Budgeting is a way to track your earnings and expenses over a set period of time. Once you start monitoring how much money is going in and out of your bank account, you can make a financial plan to reduce your spending and save up for a specific purchase/goal. With these budgeting basics, you can take control of your finances and make intentional decisions about where each dollar goes.
Monthly or quarterly budgets are the most common. Regardless of the time frame, the ultimate goal is to balance your budget so your income minus your expenses equals zero (or a positive number). To start, gather as many documents as you can and input the data into an Excel spreadsheet, budgeting app, or if you are old-school…a sheet of paper.
Try to avoid guessing or estimating. Your budgeting strategy will be more successful if you have accurate numbers. If you must estimate it is best to underestimate your earnings and overestimate your expenses.
Income:
In the income section, you should record your monthly salary. You should also include any passive income you receive regularly on a monthly basis. For example, profits from rental properties, dividends from stocks, or earnings from other investments. Be sure to record your actual monthly take-home figure after tax.
Expenses:
For the expenses section, it is often easiest to look at each line of your bank or credit card statement to get a sense of your spending patterns.
You should begin by recording what you spend on essentials such as housing, transportation, utilities, and food. Some items will be consistent (i.e. your monthly rent or mortgage payment). Others will vary month to month (i.e. grocery bills). When it comes to changeable expenses, we recommend calculating the average.
Next, you will need to consider other ongoing expenses such as clothes, hobbies, meals out, etc. You may want to take special note of impulse buys.
We recommend including a “miscellaneous” line in your budget. It doesn’t hurt to put aside a small amount of money for unexpected expenses throughout the month.
Don’t forget about one-off “big ticket” items. For example, if you have an annual 2-week vacation, try breaking down that one-time cost into monthly amounts. If your trip costs $5,000 total, you should put down $416.67 under your leisure expenses each month.
If you have debts, budgeting is especially important. Obviously, you will need to record the minimum payment amount to cover your student loan, car loan, etc. But you will also want to set money aside each month to start paying off the capital.
Ideally, you will have enough income to cover all of your expenses. We understand that not every month will look the same on your spreadsheet. Even if you have a consistent paycheck, your monthly spending may vary considerably. For example, in September you may have a lot of back-to-school expenses, or you may spend a lot of money in December on holiday gifts. Please do not be too hard on yourself during the budgeting process.
Curb your spending:
Once you have a grasp of your current spending habits, you can start making cuts.
Some cuts will be easy. For example, you may stumble across items such as old gym memberships or app subscriptions that you didn’t realize you were still paying for. Immediately cancel any useless subscriptions and get rid of that monthly bill.
In most cases, your essential expenses can be trimmed down. For example, to lower your grocery bills, you could start buying no-name brand kitchen staples. When it comes to utilities, you may be able to get a better plan, switch providers, or bundle some of your services (i.e. cell phone and internet). Often, changing your usage habits can save you money. For us, remembering to turn off the lights when we leave the house, and only heating/cooling the specific room we are using, has made a dent in our electricity bills.
If, after minor adjustments, you are still living beyond your means – you will need to make lifestyle changes. In most cases, you will need to cut down on luxury items/unnecessary purchases. Perhaps, you should go to restaurants less often, plan a cheaper vacation, or buy clothes from a more affordable brand. Budgeting is not meant to ruin all your fun, but you do need to be honest about how often you currently treat yourself.
Set budgeting goals:
You need to set tough, but realistic, budgeting goals. To keep it simple, consider setting parameters for must-haves, nice-to-haves, and savings for the future. A popular model is the “50/30/20” rule. You allocate 50% of your income to essentials, use 30% of it for leisure/entertainment, and put 20% straight into a savings account. Feel free to tweak the percentages to suit your particular finances and lifestyle.
Stick to your budget:
It is important to check back at least once a month to make sure you are still on track. If you need help sticking to your plan, you may want to use a budgeting app. Most apps can be synched to your bank account(s) so you can track your purchases, organize your expenses into categories, and set spending limits. Popular apps include EveryDollar, Goodbudget, PocketGuard, and Honeydue.
You may also want to reach out to someone who can hold you accountable. It never hurts to have a second pair of eyes check your math, or have a cheerleader to encourage you to reach your financial goals.
If you want the ultimate accountability partner, try using cash. If there is a certain budget category you struggle with, such as “entertainment,” take out the amount you have budgeted in cash. Bring the envelope of cash whenever you go out to restaurants, theaters, clubs, etc. and when the cash runs out, you will be forced to stop spending!
We hope you have enjoyed this introduction to budgeting. If you are looking for other financially-focussed content, please check out our articles Banking For Foreign-Owned U.S. Businesses, Online Brokers & Trading Platforms For International Investors, and How To Open An Offshore Bank Account.