Budgeting can help you get one step closer to achieving long-term financial goals. Keep reading for all our tips on how to start a budget.
As of 2022, only a reported 27% of Americans adhered to a personal budget1 –– with roughly 10% of respondents saying they don’t have a budget to adhere to in the first place. While this number may be staggering, financial experts are careful to note that budgeting isn’t the only way to achieve your financial goals. However, with many Americans struggling to make ends meet and even more having a hard time getting ahead, starting a budget and sticking to it might be the only way to make these dreams a reality. If you want to know how to increase net worth, you have to start saving and setting a budget now.
But, as you’ll soon learn, there’s more to setting a personal budget than there may seem, and having a carefully considered strategy in place can be paramount in the pursuit of your short and long-term financial goals. For budgetary beginners, seasoned savers, and all those wondering how to start a budget, keep reading for tried-and-true tips from the team at Truehold.
Before exploring how to set a budget, we want to take a moment to highlight some of the common mistakes budgeters of all skill levels make. The following mistakes are far from the only mistakes budgeters make, but by recognizing even these few mistakes and how to avoid them, you can keep yourself on track toward achieving your financial goals.
You might be on your way to becoming a budgeting machine, but it’s important to recognize that you’re still human. Slip-ups are part of the process, and just because you hit a minor speed bump doesn’t mean you’re derailed entirely! Further, budgeting should be diligent, but it shouldn’t be entirely joyless –– and you can prioritize your goals while still creating room for a little fun here and there.
Flexibility also plays a role when it comes to filling up each of your spending categories. While it can feel satisfying knowing that every last cent is accounted for and doing what you need it to do, recognizing that the unexpected is exactly that, leaving a little bit of wiggle room in your budget can help you handle it.
To a budgeter, there are few greater feelings than watching your savings grow month after month. Conversely, there are few worse feelings than having to drain said savings account to pay an emergency vet bill, handle overdue car maintenance, or replace an air conditioning system in the dead of summer. For those looking to avoid the dreaded unplanned savings account drainage, an emergency fund is an absolute must. While contributing to an emergency fund may slow the rate at which your savings grows, this fund also acts as a shield between any unexpected financial curveballs and your hard-earned savings.
Additionally, it's essential to know how to access home equity during a financial emergency. How large your emergency fund will need to be will come down to your needs, but most financial experts suggest maintaining a fund large enough to cover 3-6 months of everyday living expenses.
Trickier than it seems, differentiating between wants and needs when categorizing your spending is where many novice budgeters fall short. These lines can blur quickly without a harsh line in the sand, so be sure to take a good hard look at your variable expenses and determine honestly whether they’re absolutely necessary or more closely resemble a luxury. One simple method for determining needs is the “four walls” approach, which confines needs to food, shelter, basic clothing, and necessary transportation. In other words, the four “walls” you need to live your everyday life.2
Truth be told, budgeting is both an art and a science, and doesn’t necessarily get easier the more times you’ve tried your hand at it. But where seasoned budgeters have the competitive advantage over relative newbies is in their knowledge of personal spending habits and budgetary weak points. With that said, if you’re a beginner assembling a startup budget for the first time, here’s how to set a budget designed to empower your financial goals.
Before you can set a budget, define your goals, and establish a plan of attack, you have to figure out your starting position. It’s not uncommon for many beginners to go awry at this step by looking at gross pay as opposed to net pay (your take-home, post-tax income), which can distort the full financial picture. If you’re a gig worker, freelancer, or work on full commission, do your best to budget with an average month in mind. If you receive a commission in addition to your base pay, set yourself up for success by using your base compensation as your starting figure.
Now that you’ve got a clear idea of what an average month of take-home pay looks like, you can begin lumping your monthly expenses into different categories. In line with the 50-30-20 rule, which we’ll discuss in greater detail later on, your primary spending categories should be needs, wants, and savings/debt repayment.
Living expenses like rent, utilities, and internet can all be plainly filed under “needs,” as can groceries and gas. Meals out, streaming service subscriptions, and cups of Starbucks, on the other hand, should be considered “wants.” While lunches purchased near the office may feel necessary, these semi-regular expenses are no longer needed when you have the groceries to prepare midday meals at home. This step is where a little bit of self-honesty will go a long way toward helping you achieve your financial goals.
Armed with an understanding of your income and spending habits, you can begin to see how these might align –– or conflict –– with your short and long-term financial goals. These goals can be anything you want them to be, so long as they’re realistic and attainable. When drafting short-term goals, consider the next 3-6 months of your life; compiling an emergency fund, paying off one credit card, not making late payments, etc. Long-term goals, on the other hand, should be more oriented toward major financial undertakings like retirement, paying off student debt, or saving for a home.
This step is simple: Given your monthly income and your goals, what part of your budget, if any, needs to change in order to create your desired future? Diving a bit deeper into the 50-30-20 rule, your first step is to ensure that your needs are no more than 50% of your spending, your needs no more than 30%, and your savings are seeing a monthly contribution of the remaining 20% or more. If you can, tweak your budget to stay within these guardrails. If your monthly income is the limiting factor, not your spending, take some time to explore other opportunities (and potentially money-making hobbies). Give yourself a bit of grace, and understand that you are already doing more for your budget than a good chunk of the rest of us.
Your budget might be established, but it will never be “done.” Why? Because your expenses, your income, and your goals will all likely change as time goes on –– and you’ll need to revisit your existing budget categories when they do.
Perhaps one of the most popular budgeting methods, the 50-30-20 rule divides your post-tax income into needs, wants, and savings contributions/debt repayment, respectively. Compared to other budgeting strategies, the 50-30-20 rule’s emphasis on debt repayment and savings makes it the go-to choice for many Americans looking to get ahead and get out from underneath personal debt.
In addition to “four walls” expenses like rent and utilities, minimum payments for debts are categorized as a need. At the same time, practitioners of this budget are also encouraged to make additional payments to the loan’s principal under the savings category. While this may be an aggressive approach, choosing to follow it diligently can fast-track your goal timelines, expedite debt repayment, and create added flexibility in other spending categories. With that said, it’s far from the only option for budgets, and those with limited resources might consider a more manageable approach.
Given the financial struggles many people around the world are facing with inflation, it should be no surprise that 63% of Americans live paycheck to paycheck.3 If you’re like many wondering how to set a budget on a limited income, know that it’s entirely possible and that your goals might be closer than you think.
One of the best strategies for budgeting with limited resources is the zero-based spending approach. Simply put, zero-based spending is where your income minus your expenses is a zero-sum. Like the above budgeting steps, start by accurately listing your income, and precisely accounting for your expenses. Whereas the 50-30-20 rule relies on having 20% of your income apply directly to savings, the added flexibility of a zero-sum budget means you can chip away at your goals at your pace. If you have an extra $100 left in your budget at the end of the month, you can apply this directly to your savings or see how it might be able to help you reduce your credit card balance and lower your monthly interest payment — thus creating more room in your budget in subsequent months. When it comes to stretching your dollar as far as you can toward reaching your financial goals, it’s all about doing the most you can with what works for you.
If you’re wondering how to start a budget, the 50-30-20 rule and zero-sum budgeting strategy are both excellent options –– but there are several other common strategies to consider which can help you accomplish your short and long-term financial goals. Note: These budgeting approaches can pair with the above strategies or with each other to create the perfect method for you.
This budgeting strategy is proof that some seemingly old-school budgeting strategies can be every bit as effective today. But in a time when few carry cash, and even fewer pay their bills with the stuff, the envelope approach to budgeting has undergone a bit of a refresh. Here’s how it works: You create envelopes (real or imagined) for your spending categories, taking care to be as specific as possible. On these envelopes, you write the amount in each budget, “adding” items to the budget as the month goes on until you reach your budget and the envelope is “full.” While there are studies that have linked the use of cash to reduced spending habits, this strategy can be every bit as effective (and probably more so) by using an Excel sheet or other modern tools at your disposal.
A bit less rigid than some of the budgeting strategies we’ve discussed, the priority-based budget (or “values-based budget”) acknowledges the fact that you’re a human who earns your money and that deserves to find some enjoyment in it. After determining their income, practitioners of this budgeting method start by making a priority list in descending level of importance. Shelter and food will likely be at the top, with gym memberships and movie tickets somewhere in the middle, and splurge-worthy candles near the bottom. Then, budgeters determine the cost of each priority. If the total cost of these priorities exceeds income, it’s back to the drawing board to see what priorities need to be shifted. While this budget isn’t for everyone, it can be an innovative alternative to some of the more by-the-book methods listed above.
AKA the non-budget. This strategy is almost too simple: With your net monthly earnings, you pay yourself (your savings, 401k, Roth IRA, etc.) the amount necessary to remain on track toward your short and long-term financial goals. From there, the remaining income can be applied wherever you please. Seriously, that’s it. Truthfully, most budgeters will likely avoid this strategy like the plague due to its utter lack of guidelines. However, we’re certain that those who can afford the leniency and are prioritizing savings above all else will find this strategy to be at least a little useful.
While you’re setting yourself up for success by strictly adhering to one of the above budgets, we understand that there may be elements of these options that are appealing and others that contradict your goals. For that reason, the best budget for you may be the one that you tailor specifically to your needs. Let’s say your savings and Roth IRA contributions are of utmost importance, but you still need the structure that something like the envelope method can provide. In this case, your perfect budgeting strategy might be one that combines the savings-heavy aspect of the “pay yourself first” budget with the compartmentalized brilliance of the envelope method. The budget you can stick to, accomplish goals with, and achieve your dreams through is the one that’s best for you.
When it comes to how to start a budget, there’s clearly no right answer. Ultimately, how you decide to set a budget will come down to your family financial planning, goals, your finances, your habits, and your dedication. But no matter which of the above pathways you choose –– or which elements of these budgeting strategies you choose to combine –– simply having a budgeting strategy in place can be a huge step toward accomplishing your short and long-term financial goals.
For more tips on setting (and achieving) financial goals and other valuable resources from the Truehold team, visit our personal finance article library.
Sources:
1. CNBC. 73% of People Don’t Follow a Budget.
https://www.cnbc.com/2022/04/29/its-ok-to-not-follow-a-budget-says-a-financial-therapist.html
2. DoughRoller. How to Create a Bare Bones Budget.
https://www.doughroller.net/personal-finance/budgeting/how-to-create-a-bare-bones-budget/
3. CNBC. More Americans Live Paycheck to Paycheck as Inflation Outpaces Income.
Chat with a real person & get an offer for your home within 48 hours.
Call (314) 353-9757
