According to a recent survey by Debt.com, Americans are embracing budgets more and more. A staggering 80% of the respondents monitor their spending habits which is a surprising uptick from the 68% who said they manage their money with a budget two years prior.
The rise in budgeters isn’t a trend–it’s a lifestyle. It’s the key to digging yourself out of debt, going on vacations without worrying about money, and building generational wealth. For others, budgets are about saving money by telling your money where to go.
Here’s how to create a monthly budget and save money you never knew you had.
Table of Contents
What Is A Budget
A budget is a tool that tracks your income, expenses, and savings. Creating a personal budget is simple. Sit down with a pencil, paper, bank statements, and your regular bills.
You can create a budget spreadsheet in a program like Excel or download a budgeting app on your phone. Regardless of the budget template you choose to track your spending, the key to successful budgeting is consistency.
To be consistent, you need to be committed to the process of managing your money. Once you set your budgeting process, stick to it as best you can to reap the financial rewards. At the same time, make sure your budget is realistic and something you can follow without drastically changing your lifestyle all at once.
Types of Budgets
There are 3 main types of budgets: the zero-based budget, the 50/30/20 budget, and the anti-budget budget. There’s a budget to fit everyone. Try to budget to zero with the zero-based budget where your income equals your expenses.
How To Budget
1. Determine Your Financial Goals
Are you trying to pay down more debt? Are you saving for retirement? Do you want to save up for a new car or a family vacation?
It’s essential to determine your short-term and long-term financial goals before you set out to create your budget. Be specific with your goals and make them measurable. For example, if you want to pay down $10,000 of debt by the end of the year, you have to work your budget to make it happen.
If you want to have $100,000 in a retirement fund and you have 20 years to do it, that is a long-term financial goal to work to achieve
2. Calculate Net Income
Your after-tax pay is equivalent to your take-home pay. Your income will always be your starting point. An age-old saying is to ‘live within your means. These wise words say you should spend less than you are making each month. With all the expenses we have in life, this may be easier said than done. But it’s better than carrying large loads of debt that may seem impossible to pay off.
2. Make a List of All Your Expenses
These items are regularly occurring payments that are necessary for everyday life. However, some expenses are fixed every month, whereas some are variable. Fixed amounts such as rent or mortgage payments, car payments, and loans installments are much easier to keep track of. Variable expenses are more difficult to track as even your grocery bill will vary from one week to another. Other examples of variable costs would be gas and credit card payments.
One way to determine your variable expenses for the month is to list them all and calculate the monthly average over the last 12 months. Suppose you have costs that are not monthly such as car maintenance and repairs and seasonal expenses. In that case, you can add up the total amount spent the previous year and divide that amount by 12 to determine the average monthly expense.
3. Discretionary Spending
Discretionary spending is typically money used for entertainment and non-essential items. Basically, your household would be able to continue to operate without making these expenses.
Some suggest discretionary spending should not be more than five to ten percent of your income. However, it’s best to determine discretionary spending once expenses are paid, and necessary savings are set aside.
One way to budget for discretionary expenses is to list them all and then rank them in order of importance. For example, maybe there is a recreational activity your family enjoys and is a fun bonding experience for everyone. You may prioritize that cost over money for unnecessary clothing purchases or eating at restaurants.
A ranking system can help you cut the costs you determine are unnecessary.
4. Emergency Funds
An emergency fund is a separate savings account that would cover unforeseen expenses. The emergency fund account would differ from retirement savings or a vacation fund. Think more in line with your car breaking down or even losing your job. The emergency fund would help you pay your bills until you find new employment.
According to a survey from Bankrate.com, 63% of Americans don’t have enough savings to cover a $500 emergency. This is all the more reason to set aside money for a rainy day.
In terms of the size of the emergency fund, a typical rule of thumb is to save at least three to six months’ worth of your expenses. This money should be easily accessible, even if it means sitting in a low- interest-earning account so that it’s not locked in.
If you do have to dip into the emergency fund, contribute back into the account and build it up again as soon as you can.
5. Automate Your Savings
You can easily set up an automatic monthly transfer from your checking account to your savings account.
Many employers help automate retirement contributions. Reach out to your payroll or HR department at work and see if they automatically deduct pre-tax income amounts each pay period to go towards your retirement savings.
6. Track Your Progress
Give your budget at least three months and then check your progress. Here are some things to look at:
- Are you meeting your savings goals?
- Are you able to stay within your discretionary spending budget?
- Are you consistently tracking your expenses?
- Are there some spending habits you need to adjust to make this budget work?
Think about what isn’t working for you and readjust your plan if necessary. If you feel you need to change the budget, you should reduce your discretionary and variable spending before you lower your savings and miss hitting your financial goals.
Ways To Find Extra Savings
Sometimes we spend money without considering how much value we are getting out of the expense. Often the spending is automated, so we fail to evaluate the necessity of the discretionary cost. A survey of 2,000 Americans found that households spend around $7,400 over their budget every year on these kinds of expenses.
It’s never too late to evaluate your spending habits and look for budget savings. Here are some ways to save money:
1. Revisit Your Subscriptions
You may be paying fees for a regular subscription that you aren’t even using much. That could be cable television for many of us since most prefer to go online now or a gym membership that we hope will motivate us to exercise. But if you are only going a couple of times a month, you are throwing good money out the window.
2. Try a No-Spend Challenge
Some spending habits are almost second nature, so they become difficult to change. A couple of the biggest culprits are online shopping and buying coffee.
If you are an impulsive shopper and tend to spend money on things that aren’t necessary, a no-spend challenge might be something you should try.
The goal is to go without buying things that you don’t need. So brew a fresh pot of coffee at home, stay off of online shopping for a month, and see how much savings you rack up.
3. Plan Your Meals
The average American household spends around $3,000 a year dining out.
We eat out to give ourselves a break or are short on time, but the cost does add up. $3,000 would go a long way in paying down debt or going into a retirement fund annually. Even if you eat out half as much, you will still see a good amount of savings.
Meal planning isn’t complicated, especially with all of our online resources. Find the kind of recipes you and your family would enjoy that are quick and easy to make, include the ingredients in your weekly grocery list, and get ready to cook.
4. Turn Your Hobby into a Side Hustle
You may be spending money on a hobby that is a creative outlet, helps you destress, and brings you joy. If that’s the case, even if it costs money to purchase materials, you should continue with it. But have you considered selling your creations and turning your hobby into a side hustle?
A study of 2,000 adults with full-time employment found that twenty-seven percent of respondents have turned their hobby into a side business alongside their career. This extra money will not only help you fund your hobby but also give you extra cash each month to either pay down your debts or go towards your savings.
The Bottom Line: Budgeting Works
Committing to consistently tracking your expenses, living within your spending limits, and paying down debt puts you in a solid financial situation much sooner when you create a budget and stick to it.
Budgeting can help you achieve your financial goals and allow you to live life without the burden of debt weighing on you and a healthy nest egg waiting for you at retirement.
Nadia is co-creator and author of the blog This Mom is On Fire, a place where busy moms can find ideas for family meals, kids activities and tips for saving time and money, as well as relate to common experiences in motherhood. She is also a freelance writer, primarily in the areas of lifestyle and personal finance.