How To Create A Budget. Piggy Bank with pink bow

Budgeting 101: Everything You Need To Start

The term budgeting can seem restrictive but it doesn’t have to be. A budget is a plan that you make for your money. A budget is you telling your money where to go. A key to building wealth is having an intentional plan for your money. Welcome to budgeting 101, explaining all you need to know on how to create a budget.

Budgeting 101: Six Key Steps to Budgeting

New to budgeting? Here are six key steps to creating and maintaining your budget.

  1. Write down your after-tax income (how much you take home)
  2. Identify your expenses each month and categorize them
  3. Pick a budgeting method that works best for you and break down your expenses (more on this below)
  4. Automate where you can (savings and bills)
  5. Track progress using a budgeting tool that works best for you
  6. Check-in on your progress at the end of the month and plan for the next month

How to Categorize Your Budget

The level of detail in categorizing your budget is up to you. First, you must identify all your spendings before categorizing them accordingly. For example, your Netflix and Spotify monthly subscriptions can be lumped under “Entertainment”, groceries and coffee runs under “Food”, etc. The main point is, don’t forget to account for things you have to pay for whether at present or in the future. To give you an idea of how to group your spendings, here are the most commonly used budgeting categories:

  • Housing 
  • Transportation
  • Utilities
  • Family
  • Retirement
  • Savings
  • Food
  • Insurance
  • Childcare
  • Entertainment
  • Debt
  • Education
  • Giving
  • Medical
  • Miscellaneous

Types of Budgeting Methods

You’ve decided to budget and you may be wondering how to create that budget. There are a number of budgeting methods to explore. Three of the most popular methods are the envelope budget method, the zero-based budget method, and the percentage method. Let’s break down each method.

1. Envelope Budgeting Method (Cash Based)

How It Works: Set a limit for each spending category. Then, set aside an envelope for each category and put the budgeted amount in each envelope. Once you are out of money in an envelope, you are done until the next month. 

Envelope budgeting method is perfect for people who want to reduce frivolous spending without the need to track every dollar. This is also great for those who are new to budgeting. 

TIP: If you find it inconvenient keeping physical envelopes, a digital app is also available to use. 

2. The Zero-based Budget Method

Zero-based Budget, also called Zero-sum Budget, is suitable for overspenders and meticulous planners. It needs thorough monitoring of expenses to clearly know where the money was used. The goal of this method is to balance your income to your expenses. 

How It Works: List all your income resources. Identify and categorize all your expenses, both daily and seasonal, including your planned debt payoff, savings, and investments. Then, allocate every cent of your income to a specific budget category until you have a total of zero. 

TIP: There are many digital apps that use a zero-based budgeting method. Installing one on your mobile phone or tablet can help you to monitor your daily expenses.

3. The Percentage Method -50/30/20 (Proportional Budgeting)

How It Works: You divide your net income into different categories based on percentages, then plan out your spending and savings accordingly. The most popular proportional budgeting is the 50/30/20 method The 50% goes to needs, the 30% to wants, then the 20% of monthly income on savings goals.

The Percentage Method, also known as Proportional Budgeting, is focused more on saving, but not much on monitoring your detailed expenses. 

TIP: Depending on your monthly income, you can tailor your budget to your needs. Just avoid allocating higher than 80% to any single budget category. 

How Often Should You Budget?

Tracking your finances is vital when it comes to budgeting. Though there’s no set rule on when you should do your budgeting, it is best to do it at least once a month at a minimum, and weekly if new to budgeting. 

Popular Budgeting Apps To Try

You can’t talk about budgeting 101 in the 21st century without talking about apps. Here are 5 budgeting apps to try out.

If apps aren’t your thing then budget on paper or using a trust excel spreadsheet (like I do). The best method for budgeting is the method you will use consistently. Is budgeting one of your financial goals for the year?

Happy budgeting!

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