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Elevate CUJun 26, 2024 3:01:31 PM4 min read

Creating a Budget

Creating a Budget

Budgeting is a important habit for everyone to develop. And like, with all habits, it can take time to see the benefits. But once you do, you won't want to stop! So, what is budgeting? Budgeting is having a plan for your money. It puts you in control and empowers you, and that is a great feeling.  If you have dreams and goals, having a budget will help you achieve those.

Let's take a look at how to create a budget and review some popular budgeting systems and how they work. 

How To Create a Budget in 7 Easy Steps

  • Calculate your income. Determine how much you earn each month.
  • List your expenses. List all your bills first. And then look at your accounts to find how you are spending your money and list those too. Can you see any expenses you didn't think about? There are lots of apps or free tools available to help you categorize and track your spending. 
  • Tally your totals. Calculate the totals of your monthly expenses and all streams of income.
  • List your needs. These include anything essential for living and basic functions, such as mortgage payments, food, etc. As you list each need, write down its corresponding cost. When you've finished, sum the total of all your needs. 
  • List your wants. This list includes anything not essential for living, like entertainment, eating out, and all those extras where money bleeds away. Here, too, note the monthly cost of each item on your list and add up the total when finished. And remember to keep it realistic. Maybe that expensive coffee you buy every morning is a want, but you need it. Then see if you can budget it in. 
  • Set goals. Set realistic goals that fit your lifestyle and financial priorities. Are you trying to pay off debt, save for emergencies, have more money for retirement? Start with one goal, and then create others as time passes. And remember, goals are tied to dreams and help make dreams a reality.
  • Review and tweak as necessary. To keep your budget relevant, you will likely need to adjust the amounts in each expense category at least once a year. There are no rules though, so if you review twice a year, or quarterly. Whatever works for you.

 

Budgeting systems

There is a wide range of budgeting systems to fit every kind of money management style.

  • Zero-Based Budget After working out a number for every expense category, you'll track your spending throughout the month to ensure you're sticking to the plan. 

Zero-Based-Budget

  • Envelope System Budget This budget system is very similar to the zero-based budget except for one big difference: You do it all with cash! At the start of the month or payday, withdraw cash the amount you plan to spend on all expenses. Divide the cash into separate envelopes, designating one for each expense category. Then, withdraw cash from the appropriate envelope when purchasing or paying for an expense.

    For instance, as you go grocery shopping you will pay for your items with cash. If you run out of money before your next payday, then you either need to take some money from other envelope or do without. This way of budgeting can keep you very disaplined, but it can also be a hassle only dealing with cash.  
  • 50/30/20 Budget. This method requires less work than the other methods because you are breaking down your expenses into three categories:
          → 50% Necessary Expenses
          → 30% Discretionary Expenses
          → 20% Savings & Debt Payments

You can succeed with this method of budgeting as long as you know the difference between a want and a need. The drawback though is that the 50/30/20 rule might be unrealistic for people with larger debt or high savings goals because 20% might not stretch that far.

You can always customize it to fit your needs, though. For example, change it to 40/20/40 instead. Do what works for you.

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Staying Motivated & on Track

You've planned and created a budget, which is important, but now you need to keep motivated and on track to accomplish your goals. Here are some tips to do just that:

  • Review. Go over your transactions at least once a week to make sure you are spending within your budget. Not only does this keep you on track but it is a great time to make adjustments if you need too before you overspend.
  • Use a Budgeting App. There are several budgeting apps that can help you keep track of your budget. Some are free, and some cost money. The most important thing is to do what is easiest and most convenient for you so you will succeed with your goals.
  • Evaluate. Every six months take a look at your budgeting approach and decide if it's still working for you. If it's not, then rework and readjust to better align with your reality and goals.
  • Keep Your Eye on Your Goals. Create motivation for yourself. That can be a simple as making a list of "your why." Or making a vision board for yourself so you can visually see and be inspired on what you are working towards. Whatever your goals are, know how to see them as a reality in your future.

A well-designed budget can provide you with a sense of financial security and freedom. And financial freedom gives you more choices in life. We all need to start somewhere. It doesn't have to be perfect. What matters most is that you begin. So, start budgeting today!