The Basics of Budgeting
One of the basic building blocks towards financial literacy is budgeting. Budgeting can seem like a daunting task if you’ve never done it before. But not to worry! If you don’t currently have a budget, getting started is easy.
Before you begin, it’s important to evaluate your spending. If you put the last three months down on paper, what would you find? Break your spending into categories. Take a hard look at what your habits have been lately and set numbers down on paper. If you can, make a month-by-month summary of the last year. Knowing where your money has gone can help you to be more intentional about how you spend going forward.
Just as with most things in life, budgeting isn’t a one-size-fits-all situation. If you’re a beginner at budgeting, there are many different models that you can follow. Here are two just to get you going--
One popular option is the 50/20/30 budget. The idea is that, after taxes, you should allocate 50% of your income to needs, 30% to wants, and 20% to savings. That 50% should include housing, groceries, utility bills, and minimum debt payments. As much as Netflix may feel like a need sometimes, that bill would not fall into this category. Entertainment bills fall under “wants”. The 20% for savings also includes payments made towards debts but only the total paid above the minimum payment.
There are some really great benefits to this type of budget. It’s simple, straightforward, and it builds fun into the plan. This type of budget is ideal for anyone who has trouble restricting their spending, a common problem. There’s no shame in accounting for that difficulty in your first budget. In fact, it may be the wisest way to start. That 30% can go towards whatever you want-- subscription services, shopping, vacation, exploring the local gastronomic scene with friends or a partner. But it also sets a limit on the amount of your income that you treat as disposable.
This is also a great option for freelancers and entrepreneurs because the budget is based on percentages. So no matter your income in a given month, the budget applies.
Another popular budget option is the zero-sum budget. The zero-sum model accounts for every dollar of your income. You begin by putting down the amount you bring in every month and the amount you spend per category. The categories can be whatever needs you have-- rent, groceries, phone bill, internet bill. With the zero-sum budget, getting down to the nitty gritty is key. You may end up creating a category just for your pet. At the end of the day, you use these estimates to figure out how much you could save each month. In this model, your savings becomes a priority and is treated like a bill that you pay after all of your needs are accounted for.
For example, say that you’re bringing in $4,000 each month. Your rent is $1,200, your phone bill is regularly $100, you pay an average of $65 for utilities each month, $400 for groceries, $250 on your car payment, $200 on gas, $80 for your gym membership, and $200 on a personal stylist subscription service. Your total expenses for the month are $2,495. Assuming that you would like to continue spending this amount monthly, you have $1,505 remaining. In the zero-sum model, you would automatically transfer that same remaining balance to your savings every month.
The beauty of this budget is that you can build in whatever categories you want. It doesn’t have to be quite as extreme as the above example. This is an ideal model for anyone who has thus far lived by the glance-at-your-bank-account-and-wing-it budget. The security of this model is that every dollar is accounted for and dispersed. There isn’t room for irresponsible spending. But if you have trouble creating and sticking to a detailed plan, this may not be the budget model for you.
Whatever choice you make, there are three important factors to remember:
1) It is always a good idea to pay above the minimum payment on debts. Planning for this can make you and your budget more successful in the long run.
2) It’s ideal to save 20% of your income but, if you’re starting to save from $0, 20% can seem impossible. Wherever you start, the goal should be to increase your savings over time. If you previously saved 0% of your income, starting by saving 5% is progress! Take comfort in small victories. Over time, you will watch your savings grow.
3) Above all, keep in mind that if you’re realistic about your budget, you’re increasing the likelihood that you’ll stick with it. Budgets should be aspirational but not unattainable. Setting the goals too far out of reach can be discouraging and derail your budgeting before you even truly begin. Remember, progress makes perfect!