How to effectively budget.
When I first started my journey to figure out how to utilize my money best, I quickly realized that I needed to determine how to budget effectively. I knew having an emergency savings account was essential, and I knew I needed to be thinking about retirement, but I had no clue where to start when I was bringing in very little money at the time, plus I was in significant debt.
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When researching how to budget, I came across so many different ideologies that led me in many different directions. Quickly I found myself trying to balance multiple different techniques and became frustrated that I still couldn’t manage to save anything. That’s when I realized that not every budget is the same. Depending on where you live, how much you make, and your goals depend on how you need to budget. So let’s get into the basics.
The first step is to calculate your expenses—rent/mortgage, car, utilities, etc. I went about this by printing out my last 3 bank statements and categorizing my expenses into needs and wants. My needs were rent/mortgage, utilities, internet, food, insurance, and my car. Then I separated everything else from my streaming subscriptions to nights out, shopping trips, etc. Once I figured out my baseline expenses, I could move into step two.
Step two is figuring out what my goals are. For me, saving for retirement and a cash-flowing asset is very important right now. So I determined that the 50/30/20 rule would be the budget ideology that works for me. This budget says 50% of my after-tax money goes to my needs. Then 30% goes to wants, and 20% goes to savings. However, for me, I reversed my 30 – 20. I save 30% and can spend 20% on wants. Savings for me includes saving for a cash-flowing asset, and because I want this sooner rather than later, I determined that I would rather save the extra 10% than spend it.
Maybe your goals are different; perhaps you want to get out of debt, maybe you want to buy a house, perhaps you are saving for something completely different. You can utilize other budgeting ideologies, such as the envelope plan. This is where you cash your post-tax paychecks and separate the money into different envelopes. Then you divide the cash into monthly bills, groceries, hair cuts, etc. The key is only to spend what’s in the envelopes or not to spend the total amount in the envelopes. Then at the end of the month, you can use whatever’s leftover to put into savings or towards paying of debt, whatever is in line with your money goal.
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There are tons of budgets out there. The number one piece of advice I can give you is to figure out your financial goal. So often, people want an answer to a question when they don’t even know what they want. It’s okay if you don’t have the same money goals as someone else. It’s also okay if your budget changes over time; it should! As we go through life, our budgets change, and our goals change. You just have to know what you want and how to make those adjustments. Then you can structure a budget around whatever that goal is. Remember, money is a tool, and if you can figure out your goal, you can make a budget that fits what you want.
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