How To Budget: A Guide For Beginners

How To Budget

A Guide For Beginners

Keeping It Real

A quick google search will reveal hundreds of articles telling you the proper way to budget. The fact is, the right budget for you depends on your individual circumstances, and it takes time to figure out the most effective method that suits your needs, time, and is something that you can stick with. Because really, a budget doesn’t matter if you aren’t going to follow through with it.

Since getting my first real job out of college, I have experimented with the Cash-Only Budget, Priority-Based Budgeting, Credit Card-Only Budgeting, and a Balanced Money Formula. What I have found to be the most successful and accountable is the Balanced Money Formula. Below, I will explain what that is and how you can personalize it to fit your lifestyle and goals.

What Is A Balanced Money Formula?

A balanced money formula is one in which you divide your expenses into a number of categories (such as ‘necessities,’ ‘fun,’ ‘debt,’ etc.) and then you determine what percent of your net-income (meaning, your income after tax) should go towards each category.

My personal favorite balanced money formula is one that was coined by Elizabeth Warren and Amelia Warren Tyagi in their book, The Ultimate Lifetime Money Plan. It’s called the 50/20/30 Rule. I’ve had to personalize this budget to fit my necessities, goals, and lifestyle, but it has helped me get my spending under control, save thousands, and understand what my financial situation will be in the future, if I stick with it.

50% - Necessities

The 50/20/30 rule states that 50% of your monthly income should go towards the things you absolutely need. This includes housing, utilities, groceries, transportation costs, health costs, and even basic clothing.

20% - Savings

When I first saw this number, I giggled a little. I thought “there is NO way that, at this stage of my life, I am going to be able to save 20% of my after-tax monthly income.” However, this includes debt payments. Paying down debt is like reverse saving. Once that debt is paid off, you can begin to pocket the monthly amount of money that you used to have to pay to someone else.

Whatever percentage you are contributing to a 401K or IRA also counts, as well as the match that your company contributes (if they do). So, for example, if you are putting 4% of you income into a 401K and your company matches half of every dollar up to 6%, you are already up to 6% savings (the 4% you have contributed plus the 2% company match).

30% - Wants

This is the percentage of your money that goes towards a night out on the town, eating out with your friends, and buying that new accessory.

How To Make This Work For YOU

You may have just looked at those numbers and decided that your bills and spending habits do not, and cannot, align with the 50/20/30 goals. So did I. You might need to make a few adjustments to the rules and to your spending habits. I’ve listed a few steps below to help you adjust both the rules and your spending, if needed.

1.Determine where your money is currently going.

Take a look at your bank statement from last month or use online banking. I found it easiest to use Excel for this step, but if you prefer to write everything down, that works just as well. How much of your money went to Necessities, to Savings, and to Wants, as defined above?

2. Bend the rules to fit your situation.

For simplicity, I decided change the 50% rule from “Necessities” to “Bills.” Because I NEED to pay my bills. This included my rent, utilities, gym membership, car insurance, etc. I did not include groceries, clothes, or transportation costs.

My debt payments alone exceed 20% of my monthly income (thank you, student debt). So, if I was to follow this rule, I would not have to open a 401K or a savings account. However, saving for retirement and creating an emergency fund should be a priority for us all. Since my bills don’t add up to 50% of my income, I decided to add debt into the Necessity category. After all, paying off my debt is a necessity.

I put everything else into the 30% Wants category. Yes, I need clothes, but do I need NEW clothes? Yes, I need groceries, but do I really need to buy avocados this time? Yes I need to pay for gas to fill my car, but do I need to take that extra trip?

So, with my personal adjustment to this budgeting system, I was left with 50% Bills & Debt, 20% Savings Only, and 30% Everything Else. Do the same for yourself. Bend the rules to fit your personal goals. Keep in mind that you may not reach these numbers right away. Over 50% of my income was going towards Bills and Debt, so I figured out where to cut (gym membership and cable). I am not currently saving 20% of my money, but I’m working towards it. And, I work very hard to keep my other spending below 30%.

3. Track your spending.

It took me about 3 months to have a solid plan. By tracking your expenses every month, you will find where you can cut back, where you can’t, and how long it will take you to pay off your debts (can you pay more, do you need to refinance?). Again, I find Excel to be the easiest method for tracking, but you do you. It’s the only way you will follow through.

4. Adjust as you go.

Once you finish off paying a debt, where will you put that money? Into savings? Towards a different debt? Divide it up between different categories? You should constantly be tracking and adjusting your budget as new life events occur (the good and the bad).

Finding a budget that works for you takes time. Try this one out for a few months. If it doesn't work, try a new one. No matter what you are doing, make sure to pay yourself first and pay your bills on time to the best of our ability. We all make mistakes, but if you’re working on a budget and saving even the smallest amount, you are already doing better than half of all Americans who have not put anything away for retirement. It took me a year and counting to get my budget just right.

Follow this blog for more and/or e-mail me at [email protected]