Budgeting: You know you need to do it. You even want to do it, because you’re ready to pay off that debt or increase your savings. You’re prepared to take that grown-up step of being “good with money.” The problem? You have no idea where to start.
It’s ok — you’re not alone. Budgeting has a pretty bad reputation. People hear the word “budget” and think it means “no more spending on fun things ever again.” And while budgeting apps and services are abundant out there, finding the right one for you can be a challenge.
So let’s start at the beginning. How do you begin to build a budget, and how do you stick to it over the long term?
Budgets as a Lifestyle
In the health arena, people often say that diets fail, but lifestyle changes succeed. It’s less “Eat only cabbage for a week to hit your goal weight” and more “Find an exercise you love and do it three times a week for life.”
It’s the same with your budget and spending. If you restrict yourself for a short amount of time, you may see some financial improvements. But eventually, you’ll let go of that restriction and overspend.
We don’t want that. We want a budget that makes sense for your lifestyle, your values and your goals. And here’s a little personal-finance secret: Everyone’s budget is going to look different.
Many people try to market the idea that there is one budget formula that will work for everyone. And if it doesn’t work for you, it’s because you — not the system — are the problem.
We think that’s ridiculous. A married parent with two children is going to have different costs than a single 25-year-old with student loan debt.
Budget Step #1: Examine Your Lifestyle
The very first rule for designing a budget is to look at your current numbers. You have to know what you’re working with before you can start working toward anything.
Figure out how much money you take home each month. If you’re a W2 employee who collects a paycheck twice a month, total how much that comes to in a year.
To figure out your net worth, add up all the assets you have (cash on hand, stock values, home equity, savings and retirement accounts) and deduct from that all the debt you have. It’s ok if the number is negative.– Some types of large debt — like student loans and mortgages — can mess with our net-worth numbers.
Now examine your monthly spending. Sit down with a spreadsheet or a piece of paper and write down all of your expenses in two main categories: necessities and flexible spending.
Necessities should be things like rent, utilities, insurance, and health-related costs. If you’re a parent, childcare might be a need. If you own a car, oil changes might be a necessity. Debt payments should also be considered a need since you’ll get into financial and possibly legal trouble if you don’t pay your debt.
Flexible spending is the stuff that we love but could live without. Think dinners out, new clothes, movies, etc.
Once you know where all your money is going, you can start to change these numbers.
Budget Step #2: Set Financial Goals
Now that we know where we are, we can start looking at where we want to go. Ask yourself what your biggest financial goal is. Pay off student loan debt? Save for a house? Pile up cash for your emergency fund?
Write down your goals in language that is as specific as you can get. For example, this is an excellent financial goal: I want to pay off $20,000 in debt by the end of the year. It gives you a timeline and a specific amount of debt to pay off.
Budget Step #3: How Much Do You Need to Live On?
The only way to reach your financial goals is to create a financial roadmap. And that means figuring out how much you need to live on, how much you need to put toward your goals and how long you want to work on each target.
Take a look back at the spreadsheet or list you made earlier of all your expenses. Adding up all your necessities will give you your barebones budget, the absolute minimum you need to survive each month.
If you’re not ready or willing to go full-on frugal, add back in some of the flexible expenses that you really love. Look at your flexible expenses and see which ones brought real joy to your life and weren’t just mindless spending.
3 Important Questions
To make the difference super clear, go over the list and ask yourself these questions:
- Did I truly need that item?
- Was this an item or experience I want for a valid reason, or was it to make me feel better in the moment?
- Did this expense support a system I believe in? Do I want to spend more of my money on this system in the future?
These questions will help you begin to spend on the items, experiences, and companies that you care about. Try not to spend money on the things you don’t care about. That way you can save more overall.
Once you’ve got a monthly spending number that feels right and allows you to live a life that you can enjoy, turn your attention back to your financial goals. Remember we had a hypothetical goal of paying off $20,000 of debt in one year?
Dividing $20,000 by 12 tells us that we need to make payments of $1,667 a month on the debt to see success. Add this number to your monthly budget. Having a line item for debt in your monthly spending means you’ll begin to think of it as a regular expense. You need to make your debt payment before you can splurge on that fancy vacation.
To be able to reach your financial goals, it’s best to have them somewhere you see them often. A line in the budget is an excellent place to start, but you should also put your goals somewhere else, so you see them every day. You can stick them on your refrigerator or put them on your calendar or planner. Talk about them with friends, so they become a part of your life. Remember: Budget magic happens when budgeting becomes a lifestyle, not just a diet.
Once you’ve incorporated your goals into your monthly spending, congrats! You’ve just built your first budget.
You should have a firm grasp on your monthly spending and financial goals, and an idea of what you need to reach them. We recommend using the excellent budgeting-only Sign UpYNAB app[/action].
But What If…
Wait. You may be thinking, “I don’t have enough money to reach my goals.” That’s a common situation.
There are two solutions: Trim back your spending or earn more.
You can advocate for a raise at work to give you more income, or you can pick up a side hustle. Anything from bartending to freelance work to dog walking can bring in a few hundred extra dollars a month. That can provide the added financial boost you need to hit those goals we set.
You can also pull back on your spending. That’s why we identified the monthly items that are mandatory and those that are more flexible in your life. If you just need a quick injection of cash, you can eliminate some or all of the flexible category items. Not going out to eat for an entire month may not be the most fun you’ve ever had, but if it’s in pursuit of your bigger goal, it’s probably worth it.