Young or old, wealthy or not, good budgeting habits are essential for growing your wealth.
Budgeting can be an intimidating and stressful task, especially if you aren’t too sure where to
begin. But with these tips, I’m confident you’ll get off to a strong start.
When you’re first trying to jump into the world of budgeting, it’s best to start simple. The first
step is making more money than you’re spending each month. It might sound simple, but it’s
something many people struggle with. Many people never get a handle on this first step, then
wonder why they struggle with their monthly budget.
Start like this, identify your absolute expenses, which are the things you must have. These may
include rent or mortgage payments, car payments, insurance, gas, food, and your cellphone plan.
You’ll likely have some other miscellaneous, non-negotiable expenses too, such as student loans,
internet, or cable. From there, figure out your monthly take-home pay after taxes. Now, it’s
simple, if you spend more than you take home, you’ll have to make some cuts. If you make more
than you spend, you’re ready to put a real plan in place.
If you notice you spend more than you earn, it’s time to make some difficult choices. Are you
spending too much on eating out? Do you pay for too many streaming services? Are you an
impulse shopper? Ask yourself: is the streaming service I pay $19.99 a month for and barely use
worth negatively impacting my financial future? For most non-essential purchases, the answer is
no.
It’s important to understand that you don’t need to cut all your spending on entertainment, travel,
or other hobbies in order to save and budget, but you may need to cut some of it. It’s not
sustainable to spend more than you make in the long term. Changes won’t happen unless you’re
proactive and decide to make them.
Common advice is to save around 20% of what you make. Around 50% of your income should
go toward things you absolutely need, like rent, and 30% can go toward things you want. These
are things like streaming subscriptions, a new pair of sunglasses, or some new video games to
play in your spare time. You can use this rule as a rough guideline throughout your financial
journey. Thinking about getting a nicer apartment and leasing a vehicle? If the cost of those two
things will eat up 60% of your monthly income, you know they might be too expensive for you
to afford right now.
Another helpful tool can be budgeting apps and software. These apps can present a clear picture
of your finances. Sometimes visualizing your budget can be helpful. Many people spend while
on their phone, so having an app that can track your spending habits can serve as a powerful real-
time deterrent for unnecessary spending, or as a powerful reminder to save.
Now that you’ve determined you’re bringing home more than you’re spending, it’s time to figure
out what to do with this surplus income. You don’t want to let all of your money just sit in a low-
interest savings account because it may be outpaced by inflation. Places to put this money could
include an IRA for retirement, money market investments, CDs, or higher-interest savings
accounts. You’ll also need a liquid emergency fund in case it needs to be spent one day to cover
the costs of an unforeseen emergency. You also might want to keep some cash on hand in case
that’s ever needed.
Seeking professional advice for exactly how to allocate your savings can be a great idea. These
are just some simple places to start. Professional advising can provide you with a more strategic
long-term plan and help you align your saving goals with your spending goals.
One of the key components of budgeting is month-over-month consistency. Putting a plan in
place and then failing to stick to it after a few months won’t solve your problems. Putting your
plan in writing is key, as studies have shown this can increase adherence to the plan. Saving is all
about compounding over time. If your monthly budgeting is too inconsistent, it will be difficult
to efficiently save.
Everyone will have some unpredictable monthly spending, but if you have unexpected expenses
consistently popping up every month, it’s fair to ask if those expenses are really that
unpredictable or if you need to adjust your budgeting approach. Maybe you’ll need to budget for
more monthly expenses. If needed, you may have to cut some monthly spending in other areas in
order to meet your savings goals. If you frequently have unpredictable vehicle repairs, maybe it’s
time to allot some money every month toward vehicle repairs, then cut some spending in other
areas in order to meet your budgeting goals.
Every dollar should have a job. This is what prevents impulse buying and needless spending. If
you make a plan and tell yourself you’re going to save the extra $200 you have, as opposed to
having no plan for that money and letting it sit around, it’s more likely to grow in the future.
With no plan for that excess cash, you’re much more likely to spend it on something
unnecessary.
Before you can save effectively, you may also need to pay off debt. High-interest debt can make
it harder to build savings because your money is going toward interest instead of your future
goals. Paying down debt can free up more of your monthly income and make your budget easier
to manage.
Don’t forget to give yourself grace. If you fail to perfectly adhere to your budget in the first few
months, that’s okay. It’s normal, and it takes many people a few months to really start sticking to
a budget. Everything takes practice, even budgeting. At first, you won’t be great at it. You’ll
forget about it, set unrealistic goals, and probably need to make adjustments. The important thing
is that you try your best to stick with it and keep improving over time.