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Client Log InTips for Creating a Budget
The process of building a budget isn’t the sexiest idea in the world, but it is a practical undertaking that is fundamental to effective money management and sound personal finance.
A good budget provides the structure to live within one’s means – to spend less than the amount of take-home earnings each month while providing room to pay off debts and accumulate savings.
Though it may seem simple – or even feel unnecessary – to create a budget, the truth is that having a proper budget in place is important to prudent personal finance practices and that there exist many potential stumbling blocks that can get in the way of creating one. Let’s take a closer look.
Why Create a Budget?
Knowing why you should create a budget in the first place helps make the process easier. After all, chances are that building and adhering to a budget will involve some degree of sacrifice.
Cutting back on entertainment and dining out, for example, puts a damper on some enjoyable day-to-day activities – so it’s best to be clear as to why doing so makes sense for the long-term – otherwise it won’t be easy to maintain the discipline necessary to stick to the budget.
Here’s where having a clear long-term goal becomes important. Whether it be saving enough for a down payment on a house, focusing on debt repayment or planning for a career change, the short-term pain involved will be easier to bear when the long-term goal of something you truly want is kept at the forefront of your mind.
Money Management
Building a budget requires that you become acutely aware of exactly how much money you’re bringing home each month after taxes, health insurance, IRA contributions, and any other work-related benefits that reduce take-home pay.
Similarly, you’ll need an accurate assessment of necessary monthly expenses – housing, utilities, food, transportation, minimum monthly debt payments, clothing etc. Gaining control over your personal finances demands that you know both sides of this equation – your net monthly inflows and average monthly total expenses as they relate to necessities – as well as including the monthly average of lumpy periodic bills, such as insurance and property taxes.
The 50/30/20 Budget
One straightforward and useful approach to budgeting involves allocating 50% of monthly take-home pay to necessities, a maximum of 30% to “wants,” and the remaining 20% to debt repayment and savings.
Ideally, this framework fits without any tinkering, but if necessities exceed half of take-home pay, it follows that any overage should be taken from the “wants” category – and this is when short-term pain sets in and why it’s important to have a desirable long-term goal firmly in mind to maintain the discipline necessary to make the budget work.
When necessities exceed 50%, they still retain the highest priority, debt repayment and savings come next, and short-term wants come last. It is also wise to revisit the source of all necessary expenses – it may be possible to refinance a mortgage, reduce rent, change cell phone carriers, reduce (or eliminate) the cable bill, find less expensive auto insurance, a cheaper grocery store, etc.
Keep It Simple
Working things out with pen and paper is perfectly reasonable and approachable – for many people, spreadsheets and financial software programs only complicate matters and make things more difficult. Better to keep things simple and get the ball rolling toward building a budget that works. Additionally, don’t try to cut back too much right away.
Whether you work within the 50/30/20 framework or not, the most important thing is to build a budget that works for you. Much like a workout routine, the best budget plan is the one you will actually stick with on an ongoing basis. Most of us wouldn’t stick with going to the gym three hours a day, five days a week, right from the outset. In a similar manner, trim the fat slowly with your budget, too.
Some Final Thoughts on Building a Budget
Sticking to the framework of a budget week in and week out won’t always be easy, so be sure to treat yourself along the way. Reward yourself in the short-term. Ice cream, a loaded pizza, a night at the movies – whatever the reward – something simple and enjoyable at the end of a successful week can stave off any feelings of scarcity while keeping you motivated and on track for your long-term goal.
Also, be conscious of your social environment – don’t hang around big spenders while you’re trying to budget – it won’t assist in your budget working for you and it probably won’t feel very good, either. Instead of being reminded of what you don’t have or can’t do at the moment, seek the company of constructive friends who empathize with your personal finance journey and support your efforts at effective budgeting and money management.
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