Auto title loans and revolving lines of credit can be part of a personal budget.

How to Create & Live on a Budget

How To Create & Live On A Budget

For plenty of people, budget is as scary as a four-letter word. A poll from Gallup found just one-third of Americans create a detailed budget. Some people think they are budgeting, but of those people, 20 percent are only tracking their spending in their heads, which can lead to mistakes and errors.

The importance of budgeting might be lost on some people, but there are many reasons why it is important to make and stick to a budget. Plus, once you’re committed to the idea of budgeting, making and keeping one isn’t too difficult.

Why Make a Budget?

Why bother to make a budget? There are several reasons, the key one of which is that it helps you build financial security and can help you break the cycle of living paycheck to paycheck. A 2016 survey from the Federal Reserve found nearly half of Americans don’t have enough money in the bank to cover a $400 emergency or surprise expense. Title loan services can help, but having savings for an emergency is still crucial.

With a budget, you’re able to take control of your finances and lay the groundwork for a better financial future. Here are a few more reasons to consider budgeting. It will help you:

  • Prioritize your spending. If you don’t know how much you are spending or what you are spending your money on, it is impossible to set priorities. With a budget, you decide which categories you want to focus your attention on, whether those categories are paying down debt or saving for a home, car or another big-ticket purchase. You can adjust your spending priorities based on the time of year once you have a budget. For example, in the late summer, you can dedicate a category in your budget to back-to-school expenses. In the fall, you can assign a category to holiday shopping.
  • Set and reach financial goals. Along with helping you prioritize your spending, a budget helps you set and obtain financial goals. Without a budget, you have no way of knowing where your money is going or what changes you need to make to achieve specific goals, such as saving up the down payment amount for a home or saving for your child’s college education.
  • Rein in your spending. Once you know what your goals are, a budget will help you trim any spending that would keep you from reaching those goals. For example, if you know you need to save $200 per month for five years to have enough to for a down payment, you’ll be less likely to want to use that $200 to buy a new pair of shoes or a new video game.
  • Plan for the future. Where do you see yourself in ten years or where do you see yourself once you retire? Without a budget, it can be difficult to say for sure. But with a budget, you can clearly plan for the future. For example, if you want to retire at age 65, you can plan your retirement savings so you have enough set aside to let you do exactly that.
  • Put your mind at ease. Around 65 percent of people lose sleep because they are worried about money. Making a budget and finding a way to reduce your expenses can help lower your stress levels and help you get the sleep you need.

Track Your Spending and Figure out Your Income

The first step toward making a budget is figuring out what you are spending your money on each month. You also need to have a firm grasp of how much money you earn monthly or yearly.

For some people, figuring out their income is the easy part. If you make the same amount from your job every pay period, you can look at the number on your pay stub. If you have an irregular income, such as from an hourly position or freelance gigs, figuring out what amount to use as your income gets a bit trickier.

One way to determine your income when what you earn fluctuates is to add up the amount you brought home over the course of six months and use the average of that sum as a baseline. That’s not a perfect solution because you might earn significantly more or less over the next few months, but it can serve as a starting point.

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No matter if your income is fixed and steady or irregular, it’s not difficult to figure out where your money goes each month. Tracking your spending will involve some diligence on your part. One option is to carry around a small notebook and write down everything you buy and the amount you spend for each purchase. Another option is to collect your receipts throughout the day and tally up your spending in a notebook or spreadsheet when you get home.

At the end of a month, review your spending so you can see what you’re buying and exactly where your money is going. Since spending can fluctuate from month to month, you might want to track your spending for two or three months to give you a good idea of what you typically buy and when you buy it.

Along with tracking your spending in categories such as groceries, restaurant or take-out meals, clothing, personal care items and transportation costs, add in the cost of regular or fixed expenses when figuring out a budget. Those costs include your monthly rent or mortgage payment, your minimum payment for any student loans, car loans or other debt, your utility bills (even if they change from month to month) and your insurance payments if any.

Set Goals

Once you have figured out your income and expenses, you can zero in on your financial goals. Think about what you’d like your money to do or what your biggest or most important goal is at the moment. It might be paying off your student loan, getting out of credit card debt or saving up to buy a home. Although everyone’s financial goals will be different, there is usually a hierarchy of goals to follow.

That means you don’t want to start saving for a home or new car when you are still in debt. You also don’t want to focus entirely on paying off your debt if you don’t have a bit of an emergency fund saved up. Not having any money set aside can mean getting deeper into debt when your major goal is to pay it off. Generally speaking, it’s a good idea to set and obtain your goals in this order:

  • Build up a small emergency fund. Although the standard advice is to have around six months saved up in an emergency fund, if you are just getting started, setting aside $1,000 or so can give you a decent cushion to cover any surprises, such as a large car repair bill or a vet bill.
  • Focus on reducing debt. Once you have that small cushion built up, turn your attention to paying down existing debt. Concentrate on the debt with the highest interest rate first and put the minimum towards any remaining debts. Once you’ve paid down the most expensive debts, direct the money that was going to those debts monthly to any remaining debts.
  • Boost your emergency fund. When you’ve paid down your debt, take a moment to celebrate, then focus on beefing up your emergency fund. You want to have at least three months worth of income in your fund, although six to eight months’ worth of income is an even better target.
  • Don’t forget about retirement. Include retirement savings as a financial goal no matter what your other goals are. You want to be stashing away a little bit towards retirement at all times, even if it’s just $10 or $50 per month. The younger you start saving for retirement, the more money you’ll have when it is finally time to retire.
  • Save for a home, car or another financial goal. Once your debt is gone, you’ve got a decent emergency fund and you’ve been setting money aside for retirement, start zeroing in on other financial goals, like saving up to buy a home, go on a fantastic vacation or purchase a car.
  • Save for your child’s college expenses. Depending on how close your child is to going to college, you might prioritize this goal over others.

Choose a Budget Type

Now that you have a basic understanding of your income and expenses and have a general plan for achieving your financial goals, take a close look at the different budgeting options out there. Finding the budgeting method that works for you can take a bit of trial and error.

You might start with one style of budget only to decide that switching to a different one after a few months makes more sense. If you’re feeling frustrated with the type of budget you picked, choosing a different one can mean the difference between sticking with a budget and giving up the project entirely.

Here’s a quick look at different budgeting methods: 

  1. The 50/30/20 Budget

Sometimes known as a percentage based budget, the 50/30/20 budget has you divide up your income into three categories. Half of what you bring home each month should go towards essentials. That includes your housing payment, your utility bills, your groceries and your transportation costs. It includes minimum payments on loans or other debts. Anything you can’t live without or need to pay during the month belongs in this category.

The remaining half of your take-home income should go towards personal spending and savings. You’re meant to put 20 percent into savings each month. How you use the remaining 30 percent is up to you. You might put a part of that 30 percent aside to save for a trip or a new piece of furniture, for example. If you have debt, some or all of the 20 percent for savings should be used to pay off your debt first.

  1. Zero Sum Budgeting

Three features distinguish a zero sum budget — also called a zero-based budget — from other budgeting methods. First, you live off income from the month before, not from the paychecks you receive this month. Second, you give every dollar you earn a “job,” so if you spend less than expected in certain categories, such as groceries or entertainment, the money allocated to those categories can’t linger around. You’ll put it in a different category or send it to savings.

Third, you have a general understanding of your fixed or necessary expenses. The budgeting method allocates money based on expenses, not on earnings.

Often, zero sum budgeting is an ideal method for people who have uneven or irregular incomes. When you don’t know how much you’ll earn in a month, it can be difficult to predict whether you’ll have enough money to cover your expenses. But, if you live on the previous month’s income, you’ll have a clear idea of whether you have enough money to cover your costs for the month.

The big drawback of zero sum budgeting is that it does require you to have at least a month’s worth of expenses set aside before you can begin using it. Breaking the paycheck to paycheck cycle is often part of the goal of getting on a budget, but it can be difficult to start a zero sum budget if you are in the midst of living paycheck to paycheck.

  1. Envelopes Budgeting

The envelopes budgeting method is a bit of a throwback. Each category in your budget is gets its own envelope. At the start of the month or pay period, you put a set amount of cash into the envelopes, based on the amount you’ve budgeted for each category. Your grocery envelope might get $500, and your gas envelope might get $200, for example. Once the amount you’ve designated for each category is gone, you’re supposed to stop spending in that category.

If you’ve had trouble with credit card debt, the cash-only focus of the envelope budgeting method might be ideal for you, but some people struggle with the inflexibility of the method. For example, once the grocery envelope is empty, you’re supposed to stop spending that category for the month, even if you have money left over in another category, such as dining out or entertainment.

Although the old-school envelope method does involve using physical envelopes and cash, there are ways to update the method for the 21st century. Use budgeting software to create virtual envelopes and assign amounts to specific categories. Once you’ve spent the full amount, whether it was in cash, a check or a debit card transaction, you’re done spending in that category.

  1. 3-Step Budgeting 

The 3-step budget, created by investor Andrew Tobias, is the most flexible budgeting method out there. The first step involves getting rid of your credit cards, which can be a no-go for some people. The second step is to invest 20 percent of your income. The third step is to live on the remaining 80 percent of what you earn. You don’t have to mess with specific categories or allocate $XX amount to groceries or $XX to clothing.

While the 3-step method can be useful if you usually struggle with creating categories, it can be difficult to stick with if you want to set and reach very specific financial goals.

 

Budgeting Tools to Consider

After you’ve chosen a method that works for you, the next step is to figure out what type of budgeting tools best fit your style. There is a variety of tools available, both online and off, to help you track your income and spending and stick with your budget.

  • Pen and paper. For some people, the best budgeting tools are a simply a pencil or pen and a notebook. You’re able to write down your income and expenses and do the math to see if you’re coming out ahead or spending more than you earn every month.
  • A spreadsheet. A spreadsheet is a slightly more technologically advanced tool. It will do the math for you and let you know if you’ve overspent. You can program the spreadsheet to tell you the amount you need to set aside for each category based on percentages you set.
  • Envelopes. If you’re going to use the actual envelope method, you’ll need envelopes to store your cash. Consider, too, a safe place to store them. This might mean the purchase of a secure box.
  • Online budgeting software. A great many software programs are available to help you track your budget. Some offer both a desktop version and a mobile version, so you can keep on top of your budget wherever you are.

A few programs are free, such as Mint, while others, such as Learnvest, have both a free and paid version. You Need a Budget, which uses the zero-based method, lets you have a free trial, then costs $50 per year.

 

Look for Ways to Cut Your Costs

When creating a budget, people often discover one or two things. One thing they usually learn is that they are spending way more than they earn, which leads to debt and keeps them from reaching individual goals. If that describes you, part of making a budget should involve finding ways to cut your expenses or spending.

Knowing where you can reduce costs is why it’s so important to track your spending. After a few months of tracking, you might learn you’re spending a few hundred per month on lunch or meals out when you could easily prepare those meals at home for much less. You might discover you’re spending money on subscriptions you don’t use. If you only watch an hour or two of TV each night, do you need Netflix, Hulu and HBO?

There are usually many areas where you can trim your spending. Here are a few ideas:

  • Cable or the Internet. You probably don’t need hundreds of channels, and you might not need to pay for a super high Internet speed.
  • Groceries. Cutting back on meals out and buying store-brand products at the grocery store will help you cut spending when it comes to food.
  • Clothing. Fast fashion might make clothing super cheap, but if you’re spending money on things you don’t wear, it can be easy to cut back.
  • Transportation costs. If you live in a city or walkable area, try walking or biking more places rather than taking your car.
  • Cut back on some habits. Smoking, enjoying a beer or glass of wine after work and getting a daily fancy-coffee all add up. Find at least one habit you can cut back on to reduce your spending.

Look for Ways to Boost Your Income

One complaint people often have when it comes to budgeting advice is that they’ve cut back as much as they can when it comes to spending and are still having trouble making ends meet. If that describes you, it helps to look for ways to increase what you earn.

Boosting your income can include everything from asking for a raise to asking for more hours at work. If your current job can’t give you more money or time, consider taking on a part-time job or starting a freelance side gig.

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Tips for Sticking to Your Budget

Creating your budget is just the first step. The real challenge comes in actually living on it. If you’ve made a budget and find you struggle to stick to it, it might not be you that’s to blame. It might be your budget. It’s easy to go overboard when making your first budget. You want a dramatic change and a real overhaul of your money habits, but life doesn’t work that way. If you’re having trouble following your budget, re-evaluate it.

Take a look at the areas where you’re struggling in particular. Do you miss lunch out? Are you buying groceries only to order take out for dinner each day, leading to a waste of food and extra spending? If so, consider giving yourself some room for takeout at least a few times a week and lower the amount you’ve budgeted for groceries.

Another thing that can help you stick with your budget is telling others about it. If people know you’re paying off debt, saving for a big goal or otherwise trying to get your spending in check, they are less likely to regularly ask you if you want to go somewhere or order lunch out with them.

 

What to Do in a Money Emergency

Even with a budget, there might come a time when you face a money emergency. In that case, a cash loan can help tide you over and cover unexpected expenses. You can include the payment amount of the loan in your budget going forward to help you pay it off quickly.

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