The best budgets can serve as powerful tools for enhancing financial health by providing clarity, control, and direction over spending and saving habits.
Getting started can be intimidating, especially if you have a complicated financial picture with lots of debt, irregular income, or little wiggle room between income and spending each month. However, with the right strategies and insights, you can find a financial management path that works for you. This blog can help you do just that.
In this guide, we’ll explore how to make a budget that meets your needs, sharing expert tips not only on how to budget better, but also how to find room in your budget for saving for your major life goals. Keep reading to learn more!
What is a Budget?
A budget is simply a spending plan. Budgets can be a set spending limit for one purchase (like a car) or project (like home renovation), an annual plan for income and expenses for businesses or households, or a month-long calculation for managing your personal spending.
When you make a budget, you’ll take a look at your income and available funds and create ways to balance the money available to you with your expenditures. Budgets are an important part of financial management and planning, allowing you to understand your spending habits and curb excessive spending, find funds for savings, and strategize how best to use your hard-earned money.
Who should use a budget?
No matter how rich you are, no one has an infinite amount of money. That’s why everyone can benefit from a budget, to help them manage their resources and create long-term financial plans.
Budgets can be especially helpful when:
- You want to have better control over your spending.
- You need to start saving for long-term goals, like purchasing a home, paying for college, etc.
- You are working to get out from under debt.
- You live paycheck to paycheck.
- You don’t have an emergency savings fund.
- You anticipate a major change to your income or expenses.
The right budget can help you reach your financial goals, whether it’s homing in to areas to cut spending, prioritizing your financial objectives, or simply giving you insights into your habits.
How to Create a Budget
The first steps to creating a budget are understanding two key items: your income and your current expenditures. Once you do, you can use your insights to develop strategies for how to find a balance between the two. Let’s explore the phases of creating an effective budget.
1. Calculate Income
Your income is how much money is coming in. This can include income from jobs, social security or disability payments, pensions, interest, investments, rental income, and any other source. Using one checking account for most of your transactions, including deposits, can help you see your monthly income more clearly.
If your income fluctuates from month to month, you may need to look at your annual income, revisiting tax returns and statements over the course of the year, to get a better understanding of what you can reasonably expect each month. When in doubt, always underestimate, to avoid budget shortfalls. Lastly, be sure you are calculating take home pay—after taxes—even if you plan on receiving a refund.
2. Add Up Expenses
Once you know how much income you can expect to receive each month, you’ll need to make up all your expenses.
You will probably have many more individual expenses and purchases than sources of income, which means it can be hard to really understand your spending by simply adding it all up. That’s why breaking down your expenses into categories can be helpful. Consider classifying your expenses in one or more of the following ways:
- Major categories: Needs, wants, savings and goals.
- By type: Housing and utilities, transportation, groceries, subscriptions, entertainment and dining out, clothing, healthcare, debts, etc.
- By goal: Emergency savings, paying off debts, retirement plan contributions, plus necessary and discretionary spending.
- By flexibility and regularity: Fixed expenses (rent, student loan payments, cell phone bills, etc.) and variable expenses (heat, groceries, entertainment, etc.)
Budgeting apps and credit card and bank portals often have features that can break down you’re spending by category—but you’ll still have to do many of these calculations yourself, especially if you use multiple payment methods. Pull several months of bank and credit card statements to get the full picture of your spending habits and remember to include cash withdrawals or other undocumented purchases in your tallies.
Tallying up your expenses is the perfect time to look for errors and places to cut your spending. Uncover forgotten subscriptions, accidental charges, and things you tend to overspend on, taking steps to reduce unnecessary out-of-pocket costs.
3. Compare Income and Expenses
Having the numbers for income and expenses will show you, in black and white, how well your current monthly spending is working. If your expenses exceed your income or are so close to your income amount that you have little room for error or savings, you know you’ll need to make some changes to your habits. If your income exceeds your expenses, consider yourself lucky—and use those extra funds to boost your financial plans.
4. Strategize to Meet Your Goals—Including Savings!
We all have financial goals. Whether it’s paying off credit cards, buying a home, or simply not having to worry about having enough money to cover your costs of living, your financial goals are important and unique to you.
After you’ve reviewed all your financial information, it’s important to highlight specific goals to work toward. When you make your new spending plan, you will include these goals so that they are not overlooked.
Important goals include:
- Lowering your debt expenses. If you have a lot of debts, you can create strategies to reduce monthly costs by paying off balances with the highest interest rates or consolidating debt in a lower-interest loan or HELOC.
- Save for a specific goal. Whether it’s a new car or a new home, create a plan for building a nest egg for it, little by little, each month.
- Save for a rainy day. Save what you, can ideally 10%, in an emergency fund to cover unexpected expenses or lost wages if you lose your job.
5. Choose the Best Budgeting System
Want to ensure that you stay on track for your spending and savings goals and that you are not overspending in some areas of your life? It will take more than just willpower and an understanding of your habits. A good budgeting system, one that meets your lifestyle needs, spending and savings goals—and is simple enough to follow that you will! —is a key piece of the puzzle.
Let’s look at a few types of budgets that can help you best manage your money.
50/30/20 Method
This method is a great framework for keeping major components of your budget in check and in the proper proportions. If you tend to overspend on wants or underspend on savings, this method could work for you.
With the 50/30/20 method, you’ll allocate 50% of your income for necessities, 30% for wants, and 20% for savings or debt repayments, though there is some flexibility to these numbers. Necessities include housing expenses, groceries, transportation costs, and clothes, while wants are anything that you don’t need for basic day-to-day functioning (your discretionary spending). Savings includes savings goals while debts do not include monthly credit card charges.
Pay Yourself First Method
Is savings your main goal—but you have trouble making it happen—this may be the right strategy for you. More of a budgeting rule than a complete strategy, with the Pay Yourself First method savings becomes your top priority, and the first line item in your budget. After examining your spending and income, you set a (reasonable and attainable) savings goal, depositing it to your savings account before any other spending happens.
Direct deposit and automatic transfers can help this strategy become seamless. Just keep an eye on your other monthly expenditures to prevent overspending.
Zero-Based Budgeting
Zero-based budgeting is an excellent approach for individuals who enjoy planning meticulously (and those who need to closely monitor their expenses). Under this system, every dollar, including designated savings, is allocated, and each purchase and bill is carefully recorded to adhere to the predetermined budget. Not a single dollar is unaccounted for.
While managing this manually with receipts and pen-and-paper can be challenging, utilizing a budgeting app can streamline the process, which we’ll discuss later.
Envelope Method
If you’re trapped in a continuous cycle of credit card debt, the envelope method may help you get out from under it. Instead of hoping that your discretionary purchases (wants) will align with your allocated spending, you’ll set aside a fixed sum of money from your bank account each month—in cash—for the areas where you tend to overspend, like dining out or clothing purchases.
Place this cash in separate envelopes kept in a secure location. Solely use the money from these envelopes to cover expenses in their respective categories; once the cash runs out, it’s gone—preventing you from spending more than you’ve budgeted.
Test Your Budget—and Revise it Regularly
After you’ve gone through all the work of creating a budget, it’s time to put it into action and see how it flies. You may find the system you’ve chosen works flawlessly. But often, you’ll probably see areas that need adjustments. Getting it perfect the first time is less important than finding a solution that truly meets your needs.
After test-driving your budget, consider:
- Is it too austere? Very strict budgets that leave you feeling deprived might lead you to abandon them.
• What else can be cut? Are there still places where you could adjust spending to better facilitate your goals?
• Are the numbers accurate? Did you over or underestimate your income or expenses?
• Are the ratios working? Are you saving too little? Did you not allot enough for needs? Tweak your numbers based on your experience after a month or two.
Even after you have a budget that works, it’s still important to revisit it and review it regularly. Our lives, and the circumstances around us, are always in flux. By reviewing your budget once or twice each year, you can ensure it still aligns with your actual needs and goals. You can also review your budget after:
- A change in income
- Reaching a savings goal
- A major new expense (like buying a home or car)
- Paying off debt
- The birth of a child or either life event
- Major economic changes
Tips for Trimming Expenses
Struggling to balance your budget. Sometimes it’s just a matter of adjusting your expectations. However, there are some types of spending that can have a bigger impact on your bottom line. These can include:
- Dining out. If a once-a-week meal at a restaurant for a family of 4 costs $75 with tip, that’s over $300 per month and nearly $4,000 per year. Changing that habit to once a month can save you almost $3,000 annually.
- Subscriptions. Streaming subscriptions keep increasing in price as newer services are continuously added. Strategize to reduce this cost by either keeping on your most frequently used subscription or rotating between a few select plans at a time, taking advantage of introductory rates. Also consider cutting the gym membership, cable or satellite service, or other monthly subscriptions.
- Transportation costs. Once you add up your monthly or yearly transportation costs, including gas, you may be stunned by how much money you spend getting from place to place.
Budget for More than Just Your Household Expenses
Regular household budgets for everyday spending and savings are an important financial strategy, allowing you to adjust your lifestyle according to your income and financial goals. But, there is more to budgeting than just allocating funds for run-of-the-mill spending. When you are expecting big-ticket spending outside of your normal budget, it’s crucial to integrate these expenditures into your budget, and in a way that retains its balance.
Microbudgets for special expenses can be an ongoing line item that you encounter or can be for a special savings goal, like a wedding. Depending on the item and your timeframe, it could be as easy as sending a few bucks with each paycheck into a designated account. Let’s look at a few that you may want to consider.
Ongoing Line Items
Save a little each month to create a fund for regularly occurring expenditures:
- Birthdays and birthday parties
- Annual vacation
- New car or planned home improvements (build a fund over the course of several years)
- Summer camps
- Kids’ sports
- Holiday shopping
- Education savings accounts
One-Time Big Expenditures
When you have a big expense planned, integrate savings every month to prepare for it.
- Wedding
- Big family trip
- Down payment and closing costs on a home.
- Major home renovation project
Using microbudgets helps you make sure that no expenses fall outside of your purview and can help decrease dependence on credit cards and loans (and spending on interest!).
Tools To Help You Budget
Since much of our lives are digitized—including our finances—it only makes sense to take advantage of digital tools to facilitate your money management.
For those who prefer a traditional approach, Excel Spreadsheets or Google Sheets offer a free and straightforward way to organize income, expenses, and savings goals.
However, for a more streamlined experience, budgeting apps can provide convenience and accessibility.
These tools offer various options to cater to different budgeting styles and preferences—some even working with your financial institutions to automatically pull your account spending and income. The powerful features today’s apps provide can give you the tools you need to take control of your financial well-being, without the hassle of manual account management.
How Field and Main Can Help
Ready to take control of your financial future? Visit one of our convenient locations in Henderson, Cynthiana, or Lexington, Kentucky or Evansville, Indiana to learn more about how we can help you meet your budgeting goals.
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