Everything you need to know about budgeting but were never taught and now you have no idea what’s going on.
If we are being honest, talking about money, personal finances, or budgeting can be overwhelming and uncomfortable. If I could, I’d probably avoid these topics and just pretend like everything is fine. Then, I would quietly freak out at the mention of retirement funds, investing, interest rates, and so on. Is it not good enough that I’ve managed to keep myself alive this long?
Anyway, I’ve taken on the challenge of breaking things down so we can stop panicking and get our sh*t together. Let’s get started!
Step 1: Choose a budgeting method that works for you.
- Apps like Mint. This specific app lets me see everything in one place for free like my credit cards, loans, investments, credit card score, and the amount of money I actually have.
- Traditional Budget: Start with your income and then list and estimate your expenses. Pretty simple, just make sure to check that your estimates are realistic by looking over past statements or receipts. At the end of the month, you can make adjustments based on what you actually spent and what you originally allocated. If you have anything left over, you can treat yourself or put it into your savings like the beautiful, responsible person that you are.
- Envelope Method: This is one of my favorites that I used during my time in the Peace Corps that I combined with the traditional budgeting method. Basically, you grab some envelopes, label each one for an expense and you place the budgeted amount in the appropriate envelope. This method prevents you from overspending and requires you to actively analyze your purchases.
- Sinking Fund Budget: This method requires you to have multiple savings funds for different and specific objectives. If your goal is to have an emergency fund ($3000 in 6 months), a vacation fund ($1500 in 8 months), and a new laptop ($1000 in 4 months); you would determine what your monthly payments should be for each one and allocate to the funds separately. This method will prevent you from spending your emergency funds while you relax on the beaches of Tahiti.
- Values Budget: This method requires you to reflect about non-essential purchases and which ones bring you the most value. Think of this as Marie Kondo-ing your budget. If an expense doesn’t bring you joy, you let it go. If it does, keep it in your budget. This prevents you from overspending on non-essentials, while not giving up the things that make you happy.
- Zero-Based Budget: In this method, every dollar has a specific purpose and can be accounted for. So when you subtract your expenses from your income, you’ll end up with nothing leftover.
- Proportional Budget (50/30/20 or 80/20): The 50/30/20 method splits your income so 50% goes to needs, 30% to wants, and 20% to savings/debt repayment. The other method, 80/20, has 20% going to savings/debt repayment and 80% to everything else. If these percentages don’t work for you, find percentages that do! The goal of proportional budgets is to be flexible and give you an idea of what to save, just make sure you actually know the difference between a need and want so you don’t find yourself in tricky situations.
Step 2: Know your income after taxes. Use this Paycheck Calculator from SmartAsset.Step 3: Make a list of loans and debt: List your credit card balances, car loans, student loans, mortgage payments, etc. Check out NerdWallet about strategies you can use to pay off your debt, but I really encourage you to do your research and figure out what will work best for you.
Step 4: Estimate your expenses: When it comes to expenses, you can break it down into three categories: needs (essentials), wants (non-essentials), and savings/debt repayment. Here are some examples but you can look at this article by NerdWallet for more:
- Housing/Rental insurance
- Health insurance
- Auto insurance
- Student loan payment
- Car payment
- Dining out
- Internet (might be a “need” if working from home)
- Savings and debt repayment:
- Emergency fund (doesn’t hurt to have this cover 3 to 12 months worth of expenses)
- Savings account
- Retirement account
- Credit card payments
Step 5: Track it! Set some time aside to go through your financials, listen to your favorite Spotify playlist, and drink some bubble tea. This is a good time to review your income and expenses either in an app or by creating a sexy spreadsheet. If you create a spreadsheet, consider splitting it into three categories with your expenses, amount allocated, and amount actually spent. Say you allocated $300 to groceries for the month and then actually spent $400; now, you know you need to make some adjustments. This awareness can help you make better spending decisions about your finances.
If you got to the end, congrats! Look at you getting stuff done and killing it. Hopefully, this was helpful on your journey to financial independence and you feel empowered to continue kicking butt when it comes to budgeting your life.
Thank you for reading and keep shining, beautiful financially empowered people!