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How to budget your money (while improving your financial skills)

Does money stress you out? You’re not alone. Money is often described as the most significant source of stress among adults. But that doesn’t mean that figuring out how to budget your money isn’t important.

Saving, investing, and creating an emergency fund are essential to everyone’s financial wellbeing, regardless of your income level. You won’t be able to do these things without a budget. 

Plus, knowing how to budget can help us feel better and make smarter decisions. A budget is key to helping us steer clear of emotional spending and a financial scarcity mindset. Keep reading to learn some tips about how to budget so you can make a spending plan that works for you. 

Make it a habit

If you exercise for one hour, would you expect to see your six-pack right away? Of course not.

Staying financially fit requires the same kind of long-term thinking. One key to figuring out how to budget and progress towards your money goals is making it a habit. Like our bodies, our financial lives are not static.

First things first, get in the habit of taking a regular inventory of your financial wellbeing to help you figure out how to budget in a way that works for you. Using an Excel spreadsheet, or an old-fashioned pen and paper, record all of the most important parts of your financial life. 

What’s your income? What are your financial obligations? Do you have any debt or investments? What are your short and long-term financial goals? Do you have an emergency fund? What are your year-end tax obligations? Has anything in your financial life recently changed (job loss, new side hustle, the onset of a global pandemic)?

Once you have all the numbers squared away, you can begin planning how to budget. 

Think in terms of your net income

Before you get carried away, make sure that you’re not using your gross earnings as the number you input into your budget. It doesn’t matter where you live or what you do — before you get started, you should subtract your tax obligations. This figure will give you an idea of your net income. 

After that, we recommend you take it a step further and then subtract the money you plan to dedicate to savings and investing — before paying any of your other bills. This is called Paying Yourself First or the “PYF Principle.” This principle changes your investment and savings goals from an option into a priority. Some financial advisors claim this is the best universal trick to saving money and creating wealth. 

Many folks think this strategy would not work for them because they fear they would not have enough money for essentials or an emergency. But if you learn how to budget well, this isn’t as likely — after all, PYF doesn’t require you to change the amount of money you put towards bills or investing, it just asks you to prioritize it differently.

Ultimately, it works because it safeguards your precious savings from those 3 p.m. latte cravings that can be hard to deny. 

If you treat this figure as your net income, you’ll be prioritizing your savings and investments over almost everything else. 

Keep track of your spending

If you feel tempted to fib about the real cost of your brunch addiction while budgeting — don’t. It’s normal for people to feel shameful about their spending, debt, and other aspects of their financial lives. But if you aren’t honest about your spending, you won’t be able to learn how to budget in a way that actually helps you. 

It’s okay if you’re not as frugal as you like to imagine. Like physical fitness and diet, we can improve our money habits. Be honest with yourself about your spending, debts, income, and other factors. Once you’ve identified problem areas in this initial step, you can create a plan to slowly work towards improving.

Earmark your income

Keeping track of your spending is vital, but it’s equally important to keep track of your income. If you don’t monitor your side hustle income, for example, you could run into issues with taxes or squander the wealth-building opportunity that extra money represents. 

In case you have an extra stream of income aside from your 9-5, consider dedicating that money to achieving financial goals like paying off debt or creating an emergency fund.

If you don’t give a purpose to your income and track it coming in, it will probably go to waste on things that you don’t need and that won’t make much of an impact on your overall quality of life (that chocolate bar at the bus stop).

Set your goals

If you don’t set goals, how will you know if you’ve learned how to budget well? You need a plan to divvy up your income so you can try to stick to it and grow your wealth. 

It is recommended to start with the 50-30-20 rule and then tweak it according to your needs. According to this budget, 50% of your net income should be reserved for essential spending (food, shelter, and healthcare), about 30% for spending on fun stuff (hobbies, non-essential clothes, outings, and treats), and approximately 20% to your financial goals (paying off debt, investing, and bulking up your savings).

This plan can help you avoid unnecessary spending and learn how to budget in a way that works for you. 

Plan to make mistakes

Don’t hold yourself to a perfectionistic standard when it comes to learning how to budget — this may stress you out more and lead to future failures. If you fail at your well-crafted spending plan and buy an $8.00 bagel at the airport or have an unexpected financial emergency one month, all is not lost.

After all, budgeting is about improving your long-term money management, not denying yourself all of life’s comforts. 

Instead, focus on the big picture and treat your failures with compassion: How has your spending changed over the past 6 months? If it has improved, count it as a victory! Do you always overspend on food? Maybe you simply underestimated how much you need to spend to stay healthy. Is your emergency savings disappointing?

Perhaps you can consider picking up a side hustle for a few months so that you can have greater financial security in the event of a crisis. Rather than scolding yourself for making budgeting mistakes, focus on solutions to work towards your goals. 

Learning how to budget can be stressful for anyone. But by following our tips, you can get on the road to making smarter financial decisions for yourself. For more ideas on how to improve your financial fitness, check out the rest of the Academy education library. 

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