So you want to make a budget, eh? Making a budget is one of the best things you can do to begin consolidating your finances, and getting them on track! So, how does one go about making a budget, and what even is a budget?
A budget is something that can be electronic or physically on paper that tells you where you are going to spend your money each month. It usually accounts for all outgoing expenditures, such as: rent, food, water etc.
What you will need before you begin making a budget:
- A pen and paper
- Your bank statement(s) (either electronic or on paper)
- Excel spreadsheet (not necessary but is advised)
- Decided which budget you will use (more on that in a minute)
What will you use each for?
- Pen and paper- write down a physical copy of your budget in order for you to stick somewhere that you will see everyday, not a few times a week, everyday. If you have to make multiple, do so.
- Bank statement(s)- to successfully make a budget, you need to know your monthly expenditures. Why not start with the one place that stores all of your transactions?
- Excel spreadsheet- your electronic copy, should anything happen to your paper-copy, you already have a back up solution (and whatever you do, never delete it).
What types of budgets are there?
I will warn you in advance, some of these budgets are very extreme (they are ranked in order of how sensible I think that they would be for a family of 4).
50/30/20 budget, this budget is by far the most common type of budget, and is generally the one that most people (including us) recommend.
The 50/30/20 budget is broken up like this:
- 50% of your income is spent on your necessities (food, water, shelter etc.)
- 30% of your income is spent on your wants (new clothes, the latest IPhone, your morning coffee etc.)
- 20% of your income is spent on savings, investments and/or paying off debts.
This is generally considered to be the most sensible way of making a budget if you have children, pets etc.
50/20/30 budget, this budget is basically the exact same as the 50/30/20 budget, except there is more of an emphasis on the saving, investing and paying off debt side of things.
The 50/20/30 budget is broken up like this:
- 50% of all your income is spent on your necessities (food, shelter, water etc.)
- 20% of your income is spent on you wants (new IPhone, clothes, coffee etc.)
- 30% of your income is spent on saving, investing and/or paying off your debts.
These next two are generally discounted by most financial experts as it is often very difficult to stay true to these budgets if you are a family of 4.
80/20 budget, this budget was supposed to be the ‘next big thing‘ in the finance world, but failed to take hold, as many people struggled to stick to it.
The 80/20 budget is broken like this:
- 80% of your income is spent on everything else bar savings, investments, paying off debts etc. (Essentially 80% of your income is to be spent on both necessities and wants, without much real distinction).
- 20% of your income is to be spent on savings, investments, paying off debt and the like.
See the problem? You are essentially putting 20% of your money aside, and saying “Do not touch!” but when it comes to the rest of your money, it is generally a free-for-all.
30/70 budget, this is probably the most divisive budget that has ever been created. Many argue that it works (including myself, who has tried it and lives by it), but I have to admit, that I couldn’t do it if I had children.
On a 30/70 budget, your money is broken up like this:
- 30% of your income is spent on your necessities (food, water, shelter etc.)
- 0% is spent on your wants (or as little to 0% as you can get it)
- 70% of your money is saved, invested or used to pay off debt.
Obviously, 0% spent on your wants is near enough impossible if you have children, as there is always something that they want! I would only recommend doing this, if you are single or are married/in a long-term relationship, and both parties understand the end result of this budget.
Many people also recommend that as soon as children enter the picture, that there is a dramatic re-organization of your budget in order to accommodate them (even more than the other budgets!)
10 steps to successfully making a budget
Making a budget may seem like a massive task- which it is, but it has great rewards, especially if you make a budget that is successful!
10. Set your goals
This is probably one of the most thought-provoking parts of making a budget.
When you set your goals you need to think about the future. You need to ask yourself: “Where do I want to be in one years’ time?” you also need to ask yourself the same question about 3 and 5 years’ time respectively.
When you are making a budget you need to be realistic. If you are making $40,000 per year, in three years’ time, you will not save $400,000, not unless you have a lot saved up beforehand.
I understand that my example is very over-exaggerated, but you need to think realistically. If you are only saving 30% of $40,000, that’s only $12,000, so you are not going to save anything more than $12,000 times the amount of years since you created your budget.
That is, unless you start saving more and spending less.
9. Go through your banking information
This will help you tremendously when making a budget. After all, you are going to want to know what your monthly expenditures are.
When making a budget, you need to locate every single penny of your salary, in order for your budget to be the most effective tool.
I would suggest that you get the past 3 months of bank statements, and then begin to go through them. You need to ask yourself for every item: “Do I really need this? Could I be putting X amount of money to better use, by investing or saving it, or using it to pay off debt?”
8. Separate your needs and wants
Whilst you are going through your banking information, separate all your expenses into two categories (best if you use a separate piece of paper).
You need to decide whether item X is a necessity that you can’t live without, or merely a want.
You may be tempted to say that your car payment (or something similar) is a necessity, as you need it to get to and from work (or a similar excuse). To avoid this, I would recommend that you write them down, and leave the list for a few days.
When you come back to it, review each item, and see if you still believe that it is supposed to be in that category.
The best technique (and the one I personally use) is that of ‘doubling’. This sees me categorizing them both, and seeing if tehy align. If they do, great. If they don’t, I turn to the internet to see what the general concensus is.
This is by far one of the most important steps of making a budget. Without this, you can’t do our next step…
7. Find all unnecessary (or unknown) expenses
When making a budget, most people tend to find a few expenses they never knew that they even had. The most common unknown expenses tend to be expenses such as: gym memberships, magazine subscriptions and organization dues from an organization you haven’t been to in over a decade!
When you are making a budget, you too will come across your own unknown expenses. Yes, these are incredibly frustrating, I know, I’ve been there too, but you need to remember that it’s better you found them now, and not in another 10 years.
Once you have found all of your unnecessary or unknown expenses, you can…
6. Cut out any unnecessary expenses
This is fairly self-explanatory. You are making a budget, and you have found money that’s going out, that you’d be better off keeping in your pocket. So you do the natural thing, get rid off them.
Most organizations are reasonable people, you ring up, and tell them that you’d like to cancel your subscription. They’ll ask you to verify that it is yourself, such as asking security questions, personal question or banking details in order to be sure that it’s you.
Once you get off the phone, you should see that whatever unknown expenditure you had, is no longer a monthly cost.
This is one of the most important parts of making a budget. Yes, the amount of money that is going out each month may be small, and almost unrecognizable, but it all adds up. Just have a look at the rule of 752!
5. Craft the physical budget
This is such an obvious move when making a budget, physically making a budget that you can live by.
Go through you expenses, and try to integrate it with your budget. You may even need to take the extra step of negotiating your bills down in order to ensure that you are staying to your budget!
When you start actually making a budget that you can use, you want to ensure that you have multiple copies of it. After all, what’s the point of making a budget if it is only going to be eaten by your dog two seconds later?!
When you are making a budget, I would recommend having at least two paper copies, at least one copy on a laptop/computer, and maybe even a picture of it on your phone!
This will ensure that all the time you’ve spent making a budget isn’t put to waste!
4. Think seasonally
You will not be able to stay 100% true to your budget all year round. When making a budget, you need to keep this in mind.
Times such as just before Christmas (August through to November) will likely be the months where you slightly over-spend on your ‘wants’ category.
This is fine, as long as it evens out across the year. In months such as March, April and May, you might want to accommodate a slightly lower amount in your ‘wants’ category, in preparation for the inevitable overstep in the fall.
3. Plan ahead
This is quite similar to the ‘set your goals’ phase of making a budget. You need to have a plan for the money you save/invest/use to pay off debt.
If you are saving the money, you need to have the best savings account already opened, and waiting for you to deposit money into it.
If you are investing the money, you need to already know what you are investing it in. Are you investing in real estate? Are you investing in individual stocks? Are you investing in an IRA? If so, which one?
If you are using it to pay off debt, do you have a strategy? Are you targeting high-interest cards/debt first? Or is your plan just to equally split the money between all of the debts and do it that way?
(My recommendation would be to pay off high-interest cards/debt first).
You need to know exactly where that money’s going, and what it will do whilst you are still working.
Once you have got that information and you have memorized it (so if I came to you and asked you what your plan was, you could tell me it as though I had just asked you for your name!)
2. Stick to your budget
This is easier said than done. You can quite easily say “I will stick to my budget!” But the reality is, that you won’t stick to it to begin with. You’ve lived your whole life up until now, without a budget.
You will need time to adjust to your budget. But the onus is on you to stick to your budget, it’s your budget, you stick to it!
There are a number of ways to help yourself stick to your budget:
- Plan your meals, your meals are probably the second largest expenditure you make, behind rent/mortgage payments. Whilst you probably can’t negotiate your rent/mortgage payments down, you can certainly do that with your food. You just need to plan accordingly.
- Partially automate your finances, whilst I do not agree with fully-automating your finances, I do believe that you should partially automate them. By partially automating them, you allow your recurring payments (debt repayments, car payments, mortgage/rent payments) to just go out of your account without you doing anything!
- Keep your budget close, if you aren’t putting your paper budget(s) on places like your mirror, fridge, dresser etc. you should be! You need to keep your budget fresh in your mind, and the only way to do that is to see it, day in, day out!
- Break up with your social calendar, you might love your friends and can’t stand to not go out on that girl’s night out or go to that football match with your best friend. But you need to. You need to learn how to say “No.” when you are asked to go on a social even with your friends
1. Track your progress (adjust if necessary)
You’ve spent all this time making a budget, congratulations. But now you’ve got to see whether you’ll stay true to your budget.
A few months (3-4 months) I would recommend reviewing your budget. Are you on track? Are you lacking in certain areas? Are you doing very well in others? You need to know that!
So you get out your budget (either your excel one or your paper copy) and your bank statement. You look to see where they line up, and where they don’t.
Where they don’t line up, you need to make a plan of action of how you are going to get them to line up. If you need to alter your budget, do so! You may even need to go as far as making a new budget all together!
If you are all good, continue with the way you are going, and check again in another 3-4 months.
Have you ever tried making a budget? What were the weirdest unknown expenses you found? Tell me in the comments!
