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How to Budget Your Money Effectively

To many, budgeting their money doesn’t come naturally. You sigh as you think about putting restrictions over your finances or trying to figure out all the little details. I’m here to tell you that budgeting can be easy and simple! With this simple step by step guide, you will have your budget under control!

There is nothing more satisfying than watching your savings grow and your goals coming true. Yes, it will take some time and patience but the end result will be so worth it as you take steps to secure your future!

While I wasn’t always a budgeter, as soon as I decided to give it a go, I was hooked. Everything was written out in front of me and I knew all the steps I needed to take to get to where I wanted to be. The best part about it is that it works!

The most important thing to any goal is to write it out. That way you can visualize exactly where you want to be and start planning out all of the steps you need to take. Visualize the house you will buy with the down payment you saved up for, the vacation you will go on with all expenses paid for in advance, or even your net worth growing with the investments you will be able to make.

Once you have gotten excited and pumped about your goals coming true, lets get into what a budget is.

What is a monthly budget?

A monthly budget is a detailed plan where you have calculated all of your income and allotted a specific amount to each expense and savings account. With this plan, you know exactly where your money is going and can rest easy that all your bills will be payed for and your savings are adding up.

Budgeting is a tool used to accomplish what you want to do. It is best to have as much accuracy as possible to get the best results possible.

What Are the Benefits to Budgeting?

There are many people living paycheck to paycheck and sinking more and more into debt. Budgeting is the way to manage your money better and get your finances under control. If you want to increase your savings, pay down debt, start investing, and just be more responsible with your money overall, then you need to learn how to budget your money.

Different Budget Styles

There are many different styles of budgeting that work differently.

The 50/30/20 Budget

In this budget, your expenses are broken down into three categories. The 50% goes to necessities, 30% towards your wants and 20% goes to savings. This system ensures that you have all expenses paid for and have a good chunk going towards your savings to help pay down any debt and start building up a savings cushion.

-> Good for those who want a firm, consistent system, to make it easy how much to spend in each category.

The Envelope System

For this one, you set a specific limit for each expense category. Being detailed with this system is important to make sure every category is taken care of. Then fill the envelopes with the allotted cash and use that money for the month. Once an envelope is empty, you can’t use any more cash in that specific category. This system might be one of the most effective since you can actually see the money disappearing instead of just a swipe with a card. That will force you to be mindful of the things you are purchasing and be smart with your decisions.

-> Good for those that find it harder to stick to a budget and need to actually see how much money they have in their budget.

Pay Yourself First

With this system, sometimes called the reverse budget, the focus is on the savings. You treat your savings account as the first bill that HAS to be paid instead of the last thing that receives any left-over money. Of course, how much you have to save each month should still align with having enough money to pay the necessary bills.

-> Good for those that are serious about building up their savings.

Zero Based Budget

The goal with this budget is to have your income minus savings, payments and expenses equal zero. If a category comes in under budget, then you roll over the amount to the next month for that category. Or if you choose to reallocate the money to a different account, either way, the total should come out to zero for the month.

-> Good for those with a consistent income that like working out all the numbers and see exactly where everything is going.

Before getting into creating your budget, I made a budget template to make life easier for you! You will be able to write down your income, savings and expenses all on one sheet to be able to see everything in one place. The major categories for expenses have been added so you can just fill in the amounts. Then fill in all of the other expenses you have. Be as detailed as possible!

So which budget method should I use?

While there is no one budget that fits everyone perfectly, these steps will help you set up a simple budget that works. Follow these steps to fully optimize and maximize the potential of your personal budget.

1. Figure Out and Set Your Goals and Priorities

An important aspect of figuring out the kind of budget to use is to firstly figure out what your main goals and priorities are.

Is it to aggressively focus on your savings to save up for a down payment on a house, or build up a nice investment portfolio?

To be organized and see where all of your money is going?

Is it to build good financial habits?

Figuring out your motivation is what will help you be successful with budgeting. Not only will it help you to stick with budgeting if it ever gets tough but it will also help determine the budget you lean more towards. From the budgets above, you probably have figured out which one will fit your personality and lifestyle the best.

2. Calculate Your Income

In this step, you will want to calculate all of the income you receive. Be sure to include any job paychecks, side hustles, or any investments that might be bringing in income.

Many people don’t actually know the exact amount of money they make every month.

If you are a business owner or freelancer and have irregular income then have in mind a projected number you think that you are going to make this month. Take the last three to six months of income and use the lowest month’s income for your budget. That number will be the start of your income for the month to not overestimate your budget and not overspend.

For example, if in the last three months you made, $2,800, $2,500, and $3,000, use the $2,500 as the starting point. Make sure it’s an amount you are comfortable relying on.

This is what your budget sheet should look like so far filled out with your own income numbers:

Want to find out passive income streams that you can add to your income? Check out this post: 25 Passive Income Ideas to Make You Money In Your Sleep

3. Set Your Savings Goal

Whether your primary budget goal is to save or not, it is a good idea to still set a certain amount to save each month. It is an even better idea to take it out of your budget in the beginning, if you can, into a savings account.

As I have noticed with taking out the money for savings, you won’t even really notice it is gone and your savings will be building up.

Savings are important to invest and to have a good cushion in case of any emergency. There should be different savings accounts for each goal including emergency, repairs, investments, vacations, giving, etc. It might seem like a lot to keep track of, but it is good to see where you are and how much you need to save.

The best way to do this is to set up an automatic transfer into a savings account. You can do it with your bank that you already use, or open an online savings account that pays a great interest rate with a minimum deposit.

4. Figure Out Your Expenses

Start writing down all of the expenses you have, that have to be paid every month. Think of all the little things as well that you usually buy within a month. Then list expenses that are made just a few times a year such as gifts, oil changes, and clothing. For these expenses, think about creating funds to use when needed as part of your savings.

When all of the expenses are written out and added up, now you can see where your financial situation is. Are you spending well below, right at, or above your budget?

This is one of the most important steps, as it results in how much money you will be able to save for yourself. You’ll be amazed how much you’re actually spending and how much you can save!

5. Brainstorm How to Save More Money

Are there ways you can implement to save money in any category, especially in your biggest expenses? Check for competing rates from similar providers.

Once you have gone through all of the major steps of creating and customizing your budget, you are now on your way to becoming financially savvy!

Make sure you write everything out for the first couple of months to get used to your budget. Afterwards you can start using more automated approaches to budgeting.

Budgeting is an ongoing process until you get to where you ultimately want to be. The good news is that it becomes really fun when you see your savings and investments grow. The key is to stick with it the first couple of months to start seeing that potential!

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