How To Budget Money: Tips For Creating A Financial Plan That Works

Creating a budget can benefit anyone, but it’s also something that can look different depending on your financial situation and goals. One thing’s for certain: No matter how much money you make, you must learn to budget to keep your finances in check. In this article, we’ll explain how to budget money wisely so that you can preserve and grow your wealth.

Why Is Budgeting Important?

A budget is a financial plan that helps you manage your income and expenses. It involves estimating how much money you have coming in each month and how much you’ll spend on various costs such as rent, groceries and other bills. By ensuring your expenses don’t exceed your income, you can prevent overspending, reduce debt, save for the future, and ultimately become more financially stable.

How To Make A Budget

Now that you know what a budget is, let’s explore how to make one.

When thinking of how to budget money, you might consider methods that involve carefully assessing your income and spending habits. The idea of sticking to a monthly budget is simple in theory but often harder in practice. The key, though, is to live within your means, save money when possible, and look for ways to cut spending.

Examine Your Monthly Income

The first step to creating a budget is determining your net monthly income—the amount you take home after taxes and deductions. This can include money from a primary job, side hustles, rental property, alimony, and other income sources.

Once you know how much money is coming in, you can better allocate it.

Categorize And Track Your Expenses

Whether you have a budget yet or not, you likely already regularly spend money on various things. Tracking and categorizing these expenses is the next step to creating a budget.

Some basic spending categories include:

• Needs: These are living expenses such as rent, utilities, groceries, health care, clothing and transportation. 
• Wants: These are unnecessary items such as entertainment, dining out, vacations, and subscriptions.
• Goals: These are financial objectives like building an emergency fund, saving for retirement, or setting aside money for a new home or car.

Audit Yourself

Once you’ve established your monthly income and expenses, conduct a self-audit. This involves thoroughly examining your spending habits to identify areas for improvement. For example, you may need to cut spending in certain areas or add income to maintain a balanced budget.

An audit can help you:

• Determine where you can reduce spending. For instance, you may be able to cancel unused subscriptions, dine out less, or find cheaper alternatives for certain expenses.
• Reevaluate your needs. Life changes, such as a child moving out of the house or getting a new job, may call for adjusting your budget.
• Ensure accuracy. An audit can help prevent errors that could lead to overdrafts, missed payments, or incorrect budgeting.
• Track progress toward goals. Regularly reviewing your budget can reveal your progress toward financial goals, such as saving for a down payment on a house, paying off debt, or building an emergency fund.
• Lower financial stress. Knowing where you stand financially can give you a sense of control that can help reduce anxiety and stress.
• Strengthen financial discipline. Audits can encourage financial discipline by keeping you accountable and focused on sticking to your budget.

Budget For Variable Expenses

Unlike fixed expenses, variable expenses vary from month to month. They could include gift purchases, dining out, seasonal increases in utility costs, car maintenance, and medical bills.

To budget for such costs, you might set up a savings account dedicated to them. Then whenever the account gets low, you can replenish it to ensure you maintain sufficient funds to pay for variable expenses.

Opt For Sustainability

Instead of seeing your budget as a quick fix to your finances, create one that you can sustain over the long term. That way, you’re more likely to stick to it.

For example, a budget shouldn’t be too restrictive. It should still allow for spending on wants such as dining out and going to the movies. Just give yourself a realistic budget for these items and try not to go over.

5 Types Of Budget Plans

For the best chance of success, choose a budgeting method that suits your financial situation and preferences. Fortunately, there are many to choose from:

1. The 50/30/20 Rule

The 50/30/20 rule divides your income into three categories:

• 50% for necessities: rent, groceries, utilities, clothing, health care, transportation, etc.
• 30% for discretionary spending: entertainment, dining out, vacations, hobbies, etc.
• 20% for savings and debt repayment: emergency fund, retirement, car debt, etc.

By keeping to this ratio, you can avoid spending too heavily in one area at the expense of another and set yourself up for financial stability.

2. The Envelope System Of Cash Stuffing

The envelope system — also called cash stuffing — involves labeling envelopes with different spending categories. At the start of each month, you place the budgeted amount for each category in the designated envelope in cash. By spending only from this cash, you’re forced to stay within budget. If you choose to go over in one area, you must draw on funds from another.

Cash stuffing can be effective for beginners because it’s relatively straightforward. However, withdrawing and using cash for everything can be cumbersome and harder to track.

3. A Budgeting App

These days, there are many budgeting apps that can help you stay on top of your finances. For example, the Rocket Money^SM app can integrate with your bank accounts to automatically track your spending, net worth, and overall financial health.

By letting a budgeting app do the heavy lifting of creating and tracking your budget, you can devote more time and attention to other priorities.

4. Automated Finances

Consider automating your finances. This involves putting certain tasks — such as deposits, bill payments, savings, and investment contributions — on autopilot. For example, many financial platforms let you transfer funds at regular intervals, so you don’t have to do it manually.

Putting your finances on autopilot can not only save you time and effort but help you stick to your financial goals, such as setting aside money for savings, retirement, or debt repayments.

5. A Budget Spreadsheet

A spreadsheet is another easy way to set up and track your budget. Start with one of many templates available online, but be sure to tailor it to your needs and circumstances. For example, you may need to update the spending categories, tax assumptions, or savings goals.

The Bottom Line: Knowing How To Budget Money Will Help You Reach Your Financial Goals

Keeping a budget is the foundation of financial success. However, it can be easier said than done. That’s why it helps to use a budgeting tool like the Rocket Money app. Download it today to put your budgeting on autopilot and move closer toward your financial goals!