A few months ago I had a rude awakening, which led me to discover the importance of making a budget.
Basically, I was making more money than I ever had before in my life, yet a vast majority of it was mysteriously disappearing.
To my surprise, it wasn’t a lawless bandit getting away with my earnings. I was the guilty one. Me and my craft-beer-drinking, trend-adhering, no-expense-sparing self.
Like I said, it was a rude awakening.
I had never given budgeting much thought other than when my family (or certain *ahem* coworkers) brought it up, insisting it was necessary—to which I would roll my eyes and then hastily change the subject.
Having finally come to the conclusion myself the hard way (ah, how the mighty have fallen), I realized I had no idea where to start.
After doing a tiny bit of research of my own and then asking for a lot of help, I was able to break down into the following simple steps the seemingly scary process of creating a personal budget. I tried to make it as straightforward and even fun as possible (fun might be a strong word . . . fun-ish, perhaps).
First and foremost: A budget is a tool designed to save you money, not merely to observe where all your money went last month. In other words, you are in charge of where your money goes.
Choice. It’s a thing, and you have it.
Having said that, here are some tips for getting started with your monthly budget:
Spend one to two months recording what you spend your money on. Try to break it down into categories. The most common are savings, emergency fund, groceries, gas and transportation, mortgage or rent, car payment, charitable giving, entertainment, personal, clothing, saving for vacation, debt and student loans, bills (cable, internet, garbage, water, electricity, gas, phone, etc.), and miscellaneous.
Make it easy: This should be simple enough if your bank has an app, which most do. Look it up in the app store if you don’t have it already. Download it, and then log in. It will keep track of every single transaction you make. All you have to do is pull it up on your phone at the end of the month!
2. Savings come first—period
This money (savings means “retirement”) is untouchable. It’s ideally 15 percent of your salary.
Make it easy: Start small (e.g., 3 to 5 percent) and increase by 1 or 2 percent every year (or more often, if you can). Simply talk to your HR person about how to allocate a certain percentage of each paycheck to a different account (this would be your savings). They can walk you through the process if you’re not sure how to set this up . . . yay Toby!
Make it fun: Saving can feel like a pain in the derriere. A good way to build this crucial habit of setting aside money is to celebrate! When you’ve achieved a certain milestone in your savings account (you can decide this number ahead of time), pop open a bottle of champagne with a few friends and raise a glass to financial freedom.
3. Build your emergency fund
You need to have a solid emergency fund in place. Only you can determine what you are comfortable with, but let’s just say three months’ salary in liquid cash. That means not only saving for your retirement, but also for your safety net. This will ensure a safety net when your car breaks down, your fridge stops working, or a health problem crops up.
Talking about finances is never fun, and keeping track of them can be even less so. But it will be infinitely worth it.
Make it easy: This should be your priority if you don’t have an emergency fund already. Decide how much you feel comfortable with for this purpose and then create an account just for emergencies. Set aside money in your monthly budget for this account, and then when you’ve reached the allotted amount, you don’t have to worry about what you’re going to do if your car breaks down somewhere down the line.
After you’ve finished building your emergency fund (huge accomplishment, by the way), you can put that money toward your retirement fund.
4. Pick a software
Mint and EveryDollar have good free options. Find a budgeting app you like and start setting up the categories you determined in your audit. Some premium (paid) features allow you to connect directly to credit cards and bank accounts. This is probably not worth it, especially if you are looking to save money. The point of the app is to keep track of how much you’re spending and how much you have left in your budget. It can feel like a nuisance when every time you make a purchase you have to type it in, but it is well worth the small trouble, and it makes it a lot easier to stay in your budget.
5. Create your budget.
Determine how much you bring in per month. This might vary based on how you are paid (usually either twice a month or every two weeks.) This is your pool of money to work with. Now, break it down into your categories. Be realistic. If you spent $500 on groceries during your audit months, don’t commit to a $200 budget on groceries. You are only setting yourself up to fail.
Make it fun: This doesn’t have to be as boring or painful as it sounds. Get your comfy clothes on, pour yourself a beer (although beware of the pricey craft selection), turn on some tunes, and get started. You can also have a gathering of a few friends if you all are in need of getting your finances in order.
6. Report your spendings
Get in the habit of entering any purchase into your budgeting app immediately after it happens so things don’t get ignored or missed.
You’re setting yourself up for success financially and becoming truly independent.
Another way of doing this is to take twenty minutes a week (Saturday or Sunday evening, for example) to look through all your spendings and physically write them down in a notebook. It may sound tedious, but with music and a glass of wine, it won’t feel as painful. This process will help you keep a close eye on your finances and develop intentionality about your budget.
Make it fun: Every time you do this, you can do your happy dance or listen to your favorite song because you’re killing it.
7. Pause before you pay
Really hold yourself accountable to the budget you made by learning to do without. Get in the habit of checking your budget before making purchases. As restricting as this sounds, I promise that you’re really freeing yourself from the slavery of immediate gratification and clutter. You’re setting yourself up for success financially and becoming truly independent.
Make it fun: Challenge yourself and a group of friends to a no-new-purchase month. During this time, don’t buy anything you don’t strictly need (i.e. food, gas . . .). If you feel tempted, shoot one of these friends a text to hold yourself accountable—a little encouragement can go a long way. After the thirty days are up, treat yourselves to a fun night out!
8. Keep it up
You will need to do a budget every month because you will have different needs every month. I know, I know it may feel like drudgery at times, but I swear it’s so worth it. Too many people experience the fallout of poor financial planning and suffer a lot of strain and discontent because of it. This doesn’t have to be you.
"Life is choices. This is life's greatest truth and it's hardest lesson. It is a great truth because it reminds us of our power. Not power over others, but the often untapped power to be ourselves and to live the life we imagined." - The Rhythm of Life
— Matthew Kelly (@MatthewFKelly) January 17, 2019
9. Pick yourself back up
When you fail (you will probably fail at some point or another), strive to do better next month. Constantly review where you are going over budget and how you can do better.
- For large purchases, save in advance for them by budgeting small amounts leading up to the purchase. If you need to buy a couch, do not use the emergency fund (there are very few couch emergencies!). Instead, do with a Goodwill couch and save $50 a month for several months—and then buy a new couch.
- Use cash whenever possible. If you have a $100 a month for entertainment, take out $100 from the ATM on the first of the month and that is that. When you run out of that money, you have to wait until next month. Credit cards make it disastrously easy to cheat.
- If you finish paying off a debt, like a car payment, continue making those “payments” into a separate account for when you’ll need to buy a new car years from now. This way you aren’t paying interest on another car loan in the future (interest is a killer). It is tempting to enjoy the new amount of money each month . . . but it’s a trap!
- Talking about finances is never fun, and keeping track of them can be even less so. But take it from someone who sorely needed this advice six months ago . . . it’s dead useful and will be infinitely worth it.
“Money demands answers. The more it grows, the more difficult the questions become. Chief among those questions is, ‘Am I using my money as I ought?’”
What Your Money Means by Frank J. Hanna