For many, a budget feels like a diet for your wallet, restrictive and difficult to maintain. The good news is, it doesn’t have to be that way. In fact, having a budget puts you in the driver’s seat to make choices that can lead to financial freedom.
The game plan
The first step is to determine your baseline. That means you need to account for all of your income and expenses. Once you have an income figure, look at your monthly fixed and variable expenses to get a sense of your monthly cash flow. This analysis will help you understand how best to allocate funds to meet your financial goals. Whether you’re just starting or have been budgeting for years, try on some of the following strategies for size:
Cash-Only Method– Commit to taking a break from plastic for one week – no debit or credit cards, only cash. Decide how much you will spend at the start of the week and try to live within your means. This method forces you to plan and think before buying, reducing the number of impulse purchases.
50/30/20 Budget – This method helps you cover all the bases. Split your monthly disposable income into three major buckets – allocating 50% to your needs, 30% to your wants, and 20% to savings and debt repayment. For optimal results, be sure to include minimum payments on credit card balances in the 50% “needs” category.
The Envelope System – This cash-based approach requires that you allocate a set amount of money to each variable expense category – like groceries, eating out, entertainment, clothing, etc. Fill envelopes with the allotted cash and use only that money for purchases. Once an envelope is empty, you can’t spend any more money on that particular category for the month.
Pay Yourself First – Establish a monthly savings goal (such as 10%) and put that amount into a savings account via an automatic transfer. Then you can tackle your monthly expenses. This approach prioritizes saving and helps keep you on track to achieve your financial goals.
The Zero-Based Budget – This system appeals to planners, as it assigns every dollar earned a specific purpose. You allocate specific spending amounts to different categories, such as utilities and transportation until there are zero dollars left in the budget. Since spending needs to change on a monthly and seasonal basis, you will need to establish a new budget every month that accounts for both fixed and variable expenses.
Establish a Routine
Adopt a budgeting system that is flexible enough to meet your needs, whether you use an Excel spreadsheet or a smartphone app. The most important factor is consistency in tracking and monitoring so that you will be able to make informed decisions about necessary course corrections. Keep with it for at least three months to gain an accurate picture of your financial trends and for these new habits to become a part of a healthier lifestyle.