Budgeting 101 For Everyone
The world becomes your oyster when you have control over your money and make it work for you.
The bedrock of personal finance is to set up a system that finances the lifestyle you want to live.
This system is the budget. In this article, we’ll go over how to set financial goals and tie that into making a budget that works for you.
Setting your Financial Goals
Travel. Retirement. Becoming financially independent. Your goals become attainable when you can finance them, set a plan to do so, and follow through with that plan. Take control of your finances to own and shape the life you want to live.
Understand what you want to have in life. It takes time and reflection to work this out but realizing what you want out of life and writing it down is the first step to making it happen. Writing down your goals makes them more concrete and attainable. Ultimately, they will be reflected in your budget.
1. Think Backwards. How will you get to where you want to be? Think backward and map out the steps from finish to start. It’s helpful to consult a friend or family member to get their perspective on the process, especially if they’ve done it before.
2. Write out your Action Plan. Working out the steps and building an action plan sets up your approach to making what you want to happen a reality. Add in financial figures where it makes sense to get an idea of what it adds up to be. Remember, it doesn’t have to be perfect since you’ll get more experience and learn more later on to revise your targets.
3. Be Realistic. Reflect on your present circumstances — how much you take home, your rent, etc. as they determine what you can feasibly do with your money. It’s good to reach for higher goals, but an honest perspective of where you stand and what you can do will start you off on a solid foot. If you live in a high cost of living area, you may not be able to save 50% or more of your income, for instance. Achieving early wins helps you get excited and move forward. Set financial targets based on your goals and a realistic perspective as you write a budget.
4. Factor Expenses In. It’s time to understand our expenses and prioritize paying yourself first before paying out discretionary expenses. Let’s start with listing all your basic living expenses and key goals that you want to save for overtime. Then list out other expense categories such as entertainment, sports, cable, etc. This list will be handy in the next section when we build it out in the next section.
5. Be flexible and consistent. For your budget to be a successful and useful tool in your life, consistently follow it while keeping it flexible. Your circumstances will change, and you may be able to save more or less at different points in time. It’s ok to revise goals to keep them feasible and attainable.
6. Go!
Budgeting 101
1. To get a holistic view of your transactions, connect checking and savings accounts, credit cards, etc., into a platform like Mint or Personal Capital. Using these tools can help set and track your financial goals and ease the budget creation process.
2. Use your spending list from the previous section and group transactions (e.g., from Mint) to determine how much you spend on each category.
3. Add up totals for each category to see how much you spend right now. It is helpful to view a pie chart of spending to see what the relative breakdown looks like. Through these steps, you have a solid grasp of where your spending is right now.
4. Now to set up the budget. List out basic expense categories and savings/investing goals as line items on a spreadsheet. Next to each line item, put the monthly figure next to it.
5. Add up these line items to find your baseline spending. This figure reflects a pay yourself first mentality as you contribute to your goals and payout basic living expenses first. Funds spent outside of these line items should be discretionary.
6. Subtract the above figure from your total take-home pay to determine how much you can set aside for discretionary spending. These funds can be spent on discretionary items like travel, movies, etc.
7. Setup your discretionary funds for activities, hobbies, really anything you want to. You can even save a portion of these leftover dollars for investing or large purchases, like buying a car.
8. Create a pie chart of the breakdown of spending categories. Compare your previous pie chart and note any differences between your current spending habits and what they would look like in your budget.
Congrats, you’ve made a monthly budget! Remember, it's a tool to ensure every dollar you make pays for your needs and builds the lifestyle you want to live.
