Budgeting is going to save your life. Financially.
Being an adult means many things. One of them is taking care of your personal finances. And how should you be doing that? With a personal budget of course. Why? Because it is going to help you see the real value of your money, achieve your financial goals, stay out of debt, and live within your means. How’s that for a premise?
When you have decided where you want to go financially, you should make sure that you are prepared for the way. So no matter what kind of a financial strategy you are pursuing or which financial goals you are trying to achieve, it all starts with a budget.
Budgeting has gotten a bad rap in the past. Some people think it is all about spreadsheets and calculators; others believe they need to stop having fun because they are on a budget. Additionally, new budgeters often struggle to find the motivation to stick to their budgets or to develop an appropriate routine. Worst of all, some think they have failed when they deviate from their initial plans.
That is too bad, because it is actually a lot of fun to be able to save up for the things you want, pay off your debts, and to know that you are prepared to pay your bills as they come in — without having to compromise. That is what budgeting is all about; Making sure you are making smart financial decisions.
The most important parts of budgeting are making sure you remain flexible, being honest with yourself, and knowing that budgets are not here to limit you — they are here to empower you!
I suggest you choose an evening where you can do without Netflix, get a sheet of paper and a pen, maybe pour yourself a glass of wine, and start to get an overview of where you stand financially. Here are a few tips on how to set up a successful budget:
Get an overview
To begin, you should know where your money is coming from and what for you are using it.
Start thinking about your monthly income and write it down. This includes:
- your salary
- your pension
- unemployment benefits
- child benefits
- housing benefits
- alimony
- other sources of income
The next thing you want to do is get an overview of where your money is going each month. It is best to divide these expenses by their category. One way to do this is by going through your bank statements and looking at all the bills you have gotten during the past few weeks. An easier way is to use the free Zuper App for iOS and Android, which automatically categorizes your income and expenses for you.
When you list your expenses, you can probably divide them into the following categories:
- Housing: rent, utilities, internet, …
- Living: groceries, clothing, pets, hygiene, …
- Financial products: insurance, loans, …
- Transportation: car, public transport, …
- Leisure: vacations, sports, bars and restaurants, …
- Friends and family: gifts
Don’t forget to think about the goals you want to achieve in the near future. A driving license, your wedding, and that vacation to the Caribbeans you have been thinking about for months now all cost money. Try to estimate the cost of these things as good as you can and include them as savings goals in your budget.
Collect as much information as you can. There is no need to try and budget for every cent, and you will also notice that you forgot about some things a week from now. Don’t worry; this is all part of the process.
In any case, you should at least have a rough overview of your financial life by now.
Set priorities
Now that you know what you use your money for, you should try to balance your budget and your priorities. This is a critical moment for a lot of first-time budgeters. You should be able to see which of your expenses are truly important, where you have a potential for savings, and where it is worth to compromise.
If you do not know where to begin or are only looking for inspiration on how to divide your budget, you might want to get familiar with the 50/20/30 rule of budgeting.
Half of your income (that’s the 50 in 50/20/30), should be spent on the essential things. These include your housing and living expenses, your insurances and the cost of transportation. It is often the cost of housing and transportation that make up the bulk of the bill. So if you can save money here, you have more money to pay off debts, put some money on the side, or create a more flexible leisure budget.
A fifth (that’s 20%) of your net income should be spent on your financial priorities. If you have any debts, paying them off should be the number one use of this money. You should make sure that the 20% cover at least the monthly payments instalments. If you have not set up an emergency budget yet, it is worth allocating a part of the money you have available towards it. You will thank yourself when your laptop dies or your car breaks down. Life is not always fair, but luck usually favours the prepared.
The emergency budget is not only for when your car breaks down, though. What if you suddenly lose your job? Are social services enough to cover your current living costs? Most financial experts recommend putting enough money in your emergency fund to cover all your necessary living expenses for at least three months. Six months would be even better, but let’s stay realistic for a second. I realize that this is much money and it might take you some time to save it up, but knowing that you have a safety blanket like that is invaluable to some people.
Once you know how much income you can use for your debt payments and savings goals, you should try to automate them, so that they are taken care of as soon as you get paid. Not having to actively think about paying off your debt is a great start and can help you get rid of some of your financial anxiety.
How the 20% of your net income is actually divided differs from person to person and their respective situation. If you have no debts to pay off and your emergency fund lets you get a good night of sleep, you might want to start thinking about your retirement. I understand that this, too, isn’t the most exciting topic, but even saving small amounts now can make a big difference later on. Have a look at this article if you don’t know how to start:
When you are on a tight budget, 20% of your net income can seem like too much to use it all for your savings goals and paying off debts. It is perfectly fine if you want to start with a lower percentage, but you should make sure to increase it periodically. This should happen when you get a raise or find new ways to save money on other expenses.
The remaining 30% of your net income can be used for the beautiful things in life. This could be that stunning pair of jeans you have seen or going out for sushi. It can be easier to not overspend in these categories if you carry the money you have allocated for this in cash. You might even want to pay yourself a weekly allowance, to not spend all of it in one shopping spree.
Here’s a free #ZuperTip: just because the money is there doesn’t mean you have to spend it.
See it as a challenge or self-experiment to find new ways to save money. This could mean going to a happy hour or taking the bike instead of your car. You will be surprised at the amount of money you can save with little things like that.
Stick to it
Even the most beautifully designed budget is useless if it is being ignored. This is usually the case when you have chosen the wrong estimates in the beginning or when you are under the impression that a budget can not be flexible. This is why it is so important to acknowledge that budgeting is an ongoing process. You might realize that you do not buy as many jeans as you thought you would in the beginning. Great! Take some money off of your cool-jeans-budget and put it somewhere where it is needed more.
When in doubt, you can never go wrong with putting more money towards your savings goals.
You might also realize that you have forgotten to include some bills in your budget. Wanna know what that means? It means that budgeting works and you already pay more attention to your finances. All you have to do now is take a little money from this category and a little bit from that one, and you are good to go. See? You’ve got this!
Just remember that things can get icky pretty fast when you ignore your true expenses and keep swindling yourself. When you spend more money on pizza than you have allocated in your food budget, and you can not pay your electricity bill anymore, that is a problem!
Here are some tips for you to make your budgeting-life easier:
Do not lie to yourself.
Let’s say you budget €100 for your weekends with friends every month, but you keep spending twice as much. That is a serious issue. Instead of feeling guilty about yourself and shamefully ignoring your budget, you should be real about it and adapt your budget to your life. Ideally, you would meet in the middle: You try to spend a little less while simultaneously budgeting a bit more. The closer your budget is to reality, the easier it will be for you to stick to it.
Automate your essential expenses.
Standing orders are a great way to make sure you pay your bills on time. They are also extremely helpful when you want your money to go towards your savings goals instead of something delicious and seductive. Like pizza or that new Bánh Mì pop-up store …
Take a look at your calendar.
Christmas is on the same day every year. The same goes for Mother’s Day and your best friend’s birthday. Look at your calendar, create a gift budget, and save a small amount each month. It is so much easier to save €100 over four months than to go hungry for a week just because you did not want to show up to the party empty-handed.
Have a little patience.
Window shopping is a beautiful thing. Unfortunately, impulse purchases are the biggest threat to any budget. I understand that this is a pretty sweet jacket, and yes, those chairs would look great on your patio. However, when your budget says ‘no’ there is really no point in making up excuses. Why don’t you try this for now: breathe deeply and tell yourself that you can buy those shiny new things — next month. By then you either will have saved enough money, or you will have realized that you can, in fact, survive without these things in your life.
Find yourself a budget-brother (or a savings-sister).
If you still spend too much money on the wrong things, even though you have done everything you can to prevent that from happening, you might want to look for someone to hold you accountable. Help each other create your budgets and then meet every few weeks to compare your success. You will be surprised at how fast saving money can turn into a competition!
Finally, this one might be the most important thing to remember when budgeting: You are in control. If your budget does not feel right, you can and should adjust it. Pick a routine that works for you — and do not forget to reward yourself for your efforts every now and then!
Here’s another free #ZuperTip before you go: the Zuper App is an incredibly easy to use tool that lets you set up smart budgets, automatically categorizes your incoming and outgoing transactions, and lets you check your overall financial health in a matter of seconds. You should really try it! It’s free for iOS and Android.
