There are two types of people in the world: those that dread checking their bank accounts after a fun weekend, and those that know the exact amount down to the dollar that they’ll find there.
If you fall into the first camp, never fear: sticking with a budget isn’t as hard as it sounds. Done right, it can even be kind of…fun? We’ll let you decide.
In any case, let’s start with the basics: a budget is essentially a spending plan that provides a breakdown of your future income and expenses. Having this framework in place can help you make better financial decisions and set you up for long-term success.
For those who are new to the budgeting game, we’ll take it step by step. First up: take a cold, hard look at your current spending so you can start budgeting with purpose.
Give yourself an audit, and put all your cards on the table
Before you jump right into drafting your budget, it’s essential to do some prep work. After all, you can’t effectively plan for the future without a clear understanding of the money flowing into and out of your account right now.
To complete your initial financial audit, you can use an app to track your finances or print out your bank statements from the last two to three months and break down your spending by category. There are many free tools out in the market that can help with budgeting. For example, Money Talks provides free budget worksheets to help you capture a snapshot of your income and expenses. This gives you a better perspective on your current spending habits, making future expenses easier to budget for.
A self-audit can also help you identify any recurring or unnecessary expenses to cut back on. We know you love your daily lattes and weekly pedicures, but do you really need them? We’re not even going to start on avocado toast. That’s your call. But if you do decide they’re non-negotiable, consider ways to manage some of your larger expenses to balance out those smaller day-to-day expenses. Making regular payments over time towards large amounts can help with budgeting. For example, Zip is a great tool to split payments over time and keep tabs on your recent spending, freeing up precious space in your budget to treat yourself from time to time.
Find the budget that’s best for you…
Creating a budget may sound simple in theory, but there are more than 100 different types of budgeting methods to choose from. The most common include the bullet journal method, which provides a straightforward approach to your finances; budgeting apps; or a simple excel spreadsheet (if you prefer keeping things old school).
Think of your budget like picking a hairdresser: you may need to cycle through a few options before finding one that you can stick with for the long haul. As long as the method you choose provides greater clarity on your spending and helps you reach your financial goals, you’re on the right track.
…and do the damn thing!
Once you’ve selected your budgeting approach, it’s time to get into the nitty-gritty and actually create your monthly budget. Every budget comes down to three main elements: your income, expenses, and savings.
Identify your major sources of income (these could be fixed or variable). If you’re a contractor or your income varies from month to month, you may consider adding the same amount of money to a savings account each month and pay yourself a salary. To arrive at this number, calculate your average income from the last three months. For someone with a more permanent role, simply input your regular ongoing income.
Like your income, your expenses can be fixed or variable. Make sure to budget for fixed expenses first since these are non-negotiable. When it comes to variable expenses, it’s wise to maintain a healthy financial cushion to avoid the risk of overspending.
The last element to consider is your savings. Once your income and expenses are budgeted for, the remaining amount is what you can safely plan to squirrel away.
To keep yourself on the hook in working towards your savings goals, it’s a good idea to choose a concrete number to put away each month. The more specific your goals are, the easier they’ll be to accomplish.
Keep your eye on the prize
While a budget can provide a snapshot of where your money is currently going, its ultimate purpose is to serve as a tool for reaching your long-term financial goals. This means your budget needs to align closely with the milestones you hope to achieve in the coming months or years.
Your goals may include things like saving up for a much needed holiday or limiting your spending to a certain amount each month. Once you have your numbers down, do a self-check-in to identify ways to modify your budget to meet these goals. Are there bills you can renegotiate, subscriptions you can cancel, or unnecessary expenses that you can cut back on?
Consider the 50/30/20 rule
First-time budgeters may be overwhelmed by all the numbers to keep track of, but giving your budget more structure makes the process a whole lot easier. A great way to do this is by following a commonly known 50/30/20 rule. This percentage-based budgeting model takes the stress out of identifying where your money should be going.
The 50/30/20 rule breaks down your spending into three major buckets. 50% of your income goes towards spending on essentials like rent, food, and utilities. 30% of your income is ‘fun money’ which includes dinners and social outings. The last 20% is for an investment in your ‘future self,’ aka savings. You can put this money towards for example,a home deposit or keep it an emergency fund.
We hope this list of actionable tips helps you craft the perfect plan of action. If you find that your expenses creep into a larger percentage of the finance pie, using a product such as Zip can help you make your day-to-day spending more manageable.
Download the Zip app to check out the better way to pay and start splitting your payments over time.
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