When people say the word “budget”, it usually conjures up images of spreadsheets and envelopes filled with cash, maybe even arguments or waiting until payday to get gas. However, if you want a budget that actually works, you need to design with your lifestyle and priorities in mind. The best kind of budget is the one you can actually stick to. It should provide freedom, not restriction.
The 50/30/20 Budget Method
If you have never made a budget before, the 50/30/20 method is a great place to start. Here is how it works:
50% of your earnings go to needs, including:
Housing
Utilities
Transportation
Food
30% of your earnings go to wants, including:
Entertainment
Eating out
Hobbies
Subscriptions
20% of your earnings go to savings and debt, including:
Retirement accounts (401k, IRA, HSA)
Long-term savings (emergency fund, vacation fund)
Short-term savings (sinking funds, upcoming expenses)
While basic, the 50/30/20 budget can help give newcomers easy guidelines to start tracking spending and see where changes may need to be made.
The Zero-Based Budget
For those who want to track every dollar and get a handle on their personal financial trends, the zero-based budget is incredibly helpful. The goal with this budget is that every single dollar has to be spent somewhere. At the end of the month, you should have zero dollars left over. This method can feel intimidating if you’ve never had a budget, but it gets easier over time as you get to know your spending habits.
Here’s how to create a zero-based budget:
Start with a spreadsheet or tracking sheet and enter every single expense category for the previous month. For example, if you are starting to create a May budget, use your April expenses as a guideline.
Add any additional categories that were not accounted for. This applies to costs that are not monthly like annual insurance premiums, medical bills, car maintenance, etc.
Subtract all your expenses from your income. If there is any amount remaining, re-work your budget and assign each dollar a spending category.
At the end of the month, gather your bank and credit card statements to reconcile your budget. If you overspent or underspent in a category, make adjustments for the next month's budget.
How To Stick To A Budget
Spending according to your budget can be the most challenging part of the process. Make sure when you are creating a budget, you include things you enjoy doing. If you frequently use meal delivery services like Doordash, but recognize that it’s expensive and want to cut back. Don’t go from eating out 7 days a week to expecting yourself to cook every single night - that’s setting yourself up for disaster. Be realistic and realize that changing bad spending habits takes time. Also, have a reason why you want to stick to your budget. Are you saving for a big trip or trying to pay off debt?
If you have a goal in mind, it can be easier to stick to your budget on hard days when you are craving the dopamine from emotional spending.