Easy Ways to Create A Budget
For most people, living more frugally means that they want to spend less money. But how do you know if you are spending less? First you need to have a clear picture of your income and your expenditures, and a budget can help you do that.
Wait…. what’s that you say? “Budgeting? Booooring!!”. It’s true that many people do find the idea of budgeting boring. According to a 2016 survey by Standard life the biggest reason why people don’t make a budget is that they find it boring (31%), the second most popular reason it they think they lack the time (19%).
But stick with me on this. We’ll cover some basic stuff about budgeting and then look at a couple of very simple ways to budget, as well as the more traditional way.
What is a budget?
A budget is just a fancy-schmancy name for a plan that details how you will spend your money.
If you look at your income and then take away your expenses, you will get one of two outcomes:
A budget will help you to track and control your expenditure, so that you get more money leftover and less debt. Sound good?
NOTE: Side effects of having a budget may include:
- A reduction in stress and worry
- Sleeping better
- Flexibility to cover any emergency expenses
- Ability to save money for the future
- Money to spend doing fun stuff
Who should budget?
I believe that everyone could benefit from a budget, but sadly only about 32% of Americans actually make a budget.
When should I start budgeting?
Now! Seriously, the sooner the better. Getting a budget in place will really help you understand where your money goes, and which areas offer opportunities to save.
How do I create a budget?
First step is to calculate your net (after tax) household income each month. This could include:
• Job(s) income including bonuses *
• Money from pensions or social security
• Child support and/or alimony
• Dividends, interest, and capital gains *
• Rental income
* There are arguments for not including bonuses, dividends etc. in your monthly income, as these are often variable and not guaranteed. If you decide to include these types of income, remember to average them out for 12 months, and realize that your budget might get busted if they fail to materialize.
Once you have your monthly net income figure you can choose one of the budgeting methods below. Your choice will probably depend on how much effort you want to expend so we’ll start with the easiest one, the 80/20 budget.
Option 1: 80/20 Budget
Let’s say you are trying to be more frugal with your time as well as your money. In that case you want the easiest budget possible (plus you can save more time by not reading this whole post).
One of the easiest budget's to use is the 80/20 budget.
Here’s how it works:
- Save 20% of your income.
- Spend the other 80%.
- Very simple to set up and to track. It’s even simpler to track if you automate your savings so that when you get paid, 20% is automatically moved from your bank account to your savings or investment account.
- If you have a low salary and high expenditures, or have debts you need to pay off, 20% can seem like a lot to save. In that case start with a smaller percentage, and work your way up to 20% over time.
- Since you are not tracking details of what you are spending, it may be more difficult to understand where your money is going. Understanding what you spend your money on is important if you want to reduce your expenses. In that case you have a couple of options:
- For a few months take a closer look at how you are spending your 80%. In particular, look at the big 3: housing, food and transportation. The average American spends about 62% of their annual budget on these 3 things, so reducing these expenses can give you the most bang for your savings buck.
- Instead of the 80/20 budget, try the 50-30-20 budget.
Option 2: 50-30-20 Budget
The 50-30-20 budget was developed by Senator Elizabeth Warren and her daughter.
In this budget you divide your income into three buckets:
20% Saving / Debt
Interesting that both this budget and the 80/20 budget are advocating 20% for savings!
Needs are the stuff that you must pay for like:
- Rent or mortgage
- Health-care costs
- Loan payments
- At least the minimum payment on your credit cards
- Don’t forget the other expenses that occur less frequently such as car or home maintenance
And your Wants are the fun stuff like:
- Dining out
Then the remaining 20% should be going towards Savings and Debts:
- Emergency fund
- Retirement savings
- Paying off more of your debts
NOTE: because you are using your net income, you may already be saving money from your gross income to 401K so your savings rate could be greater than 20% if you follow this model. But if you are self-employed then having a 20% goal for savings and debts can help you to save money towards your retirement more easily.
- Gives you a much better picture of how you are spending your money than the 80/20 budget. For example, if you are spending much more than 30% on wants then you know where to start looking to trim your costs.
- Unlike 80/20 budget, the 20% portion of the 50-30-20 budget can be put towards savings and debt so could help you pay down your debts quicker.
- More effort to set up and much more effort to track than the 80/20 budget, but there are some spreadsheets that can help. BrightPeak Financial have a free one that you can download.
Option 3: Traditional Budget
The 80/20 and 50-30-20 plans are two simple ways to create a budget, but you could get much more detailed by doing a more traditional style budget. After establishing your income, you then categorize your expenses into categories that make sense for you and your family, such as:
- Emergency fund
- Phone and Internet
- Debt payments: credit cards, student loans, medical bills, car payments
- Child care
- Charitable giving
Next you work out how much you spend in each category and use that information to set your budget. This may take a few months as it is important to capture both the regularly recurring costs, like a mortgage or rent, as well as the more variable expenses like car or home maintenance.
Lastly you will need to track spending in each category every month to make sure you are on track.
- You get a very detailed picture of where your money is going which should make it easier for you to see where you can make savings.
- It can take a lot of time to set up because you need to capture as much detail about your expenses as possible.
- It takes much more effort to track your expenses in so many categories, although you can use a spreadsheet or apps to help.
Guidelines, Not Hard Rules
Remember that these budgets are to help you get more control of your money. This means you may need to adjust them to meet your specific needs. The 80/20 budget may not work for you, perhaps you need a 95/5 balance? Or maybe you want to save more? In that case 70/30 is a better ratio, or you could change up the 50-30-20 budget so that 30% is going towards savings and 20% is for wants.
Keep it Simple
As I mentioned earlier, many people do not budget because they find it boring or they think they do not have enough time. Therefore, if you are new to budgeting don’t make life harder than it needs to be. Start simple as possible and if you find that you want to get more detailed or complicated, go for it!
If this all seems too much, there is another low-effort, no-budget option that can help you to save more: check your credit card and bank statements every month.
The simple act of reviewing your spending can help you to identify issues like incorrect billing or forgotten subscriptions. Many people miss these errors or forget what they signed up for. Plus, if you keep seeing the same non-essential spending items, you will quickly understand where you can adjust your habits and save more.
Don't Delay, Start Today!
Which ever budgeting system you choose, it’s much more important that you make a budget and then track it. If you get to the end of a month and wonder where your money went then a budget will help uncover that mystery. I can tell you from my own experience that it can uncover some surprises (“Really? I spend that much on coffee?”). But once you see exactly where your money is going then you have more control to adjust and make changes. Knowledge truly is power!
Do you already have a budget? If not, is it because you find it boring or you don’t have enough time or something else? Have I convinced you how easy budgeting can be if you pick the right one? Let me know below!