Breaking down a budget — what methods are right for you
There are three types of expenses to consider when building your budget. They are: fixed, variable and non monthly expenses.
So, the equation from Chapter 1: How To Start a Budget really breaks down into:
Income - Fixed Expenses - Variable Expenses - Non Monthly Expenses = Money for Goals
Plan, plan, plan
Non monthly expenses and emergency funds are part of budgeting wisely. Each takes effort, intentionality and planning.
For non monthly expenses: Estimate how much you need and divide it by the number of months you have to save.
Emergency funds help you not reach for a credit card and eliminate the need to drain money from other savings goals when unexpected events hit. They help you keep enough cash on hand to cover deductibles or minor incidents. For emergency funds: try to save six to nine months of funds to cover any essential expenses. Think of it as insurance for your budget!
To start, imagine your budget has two parts
- Money coming in.
- Money going out.
So where does the money go? Is your money going to pay the rent or the mortgage? Utilities? Food? Clothing? Lattes? Take a few minutes to think about it and write down where your money is going.
If more money is going out than coming in, see if there are places where you can cut back a little. But don’t go 0 to 60 when making changes to your budget or spending habits. You’re more likely to succeed by taking small steps toward a change.
Some simple budgeting strategies you can try today
- Set a weekly allowance that starts on Monday for spending money. When the money you allotted for the week is gone, you’re done spending for the week. This can help you be more selective during the week when choosing what to spend at events, for meals or a quick coffee — you decide.
- Try the zero dollar a day challenge. How many days in a month can you spend zero dollars? Keeping track of your progress can help you see how well you’re doing and keep you motivated. There will definitely be days when not spending isn’t an option. And that’s okay.
Now that you’ve got a way to budget that works for you, you’ve taken a really important step towards building a solid financial future. You’re on your way!
Budgeting strategies to become a frugal superstar
It’s okay to be frugal on the things that don’t matter as much and spending where it does matter. Let’s take a look at some spending strategies without having to sacrifice joy.
Start with a personal goal
Deciding how much you spend is easier if you have a goal in mind. Whether you’re looking to put aside money each month or planning ahead for early retirement, it’s important to be specific and honest with yourself about your own needs rather than following the suggestions of others.
Start brainstorming by writing down your top three financial goals. Once your intentions are clear, it’s easier to build a budget that fits your needs and the 50/30/20 budget rule is an easy way to get started.
Try a zero-sum budget
When you’re ready to tackle your spending, try a Zero Sum Budget where, on paper, all of your monthly income is allocated at the beginning of each month. Any left over money should be deposited to a savings account or emergency fund before you spend it on other things that crop up throughout the month.
At the end of the month, your checking account should be at zero with every dollar having been spent somewhere — rent, utilities, car payment, savings, investments — every dollar is gone. Then at the beginning of the next month, you start again.
Know your must-haves
Know your limits of what you will and won’t sacrifice. That might mean you’ll give up costly cable service and pay more for faster internet.
Try a simple exercise to build a budget without sacrificing joy. Use a printout of your credit and debit card statements to figure out what items or experiences you’re not willing to strike from your budget. Having a visual of your monthly spending habits may make it easier to understand what you’re willing to cut and what’s important to keep in your budget.
Weigh the time commitment
Don’t immediately pick the cheapest option. Instead of a DIY project, a consumer might spend more money on hiring a professional for a home repair because of the time commitment. Or buying a high-end appliance that could outlast a cheaper model could save you time and money in the long run.
Your chapter 3 checklist
- Watch the Budget Breakdown video,
- Download the Budgeting 101 Worksheet, and
- Crunch the numbers on your budget.
Figuring out what to budget requires some insights into your current spending habits.