Introduction: How To Budget Your Money
Have you ever found yourself living paycheck-to-paycheck or lying awake at night wondering if you’d have enough money to cover essential expenses?
If so, you’re certainly not alone.
Research compiled by CNN Money in 2013 found an astounding 76% of Americans reported living paycheck-to-paycheck. This leaves the majority of Americans with no real opportunities for saving or investing because they’re just struggling to make ends meet.
The same research also showed that less than one-in-four Americans had enough in their savings account at the time of the study to cover at least six months’ worth of necessary expenses, and 27% had no savings at all.
CashNetUSA was cited in the CNN Money piece, after surveying 1,000 people and finding 22% had less than $100 in their savings account to cover an emergency situation.
Image source: Bigstock
Top Spending Areas
So where does the majority of American’s paychecks go?
Research cited on CreditLoan.com showed the average annual income before taxes for U.S. residents was $63,784, and the average annual expenditure was $51,100.
The largest expenditures included housing, transportation, food, personal insurance, pensions, and healthcare. While the numbers may fluctuate slightly from year to year, the overall spending trends remain relatively similar.
So after looking at the numbers, the question becomes, how can you learn how to budget your money in a way that will get you out of the cycle of paycheck-to-paycheck living?
The Advantages of Household Budgets
One of the reasons many people don’t consider financial budgeting as a viable solution to their money problems and paycheck-to-paycheck lifestyle is because they don’t understand how to budget money.
They may also not fully understand how advantageous taking the time to learn how to budget your money can be.
The benefits of home budgeting include:
- When you budget, you can see where money is going, where you can reduce expenditures, and ways to save more money. This gives you a safety net that you’ll never be able to create otherwise.
- Smart financial budgeting can help you identify potential problems you may experience with money or expenses. You can look at trends in spending and income to see where cash flow deficiencies have the potential to show up.
- With solid financial planning, you may be able not just to save money to cover unexpected expenses, but you could start planning for retirement.
- When you have a clear idea of your finances, you’re less likely to make extravagant purchases you’ll end up realizing you couldn’t afford. People who have budgets are less likely to spend on a whim, and they know more accurately what they really can afford.
- You can prioritize what you’re spending, which will help you pay the most important things first and make sure you’re not overspending in areas that could be avoided.
So how do you begin budgeting?
It can be challenging to know where to start learning how to budget your money, particularly if it’s something you’ve never done before. It can be intimidating and discouraging to take that initial look at your finances.
Once you get past the initial hurdles, you’re likely to discover that budgeting can be empowering and contribute to a greater sense of control and peace of mind in all areas of your life.
We put together 10 of our top budgeting tips, ideal for household budgeting of all types.
These tips aren’t specific to family situation or your income. Rather, we designed these tips to be valuable for anyone, with any financial background. So whether you’re a Millennial just beginning your career, or you’re middle-aged with a family, these budget tips are flexible enough to get you started on the path to financial security as you move away from paycheck-to-paycheck living.
1. Decide on a System
When we say system, we mean the tool or format you’ll use for budgeting your money. You could keep it simple and track everything in an Excel spreadsheet.
If you’re tech-savvy, you may want to use an app or budgeting-specific software tool.
The advantages of using an app are that you’ll have access to money and financial information on your smartphone or tablet, which can help you keep up with expenses even on the go and make smarter financial decisions at all times.
Ultimately, when selecting a budget system, you want to consider what is going to work for you, and no two people are the same.
2. Create Short-Term Goals
Short-term goals are important in a budget, because they put you on the path toward realizing longer-term objectives. Maybe you want to save up for a new phone or limit how many times you eat out this month.
They’re also easier to attain; by creating regular short-term goals, you can inspire yourself to remain on-track with your home budgeting in general.
These small milestones all add up to a greater level of financial accountability and responsibility over time.
3. Set Long-Term Goals
Any good budget should have a strong combination of both short- and long-term goals. Long-term goals are those things you hope to achieve over a period of years, or even decades.
These could include saving money for your children’s college, or saving for a comfortable retirement.
4. Categorize Your Spending
By categorizing your spending, you can remain more organized and also see where the largest portions of your income are going.
A few of the categories you’re likely to include as part of your budget are:
- Housing
- Transportation
- Food
- Utilities/variable monthly expenses
- Entertainment
- Emergencies
Of course, your budget will include other areas are well, such as healthcare, clothing, or education costs. You can create your budget based on the categories that are most important to you.
By categorizing spending, you can prioritize where your money needs to go first and the areas where you can spend less or put less of your focus.
5. Set-Up Automatic Bill Pay Where Possible
One thing that sabotages many of our efforts to create household budgets is paying high fees because of late payments.
We all have bills, and they need to be not only paid, but paid on time. This includes everything from utilities to credit card bills.
If you have a tough time remembering when bills need to be paid, you may be racking up high fees as a result.
Alleviate these fees and take some of the effort out of bill payment and budgeting by setting up automated payments whenever possible.
6. Create Segmented Bank Accounts
When all of your money is going into and coming from the same bank account , spending and saving can become a bit jumbled.
A good tip for financial budgeting is to create several accounts, based on purpose.
For example:
- Have one primary checking account used for bill payment and daily expenses.
- Create another account for emergency savings.
- Another account can be designated as your long-term savings, which can be put into an account such as a CD, with higher interest rates and longer terms.
- You might also want to create an account for discretionary spending. If there’s money left to distribute to this account, it can be used for entertainment, new clothes, vacations, or other things you find enjoyable but not necessary.
Another way to divide accounts is into fixed and discretionary spending. This means you’re dividing your accounts based on what you have to pay at a regular cost each month, and then those variable or optional costs.
7. Be Realistic
One of the biggest deterrents to maintaining household budgets is a sense of rigidity or unrealistic expectations that make it difficult to keep it up for an extended period.
Your budget needs to be both realistic and flexible. Otherwise, you’re not going to be able to stick to it.
Consider the following:
- It can be a good idea to overestimate your expenses when you’re developing a budget. This can give you more wiggle room, and you’re more likely to make good decisions that will leave you with a surplus each month, as opposed to a deficit.
- Don’t create a budget based on standards you’re never going to be able to uphold. If you’re cutting your food costs to an anticipated $200 a month for four people, it’s just not likely to work. You have to maintain a sense of realism for any budget to be something that’s a productive part of your life.
Leave room for things you enjoy. A budget is about smart planning, but that doesn’t have to equate to total deprivation. You may need to cut down on those extra expenses, but a good budget doesn’t eliminate them altogether.
Image source: Bigstock
8. Get Everyone Involved and On Board
If you share expenses with a partner, spouse, or family, it’s important to make sure everyone is on the same page. Otherwise, budgeting isn’t going to work.
Family budgeting can be quite a bit more challenging compared to simply learning how to budget your money without considering others.
A few tips for more successfully family budgeting:
- Set goals as a family. For example, everyone may be more likely to show enthusiasm for budgeting if there’s something like a vacation to look forward to or something new everyone will enjoy in your home.
- Create individual budgets for each member of the family, in addition to the overall household budget.
- Find places where everyone can contribute to cutting costs. For example, make meal planning a family affair to save money on the costs associated with eating out and groceries.
The best way to ensure a successful family budget is to make sure everyone is on the same page.
9. Don’t Be Afraid to Adjust
Adjustments aren’t something you need to avoid when you’re budgeting your money. They’re actually something to embrace.
We already briefly touched on the importance of flexibility in a budget, and this speaks to that concept.
You may work to create an initial budget, and then discover it’s no longer realistic for your needs or the needs of your family.
If that’s the case, go back to the drawing board and make the necessary changes. Adjustments don’t mean you’ve failed at budgeting; in fact, quite the opposite is true.
When you make changes along the way, it shows you’re dedicated to budgeting not just as a short-term whim, but as a long-term lifestyle. You may even want to sit down and make adjustments every few months to make sure you’re maximizing your income and working toward your goals.
10. Tackle Debt
Debt is a burden on successful financial budgeting and also can derail long-term financial goals, yet most of us have some form of debt or another.
Debt doesn’t have to destroy your financial budgeting if you manage it correctly.
The most challenging type of debt is typically from credit cards. This is where you’re going to find yourself paying the highest interest rates, which can eat into your savings potential very quickly.
If you want to put yourself on the financial fast track, it’s imperative that you understand your debt and develop strategies to deal with it effectively.
Here are a few tips to help you tackle debt as you build your budget:
- Know your debt. It can be emotionally draining to face your real debt, but it’s important to have an accurate picture of what you owe before you can make any other decisions. List your debt, divide it into categories, and also note the interest rates for each.
- Create debt goals that are separate from your larger financial goals. Your debt goals can outline how long you’d like to take to pay off debt as well as your priorities. For example, prioritize payments on your high-interest rate debts.
- Develop realistic payment schedules. You need to look at what you can pay on high-priority debts first, and make this a non-negotiable part of your budget. Try to pay as much over the minimum amount as you can on these debts each month. You can simultaneously pay the minimum amounts on the lower priority debts, and then increase this as high-priority items are paid off.
- Explore consolidation and refinancing options. You may be able to find opportunities allowing you to consolidate your debt onto a credit card with a low interest rate, which would mean you would be paying lower monthly interest charges, and it can be easier to pay everything off. It can also simplify things since you only have to keep up with one payment.
Once your debt is paid off, no matter how long it may take, you’re going to find the rest of your budgeting efforts are much easier.
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Take the Steps to Learn How to Budget Your Money
If you’ve ever spent time asking yourself “how to budget my money,” it’s easier than you think.
An effective budget is one that accounts for possible unexpected situations and allows you to build a comfortable financial cushion. It depends on your ability to prioritize, plan ahead, and remain realistic.
Learning how to budget isn’t necessarily effortless, but it is certainly attainable regardless of your income or family status, if you’re willing to dedicate yourself to it.
In the end, you’ll be rewarded with more stability, less financial worry, and the ability to break the cycle of paycheck-to-paycheck living.
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