Budgeting – it’s one of the least sexy financial terms out there. People think budgets are strict, time-consuming, and straight up boring.
But learning what a budget is and how to stick to one can literally change your life…
I paid off $40,000 in student loan debt in 18 months by using a budget to keep my expenses as low as possible. This freed up extra money that I could throw towards destroying those student loans.
Having a budget helped me make the decision to quit my teaching job to blog full time – I knew how much money I needed to save up to make the leap. And after this site started to take off, my budget showed me and my wife that it was okay for her to retire early.
Budgets put you in control of your finances.
If you’re ready to start a budget or get back to budgeting, I’m going to cover the most basic budgeting questions, like what is a budget? I’m also going to debunk some budgeting myths, explain different budgeting styles, and give you tips for sticking to your budget.
What is a budget and how to stick to it
What is a budget?
A budget is a plan for how you spend and save your money. Your budget is based on the amount of money you make (income) and how much you spend (expenses).
Most people’s budgets are an estimate of their spending and savings over a set amount of time, for example, a monthly budget. You’re estimating how you want to allocate your money over that period of time.
Budgets are plans. Yours can be as flexible as you want it to be, and budgets can fit any kind of income or lifestyle.
What is the purpose of a budget?
Remember, a budget is a plan. It’s not to deprive you of anything; it’s about taking control of your money and making things happen.
Take a second and think about your financial goals. It can be anything.
Now think about how you’re going to make those plans happen.
Do you see a clear path there?
Most people need a plan to get from point A to point B, and budgets give you direction. That’s why they matter.
Here’s an example: let’s say your goal is to buy a house in the next two years and you need a $10,000 down payment. $10K can feel unattainable without a plan.
When you break it down, you’ll realize you need to save approximately $415 each month for the next two years. When you put that monthly savings goal in your budget next to the rest of your expenses, you can see where you need to adjust your spending or find a way to make more money.
You’ve just created a realistic plan for yourself, and you’re in control.
You can do the same thing to pay off debt, save for a vacation, to create an emergency fund, investment, and more.
Because I spend a lot of my time talking to people about money, I’ve heard nearly every reason for why someone doesn’t keep a budget. Most of these reasons are based on myths about what budgets are and who they’re for.
I make enough money, so I don’t need a budget. They myth that budgeting is only for poor people is ridiculous. Budgets are for everyone.
A budget can help you pay off debt, retire early, save up for a down payment on a house, buy a new car, go on vacation, pay off medical bills, invest more, spend more money on fun stuff, donate money, go back to college, start a business, etc.
Budgets help you take control of your money so you can reach your financial goals, no matter what they are.
Frugal living isn’t for me.
A lot of people believe the myth that budgets = frugality. The thought is that being on a budget will restrict your spending too much and you won’t have any fun.
A budget is just a plan, and you can plan for wild and crazy parties, extravagant purchases, whatever you want. Put a line in your budget for it and start setting money aside.
The point is that you plan for that fun stuff after you plan for the stuff you need, like your groceries, gas, mortgage, etc.
I’m no good at math.
No problem! You don’t have to be good at math to keep a budget – they require only basic math skills. Or you can plug the numbers into a budgeting app and let them do the work for you.
Budgeting takes too much time.
Budgeting takes a little bit longer when you’re first getting started because you have to figure out your income and expenses. Once it’s started, it’s basic maintenance. You check in on a regular basis and make adjustments.
Honestly, it’s not a major time commitment, but the time you do spend is an investment in a better financial future.
How do you create a budget?
This is a step-by-step guide if you are new to budgeting. I’m going to walk you through the process of starting to track your expenses, and all the way through maintaining your budget in the future.
Step 1: Start tracking your income and expenses
You want to start with a clear idea of how much money is coming in and going out each month, and the best way to do that is to start tracking your expenses and after-tax income. This is honestly the most time consuming part.
You can track everything by looking at bank statements, receipts, credit card statements, etc. You can enter things into a spreadsheet, keep a ledger going, or you can connect your accounts to a budgeting app.
Using a budgeting app will save you time – you connect all of your accounts and the app pulls your transactions and puts them into different budget categories for you.
You will go back and adjust those budget categories after you spend a month tracking everything, but right now you’re just focusing on finding out how much you make and spend each month.
Step 2: Make a list of your debts
You want to make a list of all of your debts – what each debt is, the minimum payment, and how much you owe. Include your mortgage, car loan, student loan, credit cards, personal loans, etc.
If you’re using a budgeting app, your debts will probably show up as you make payments towards it. The reason you should still make a list of each debt is because a budget can help you pay off your debt even faster.
Step 3: Figure out your goals
I’ve talked a lot about how a budget can help you reach financial goals. You need to think about what those goals are, what your timeline is, and how much you want to put towards your goals each month.
This step can feel a little overwhelming, and if you don’t know now, that’s okay. You can start your budget and add your financial goals in later. Honestly, keeping it simple at first isn’t a bad idea.
Step 4: Organize and add up your expenses
After spending a month tracking your expenses, add things up by category. Here’s an idea of how you can organize things:
- All of your trips to the grocery store can be labeled as “groceries”
- Each time you ate out as “dining out”
- Every time you put gas in your car as “fuel”
- Electricity, water, gas, sewer, and internet are listed as “utilities”
- Any clothing purchases you bought during the month go under “clothing”
- Your mortgage or rent under “housing”
That’s just a start, and you want to organize things in a way that makes sense for you. Some people like to list each utility as their own category or put them under housing. There’s no wrong way to do this.
Step 5: Don’t forget about savings
If you're making retirement contributions, investing on a regular schedule, or putting money in other kinds of savings, keep track of how much you’re allocating to each one.
Again, how you categorize them is up to you. Right now, we want to make a note of them so they end up in your budget.
Step 6: Put everything together
Now is when you’re going to add up what’s in each of your budget categories and make any adjustments to your final budget. This includes debts, savings, and the rest of your expenses.
Your goal is to spend less than you make. If you’re spending more, then you need to reduce your expenses or start making more money ASAP. But people who are spending less than they make can still use their budget to take control of their finances.
You might realize you’ve been spending a couple of hundreds of dollars each month going out to eat while putting hardly anything away for retirement. Setting a spending limit on your dining out spending would give you more for retirement savings.
You may also realize:
- How small adjustments like finding a less expensive alternative to cable or cheaper cell phone plan can free up some cash.
- That destroying your debt can make a massive change in your overall finances.
- You need to start making more money if you want to make faster progress towards your financial goals.
Step 7: Keep checking in
Now that your budget is in place, check on your progress throughout the month to make sure you’re staying on track. Don’t worry, I’m going to give you some tips for sticking to your budget a little further down.
You’ll also need to adjust your budget as your life changes. For example, once you’ve paid off your student loans, figure out how you’ll allocate that money that’s been going towards your loan payment.
Different budgeting methods
Everyone has their own personal style, and the same goes for budgets. FInding a budgeting style that works for you can give you a little more guidance while working better for your particular financial needs.
Here are the most popular budgeting methods and why they may or may not work for you.
The zero-based budget was made popular by personal finance expert Dave Ramsey. The idea is that you start with how much money you make and allocate every last penny down to zero. You’re accounting for every single cent of your income before it’s even spent.
It sounds rigid, but you’re in full control of where your money goes, so there is a surprising amount of flexibility.
Pro: The zero-based budget works really well because it makes you aware of how much money is coming in and out each month.
Con: It’s harder for people with fluctuating incomes, like freelancers, so you will want to use the previous month’s income as a guideline.
M$M tip: YNAB and EveryDollar are two really popular budgeting apps that work on the zero-based budgeting principle. Learn more about how they work YNAB Review 2020: The Most Effective Budgeting App Around? and EveryDollar vs. Mint Comparison 2020: Which Budget App is Best?
This is a budgeting rule that has you divide your income as follows: 50% towards expenses and financial obligations, 30% towards wants and non-essentials, and 20% for debts and savings.
The 50/30/20 budget makes sure you’re putting money in all of the right places.
Pro: This is a great maintenance budget for people who have paid off most of their debt.
Con: It doesn’t work well for people with a high debt burden or those who are trying to retire early.
This is super old school – it’s literally a system of envelopes with cash in them. It’s a cash-based approach that forces you to only spend the cash you have on hand, and you don’t carry cards as a back-up.
You determine how much you want to allocate to each budget category, then fill an envelope with the allotted cash. You would have an envelope for groceries, gas, clothing, etc. Once an envelope is empty, that’s it for the month.
Pro: Cash feels more real for some people, so it forces you to think more about your spending. This makes it effective for people who struggle with credit cards.
Con: Fewer and fewer places accept cash, and cash doesn’t work for all of your expenses, like mortgage or other debt payments.
How to stick to your budget
This part is huge. You’ve put a budget together to gain control of your finances, but how do you really make it work?
Here are 17 tips for sticking with your budget, and this list includes tips from readers in my M$M Facebook community.
1. Be realistic
Part of sticking to a budget is to set yourself up for success, which requires you to be realistic with your limitations. Some people are better with incremental changes, while others can successfully make drastic cuts to their spending.
2. Focus on weekly spending
If a monthly budget is too hard to grasp, keep a weekly budget instead. This works particularly well for things like groceries, entertainment, and gas. You can even put money towards savings on a weekly basis instead of monthly contributions.
3. Put your bills on autopay
You can put student loan payments, your mortgage, some utilities, and your cell phone bill on autopay so you make on-time payments every month. The set-it-and-forget-it method can ease some of the stress of sitting down to pay bills.
4. Check the calendar
Birthdays, holidays, your anniversary, graduation gifts, plans with friends – all of these can cost money. Looking at the calendar before you set your monthly budget can help you plan for these kinds of expenses.
5. Sinking funds
Several of my readers suggested sinking funds, and if you’re not familiar, here’s what they are:
Sinking funds are a strategic way to save money that you know you will spend in the future. You’re intentionally setting money aside to spend.
You can use sinking funds for annual car registration fees, vacations, a new cell phone, clothes, gifts, professional development, etc. Then, the money is there when you’re ready to spend it.
6. Have separate accounts
This is another suggestion from several readers – keep your money in separate accounts. You can have separate bank accounts for your sinking funds, you and your partner can have separate “fun money” accounts, you can even have a separate account for your groceries.
Separate accounts help you stick to your budget because you’re less likely to take money you know you need and use it for something else. You can also check the balance of each account to see how you’re doing in each budget category.
7. Talk yourself out of unnecessary purchases
If self-discipline is why you struggle to stick with a budget, here are a few ways to stick to your budget:
Think on unnecessary purchase for at least 24-48 hours
Ask yourself if you’ve bought something similar and didn’t actually use it
Think about how that money could be used for something else
8. Focus on your end goal
This goes hand-in-hand with the last one. When you put your bigger financial goals in your budget, you can start to see how sticking to your budget helps your long-term plans.
9. Pay attention to patterns
Budgeting will show you patterns in how you spend your money. Patterns can turn into bad spending habits if you don’t address them. Think about why you’re overspending in certain budget categories, think about how that makes you feel, and start working on breaking those bad habits.
10. Create new habits
If you’ve fallen into the habit of online shopping on your lunch break, create a new habit of reading, starting a blog, listening to a podcast, etc.
If you want to stop buying coffee on your way to work, buy some nice coffee for home and make a morning routine out of brewing a cup for yourself.
That’s just an idea of how you can start replacing bad money habits with healthy ones that help you stick to your budget.
11. Learn to say no to your friends and family
I watched people around me spending money while I was working so hard to destroy my student loan debt. There were a lot of times when I had to turn down offers of a night out because I wouldn’t be able to stick to my ultra-frugal budget.
It was really freaking hard, but I kept thinking about how much I wanted to be debt free. I also told myself that people who really cared about me would understand and respect why I was saying no.
12. Set up spending alerts
One of my readers said she and her husband set up text alerts that go off if either of them spend over a certain amount. They set them up through their credit card and bank accounts, and it helps them stay accountable and transparent with their purchases.
13. Talk about your budget with your partner
Speaking of spouses, you have to involve your partner in the budgeting process. It’s hard to talk about money if you’ve never done it before, but it keeps you accountable and helps you work towards your financial goals together.
14. Use a no-spend or savings challenge
A no-spend challenge is when you don’t spend any extra money for a certain period of time. It’s kind of like fasting, but for your finances. It can be a day, week, month, or longer. Savings challenges push you to save more than you normally would.
You can motivate yourself with a reward at the end, like a nice bottle of wine, dinner out, etc. Just don’t go wild and blow your budget!
15. Don’t fall for lifestyle inflation
I’ve seen this happen with a lot of people my age – more money, same problems. Your income starts to go up, but you still can’t stay on budget. What’s the problem?
The problem is that you keep increasing your spending with a nice car, better cell phone, more vacations, more dinners out. Your friends are doing it, so why shouldn’t you?
You’re never going to meet your long-term goals and stay on budget if you keep upping your spending. Ignore the noise and focus on your goals.
16. Pay yourself first
Often, one of the first budgeting categories to pull from if you can’t stick to your budget is your savings or extra debt payments. Instead of putting money towards those at the end of the month, make those a first of the month priority. You probably won’t even miss that money, especially if you set it up as automatic transfers or payments.
17. Create a gratitude practice
This last tip is from one of my readers. She said, “Every night I try to think about all I’m grateful for, including tangible items [...] I think when you reflect on the fullness you already have in your life, your mind wonders less to what else you could have.”
Even she admits that it’s not the perfect solution to always sticking to your budget, but it might help you avoid some unnecessary spending.
What is a budget? The final word
Remember, a budget is a plan that helps you create a better financial life for yourself. You’re in charge of what goes in your budget, the method you use, and how you stick to it.
Budgets are great for everyone. You might have a really loose system to budgeting or a strict one, but the idea is that you’re creating a plan to make things happen. It’s your money, take control and do what works for you.