Saving money is stressful. Period. We have bills, expenses, and the rare small luxury, hurtling out of our monthly paycheck before we’ve even had a chance to check our bank balances. And then there’s that little voice lingering in our heads, telling us we’re spending too much, or we need to save. But there is a way to make it less stressful – by budgeting. And the best part of budgeting is that it’s easy and free.
It’s simply a spending plan. Ok, so some of you will be thinking ‘my gym membership is non negotiable’ or ‘I can’t give up my morning coffee, no way… nope. Not happening’. And that’s perfect, because you already know what things are most important to you, and these are the things you should prioritize when budgeting.
By creating a spending plan, like the 50/30/20 strategy, you’re able to work out whether you will have enough money to do the things you need to do, and/or would like to do.
How to set the right budget?
1. Calculate your income after tax
The money you have to spend, whether it’s for your needs or wants, depends on your take-home income – the amount you have leftover after tax and with payroll deductions added again.
This is your starting amount, from which you’ll deduct your monthly expenses and save money for retirement and emergencies.
2. Choose a budgeting plan
No matter which budgeting method you choose, you always need to make sure you don’t spend more money than you have, so you can reach your savings goals and living standards. Let’s take a look at four of the most popular budgeting methods:
A the name suggests, 50% of your take-home pay goes to needs, 30% to wants and 20% to debts and savings.
The 50% is to cover essentials you can’t live without, like rent, food, health insurance and transport. The 30% is for obvious extras like eating out, clothes, travel, club memberships, as well as your cell phone, cable and subscription plans. The remaining 20% is for retirement, emergency funds and other savings.
The key to making this budget method work for you is making a clear distinction between a ‘need’ and a ‘want’. Just imagine a friendly voice in your head every time you go out shopping asking, ‘do you REALLY need it though?’ The downside of this method is that it’s not ideal for people who have an unsteady monthly income.
The envelope system
With this budgeting method, you’ll set aside an envelope for each of your spending categories every month – gas, groceries, utilities, rent – and use only that money for purchases. This budget works best for people who are paid in cash.
However, it can be adapted into digital envelopes or accounts. It’s best for people who can’t separate spending categories. Using cash in shops stops you from overspending on ‘extras’, as it’s less easy than just whipping out the plastic.
The zero-based method
One simple rule to follow: your incomings minus outgoings equals zero at the end of the month. At the start of every month, give each dollar of your income a purpose. Allocate the first lot to debts and your savings goals, then list your expenses.
The downside of this meticulous method is that it doesn’t allow for unforeseen spending. What if your computer breaks and you need to replace it so you can work?
Since you already have everything planned out, you’ll have to find funds elsewhere. That’s where an emergency fund would come in handy.
Pay yourself first
Before you ask, this method doesn’t prioritize all those things that make you skip with happiness, like dining out or growing your sneaker collection. In fact, on the contrary. The Pay Yourself First principle puts savings before immediate expenses. Retirement and emergency funds should be your first priorities.
Then, you should decide how much you need to save to reach those goals, and the portion you’re able to to save each month. The good thing about this method is that it doesn’t require you to categorize every expense, or keep a detailed record of your spending. It also helps you focus on the big picture.
Be careful though, don’t be too ambitious with your savings goals. You can risk not having enough to cover some of your monthly expenses, such as housing and groceries.
How to monitor your expenses
While there’s not much you can do about your fixed expenses, rents and mortgages for example, you may want to limit yourself from spending more than you’ve planned in other categories, like treats and travel expenses.
Whether you budget manually or with an app, make sure you update and review your budget on the go. Some people prefer writing it down because they feel more connected to their budget. Others prefer apps that link directly to their bank accounts, so they can receive notifications – if they’re overspending for example.
Make changes along the way
Your spending is likely to fluctuate over time, with salary increases and natural life changes. If you’re short on funds at the end of each month, revisit your spending habits and come up with ways to save money, like carpooling to work or using coupons.
In order for a budget to work, it must be tuned to your life. And that means reviewing and updating it constantly.
Try not to lose sleep worrying about how you’ll pay this month’s bills. Just make sure you budget in a way that suits you, to make sure your expenses don’t exceed your income.
Find ways to maximize your income and minimize your spending and don’t forget about emergency funds – money that you have in an easily-accessible account, saved for a rainy day.
If you make budgeting a habit, it will become an easy task. You’ll know roughly how much you spend each month, with bills and dining out included. Plus, you’ll have savings to cover a few months of expenses, just in case the unforeseen happens, like falling ill or getting laid off. Worst case scenarios!
We’re not saying you should obsess over every cent that goes in and out of your wallet. Just a few check-ins during the month will be enough to know if you’ll need to skip that fancy dinner or weekend getaway.
Finally, update your budget if you change job, hometown, or experience any other life-changing events. After all an obsolete budget is like a VCR. Great 20-odd years ago, but useless now.