Do you want to get on a budget but don’t know how? You look at your income and expenses and your head just spins. How do you know where to budget and how?
It can seem overwhelming, but we’re going to simplify it for you. If you need a special plan to follow, we have three great budgets that have helped millions of people get their financing on track.
Types of Budgets
These budgets help you know where to spend your money and how. They take the guesswork out of budgeting, and they also don’t make budgeting feel restrictive, which most people feel that it is, which is why they ignore it.
50/30/20 Budget
The 50/30/20 budget splits your money up into three categories:
- Necessary expenses
- Unnecessary spending (fun money)
- Savings and debt payoff
With this budget, you budget 50% of your income for your fixed expenses. These are necessary expenses like your mortgage, utilities, groceries, and basic clothing needs. No more than 50% of your income should be needed for these expenses. If you need more, then you should see where you can cut back.
Unnecessary spending shouldn’t take up more than 30% of your income. This includes dining out, entertainment, and unnecessary clothing or household purchases (things that aren’t a necessity).
Finally, 20% of your income should be set aside for savings or debt payoff. Savings can include an emergency fund, rainy day fund, or retirement. Debt payoff includes money needed to pay off credit cards or any personal loans.
People like this budget because it gives you a guide on where your expenses should fit. For some people, it’s still too flexible though and allows too much room for overspending.
Zero-Based Budget
Zero-based budget is a budget that gives every dollar a ‘job.’ In other words, at the end of the month, you shouldn’t have any money left that doesn’t have a specific place to go.
This budget helps you account for every dollar you bring in. Your budget should have a spot for every dollar including necessary expenses, fun spending, debt payoff, and spending.
To create a zero-based budget, start by listing your expenses. Take each expense off your total monthly income and see what you have left. Make sure you give every dollar that’s left a job.
For example, put some money in your emergency savings, earmark some money for retirement savings, use some to pay your credit cards down, and other money to invest in the market, for example.
Everyone has different uses for their money, but this budget helps you see where every dollar goes and if you’re making good use of your funds.
Envelope Budget
The envelope budget is for people who like to live on cash. The budgets above are hard to manage when you mostly use cash, but the envelope budget makes it easy.
Start by making an envelope for every category you spend each month. In that envelope, put the amount of cash you have budgeted for that category. For example, if you have $500 budgeted for groceries for the month, put $500 in the envelope. Once you spend $500, you’re done spending in that category for the month.
The envelope budget makes it easy to see where you spend your money and which categories you overspend. If you find you don’t have money for categories, such as food, figure out where you can cut back or make changes so you have enough money for food or other necessities.
What Should be Included in your Budget?
Every budget is different, but in general, here are the items most people have in their budgets:
- Mortgage
- Utilities
- Groceries
- Basic clothing
- Household needs
- Medical needs
- Emergency savings accounts
- Rainy day funds
- Retirement funds
- Debt pay off
How to Split your Money Between Savings and Debt Payoff
Since savings and debt payoff are often in the same category, how do you decide where your money should go?
Here’s a simple order:
- Emergency fund
Your emergency fund should have 3 to 6 months of expenses in it. Your emergency fund is only if you lose your job or can’t work for some reason, such as falling ill. It should help you get through 3 to 6 months of expenses without any issue. This way you can focus on getting a new job or getting better so you can get back to work without worrying about your finances.
- Rainy day fund
A rainy day fund is a fund to cover unexpected expenses, like sudden car repairs or a medical bill. No two rainy day funds have the same amount, but try to have at least $1,000 saved for those unexpected expenses so they don’t put you over your budget.
- Pay off debt
If you have credit card debt, try focusing on one card at a time, paying it off. The less debt you have, the more money you can save. It doesn’t make sense to save or invest money outside of the emergency fund or rainy day fund until you pay off your debt because no savings rate will outpace the rate you pay on consumer debt.
- Retirement and taxable investments
If you have any money left in your budget, you can invest in your retirement or taxable investments. Earmarking at least some of your annual income for your retirement now will help you have enough money to enjoy your golden years rather than worrying about your finances.
How to Track your Budget
The only budget that will work for you is the one that you track. You can set up the best budget, but if you don’t track how it’s going, you won’t know if you’re staying on track.
Fortunately, it’s easy to track your budget whether you’re a pen and paper person or you love technology.
- Create a handwritten spreadsheet – If you still love pen and paper, write down your income and expenses, making sure your expenses fit within your income. Create a line item for every bill and make sure the numbers add up. Track every dollar you spend and make sure you’re staying on track.
- Use a free budgeting app – Apps like Mint are free and make it easy to track your spending. Mint links to your bank accounts and automatically tracks your spending. You’ll know every dollar you spend in real-time and see how it affects your budget.
- Set up a spreadsheet using Google Sheets – Choose a free budgeting template from Google Sheets and input your information (income and expenses), and keep it updated.
What if you Go Over Budget?
It happens to the best of us. You create a budget with the best of intentions, but life happens and you go over budget.
That’s the beauty of setting up and using a budget. You’ll know right away when you overspent and where you overspent. If you have your expenses categorized and you track your spending in real-time, you’ll know right away.
Even if you don’t check your budget daily, but at least check it once a month, you’ll see where you stand. If you look at it as a lesson rather than a mistake, you can pick up the pieces and move forward.
Let’s say for example, you had $500 budgeted for fun money, but this month got a little crazy and you spent $1,000. You can go back through your budget and see what it was that put you over your budget. Did you make impulse purchases or eat out too much?
Ook closely at what caused you to overspend and try to fix those habits. If you can’t find anywhere to cut back, look to other categories. Did you underspend in certain categories that you could lower the allotted budget for and instead use the money for fun money?
Make More Money
If you can’t find places to cut back and save money, you can find ways to make more money. It’s easy to find side hustles or work part-time jobs today. You could even drive for Uber, deliver for Door Dash, or shop for Instacart and make some side income.
Key Takeaway
Budgeting is the key to financial peace. You need something to tell your money where to go and a way to track your spending. If you have financial goals and aren’t meeting them, it’s likely because you aren’t tracking your spending and/or telling your money where to go.
Choose a budget that works for you and make sure you have a solid method to track it. With these two tools you can have an effective budget that helps you stay on track with your spending today.
