like I am, and I love tracking every single thing that I do. I actually write down everything in a financial planner. And what I’ll do in this article is I’ll link that resource that I use, it’s called the Budget planer.
It includes a 12 months financial planning with structured pages for setting financial goals, financial strategy, savings, debts, daily expenses, monthly budget, monthly budget review, Holiday budget, summary of the year sections, etc.. It’s a good financial planning book that’ll help you take control of your money effectively.
Alright, let’s keep going on.
Categorize Your Expenses
After you figured out your expenses for the last three months on average, what you want to do next is categorize these expenses into different categories. Those categories can include things like your rents, transportation, utilities, subscriptions, coffee, eating out, etc.. It’s easier with the financial planner.
There’s all these different types of categories, but as long as you categorize all your monthly expenses, you can start to figure out where your money is going.
Assess where your money is going base on the categories you’ve written down. I think that a lot of people kind of understand or they inherently know where there money is going. But, having it written down in a financial planner is kind of like in your face and it really helps you to kind of understand where your money is going.
An example would be let’s say after writing down all my categories I could understand like “ Oh my God, Kienma, you’ve been eating out a little bit too much the past three months, you’re spending about $600 to $650 on eating out at restaurants.” And I inherently know that I’ve probably been doing that a little bit too much. Having it written down and seeing that number is going solidify that for me. I can be a little more mindful the next time I go out whenever I’m eating out to maybe tone it back a bit.
I find that this exercise really helps, if you’re the type of person that might just be off by a couple hundred dollars every month on your budget, that’s one of the easiest way to save a hundred or two hundred dollars is to basically write down all your categories, figure out where you’re overspending a little bit too much, and just put limits to those categories in which you do think that you’re overspending.
When it comes to being observant, I feel like a lot of people when it comes to spending their credit card, they just kind of don’t really understand that they’re spending their money, they’re just swiping their cards.
They’re just basically making an action and it’s not really registering in their brains that they’re spending money. What I recommend most of the times to be more disciplined is to write your credit card expenses in your financial planner. The financial planner has a page for that where you can track all your daily expenses, an expense tracker.
If you don’t want to do that is at least to be mindful and maybe make a mental note that “Hey, you just spent some money here at the coffee shop”. Maybe you should make a mental note of this so that when you’re going to bed at night, you can just reflect on your spending for the day and realize “Okay, I spend some money here and there, but that might be okay because it might still fit into my budget.” You can also record it down into your financial planner under your daily expense tracker so you can be more accountable to yourself.
The 50/30/20 Rule
When it comes to managing your money, there is a popular budgeting rule or guideline that’s going around the internet right now. It’s actually been popularized by Elizabeth Warren and it’s called the 50/30/20 rule.
It says that you should allocate 50% of your income, your after-tax income towards needs, 30% towards wants, and 20% towards savings.
If your after-tax income is $4,000 a month, that’ll be $2,000 a month will be for your needs, $1,200 will be for your wants, and $800 towards savings.
When it comes to your needs, you already know your categories of expenses but your needs are basically rent, transportation, utilities, and basic groceries. So your wants are things that are optional, things that you discretionarily spend money on. For example, getting a coffee, going out to shop, eating out, your Netflix subscription, etc.
The 50/30/20 rule is a pretty good guideline for those that are pretty new to managing their money. But I do like to shift it around a little bit based on your cost of living. Let’s say your cost of living is a little bit cheaper than $2,000 a month for our $4,000 a month example.
Let’s say you live in the middle of America where it’s a lot cheaper to live, if your necessities don’t make up $2,000 a month, I like to shift that difference of extra spend into the saving category, not the wants category.
Now my personal modification when it comes to the 50/30/20 rule is actually to save a closer to 40%. That’s what I’m aiming for, it doesn’t happen every single month. But if I’m able to save 40%, what I’m actually doing with those savings is I’m moving all of those savings into an investment account and actually investing that money.
Also, I want to make sure that my emergency fund is covered, that means in case of an emergency I have some backup money to basically survive on.
I do think that’s one of the things that the 50/30/20 rule doesn’t really specify which is where should your 20% of savings go. In terms of savings you want to have your emergency fund covered, then the rest can just go towards your investments.
Review Your Budget Monthly
My biggest tip for you guys when it comes to budgeting is to review your budget monthly and see if you’re actually saving towards your goals. It’s easy to get overwhelmed with a budget and think that you’re not making any progress, so what I like to do every single month is to look at how far I’ve come in the past month.
I love this quote “People overestimate what they can do in a day, but they underestimate what they can do in like say a month or a year”. If you think you can solve all of your budgetary problems within lets say a few days, that’s not really going to happen.
What budgeting does require is a lot of consistency and discipline over time, but if you’re able to stay consistent and disciplined you’re going to see results. So a monthly check-in is really important, what I like to do personally is I like to look at my bank account balance from one month to the next, and I have a log of what my bank account balance is on the first of every single month. This is a really simple way to keep track of how your budget is going.
Let’s say your savings goal is $800 a month, like in our 50/30/20 rule example with $4,000 of after tax income a month, that means that your bank balance should be going up by roughly $800 from month one to month two, to month three.
And lets say it actually is going up on month one to month two, to month three on the first of every month, that means on the second of every month you can withdraw some of that money and put it into let’s say your retirement account or your investment accounts.
I think that sometimes people just make budgeting way over complicated, but a summary of what budgeting is is as long as you make more than you spend, and you allocate some of that savings to an investment account, you’re doing right by your budget.
Anyways guys, I hope that you found this content super helpful and valuable. If you did, let me know in the comments below. I appreciate you guys being here for yet another post and as always, Peace and Happy Hustling!