Expanded Lesson
5 min read
How to Budget
-
-
Copied link to Clipboard!
Making the most of your money isn’t always easy these days. Chances are you’re getting hit with expenses from all sides, which can be stressful if you don’t have a lot of money to go around. Regardless of how much money you make or what you’re looking to do with it, it’s always a good idea to learn how to budget. This will help you better manage your finances, so you can prepare for the unexpected.
Lesson Notes
- Create a list of all of your income and expenses.
- Use budgeting systems to categorize your income and expenses and to help you determine how much you should budget for each category.
- Use spreadsheets, calculators and digital tools to help put your budget into action.
LESSON CONTENTS
Making Sense of Your Finances
Start with Income
Start by calculating how much money you make per month. If your income varies, use your total income from last year and divide it by 12 to estimate your average monthly take-home pay.
For many people, this means multiplying their weekly paycheck by four, but considering over a third of Americans work on a freelance or per diem basis, you may have to do some math.
Add all your income together, including your main job, side gigs, gifts, and don’t forget to deduct any business-related expenses, such as equipment, inventory, and other costs that affect take-home pay.
What About Taxes?
If you are a W-2 employee, taxes are likely taken out of your paycheck automatically. This usually means you won’t have to pay a large fee in the spring when you file with the IRS.
If you work freelance or get paid in cash, set aside around 25% of your monthly income for taxes. Check how much you paid in taxes last year to get a better idea of how much you will owe.
Bills and Expenses
Once you have your monthly income squared away, deduct all your required monthly expenses, including housing, food, water, clothing, transportation, internet, cell phone, utilities, insurance premiums, healthcare, loan repayments and anything else you need to pay for regularly.
This will leave you with what’s known as disposable income. If your monthly income isn’t enough to cover all your regular expenses, consider taking on a part-time job, looking for a higher-paying job or lowering your living expenses.
Some ideas include living with a roommate, moving back home with your parents or family members, taking public transportation instead of a car, moving to a smaller apartment or house and reducing your monthly car, student loan, credit card debt or mortgage payments.
How Much Do I Need to Save?
As a rule of thumb, experts recommend having at least three to six months of expenses stashed away in an emergency fund, but you can always save more. If you don’t have anything in savings, now’s the time to get started.
When setting a budgeting plan, it all depends on how quickly you want to reach your goals.
The Zero-Based Budget
If you are committed to getting out of debt (link to How to Get Out of Debt article), enrolling in college or buying a car or a house, you might take the zero-based budget approach. This means spending as little as possible every month and squeezing every penny. Every purchase should go to a meaningful cause, such as your basic necessities or savings.
Of course, getting rid of all non-essential purchases isn’t easy. You’d have to cook every meal at home, bring a lunch to work, and stop going to bars, restaurants, concerts and the movies. You can still enjoy in-home entertainment for just a few dollars a month, see your friends without spending money and eat good food if you know your way around the kitchen.
The zero-based budget will help you reach your financial goals as quickly as possible. Every penny will go into savings, so you can pay off your debt, make a major life purchase or go back to school.
The 50/30/20 Budget
If you like to enjoy the occasional night on the town or indulge in your everyday wants and desires, you can always go with the popular 50/30/20 budgeting plan. This breaks down as:
Spending 50% of your income on basic necessities, 30% on impulses and non-essential purchases and 20% toward savings and debt payments above the minimum.
This should leave you plenty of money to have a life outside of work and home. It’s also important to remember that you don’t always have to spend money to have fun. If you’re looking to change your lifestyle, look for low-cost alternatives to going to the movies, eating out or buying clothes at trendy stores.
These numbers are just rough estimates, consider moving them around to suit your everyday lifestyle. Try to limit your essential purchases to just 50% of your income. If you’re spending over 50% on housing, food, transportation and basic utilities, you won’t have a lot left over for savings.
Putting Your Budget into Action
Learning how to budget is only half the battle. It’s nice to have these estimates as references but following through on your goals isn’t always easy.
There are dozens of ways to put your budgeting plan into action so that a certain amount goes into savings every month. If you work for tips or bring home cash, you can physically separate your money into envelopes for different spending categories.
Digital banking tools have made tracking your expenses so much easier, such as spending trackers and spending category charts. Many financial institutions also provide free financial calculators to help you set up your budget and stay on track. If you need help putting money aside into savings, banks or credit unions will often automatically divert an amount you request to your savings account. This automatic approach will help you build a rainy-day fund.
You can use your online banking system to analyze your spending history. The bank or credit union should be able to tell you how much you tend to deposit and spend every month. Use this information to get a better sense of your lifestyle and how these expenses are affecting your finances.
There’s also the old budget spreadsheet method for itemizing your expenses. Excel will automatically calculate the totals, so you don’t have to break out a calculator.
Downloadable Resource
Download our free budget spreadsheet to help you keep track of where your money goes.
You can also consult an accountant, financial planner or financial coach. This is a great option for those with multiple sources of income, changing business expenses, or complicated finances. You don’t have to manage your money on your own. Consider working with a professional to get your budget off the ground.
Whichever approach you take to budgeting, create caps on your monthly spending to help you better manage your money. It’s easy to lose sight of your financial goals when you’re focused on work and your personal life, which is why it is important to create a system to stay on track.
You can use the calculator below to determine how much you are spending right now:
As you can see, learning how to budget is all about understanding your finances and setting the right goals. Consider where you see yourself in five years and what kind of life you want to lead. Use this guide to make the most of your money, so it doesn’t end up going to waste.
Related Resources
View All
Expanded Lesson
5 min read
How to Save Money
Do you work hard every week, only to see your paychecks slip away like sand between your fingers? Saving money can be difficult. The good news is that it’s never too late to start saving and you can take baby steps while you learn how to put money away. As your nest egg grows, you’ll be motivated to find more ways to boost it up and can add even more money saving tricks to your repertoire.
Expanded Lesson
5 min read
How to Budget
Making the most of your money isn’t always easy these days. Chances are you’re getting hit with expenses from all sides, which can be stressful if you don’t have a lot of money to go around. Regardless of how much money you make or what you’re looking to do with it, it’s always a good idea to learn how to budget. This will help you better manage your finances, so you can prepare for the unexpected.
Expanded Lesson
6 min read
College Savings Plans: What You Need to Know
Whether you’re saving for your child to go to college or planning the next chapter of your career, you have several options to choose from when it comes to paying for school. The good news is that you’re thinking about your options ahead of time, which should help you make the most of your money as you prepare to further your education. 529 plans can be confusing but learning about these programs will help you save money over time as you finance your education, regardless of where you decide to go to school.
Expanded Lesson
3 min read
The Power of Compound Interest
It’s no secret that compound interest can be a huge asset when it comes to your finances. But it can also be a recipe for disaster if you’re having trouble making monthly payments on your mortgage, student loans, or credit card bills.
Expanded Lesson
6 min read
Five Tips for Tax Season
Have you filed your tax return yet? If you're worried about preparing your taxes, use these tips to help get you ready for tax season.
Quick Lesson
2 min read
Do Youth Accounts Help Kids in College?
Read this article to learn how a youth account can help your kids succeed in college.
Expanded Lesson
13 min read
A Parent’s Guide to Raising Money-Smart Kids
As a parent, you might struggle with when and what to teach your children about money management. Is five too early to earn an allowance? Should you share the family budget with your children? When should teens learn about credit? These are all important questions, and it’s often not easy to know the answers. Kids have different levels of interest in financial education. But research tells us that by the age of five most children understand money and what it can do. The information below offers more specific guidelines for different age groups. Again, these are just guidelines. What decisions you make about when and what to teach at home depend on your family situation, household budget and how comfortable you are in the role of teacher.
Quick Lesson
3 min read
How-to Build Savings: Four Ways to Help Build Your Savings
Saving money can feel like a challenge. Even thinking about saving – when you’re trying to pay off existing debt – can be stressful. But, it doesn’t have to be. You can start to save more by using these strategies.
Financial Principles: Four Important Money Principles
If you could only learn four things about money, what would they be? Read this article to learn about four essential money principles that can help you take control of your finances.
Expanded Lesson
10 min read
Want to be happier, healthier and more productive? Try learning about money.
We’ve all heard sayings like you can’t buy happiness or money is the root of all evil. While people may have negative feelings around money due to bad experiences in the past, that doesn’t mean that money can’t be a positive part of a person’s future. Money isn’t the most important thing in life, but it can help someone achieve their goals in other areas such as providing for their family, having more freedom around lifestyle choices and taking care of their health.
Expanded Lesson
13 min read
Managing Money Personalities
Money means different things to different people and can motivate people in unique ways. When thinking about how to manage your personal finances, remember that there is not a perfect, one-size fits all strategy. Adapt plans to your personality so that they are easy to follow through on and rewarding. While money is important, it is a tool meant to make your life better and shouldn’t rule your life. The first step to having a better relationship with money, is to first know yourself. Take this quiz to find out your money personality.
Video: Living on Your Own
Watch this video for some tips on how to be financially prepared to live on your own for the first time.