Setting up a perfect budget system can feel as daunting as starting a new diet or exercise routine – there are so many different options (that people swear by) and no guarantee it will even work in the long run. So where to even get started?
Although the good old trial-and-error method can be good for some things in life, when it comes to your budget, you want to put yourself in the best position possible to succeed. After all, this is your hard-earned money we’re talking about and you’re in control of what that looks like. So, instead of blindly testing out different budgeting systems to find what works or doesn’t work for you, follow the below steps to help you proactively choose the best fit for you and your situation.
Step 1: Conduct a (Personal) Financial Audit: no, not the scary kind. The informative kind. This takes some self-reflection and planning to identify your current situation and future goals. It should take inventory of your financial health, including:
- Debt: take note of all your debts, including credit cards, student loans, mortgage, etc. As you’re going through this exercise, it can be helpful to also capture your rate, loan term and any other payoff details to have it easily referenceable in one central place.
- Income: what’s your take home pay? Also write down any supplemental income or side hustles that may add to your income.
- Savings: write down what you have in your savings account. This should also include what you have set aside for an emergency fund, which some suggest should equal 3-6 months of your living expenses.
- Retirement: what are you currently contributing to retirement? Are you taking advantage of any employer match? If you haven’t already, now may be a good time to talk to an expert about whether you’re on the right track with your contributions.
- Credit Score: it’s important to keep a pulse on your credit score, especially since this is such a big factor in any future loans you may need. Remember, you can pull a free credit report each year from the three credit reporting agencies or your bank should have this information available for you. Write your score down for future reference.
- Goals: did you fall short on any of the above categories? If so, then this may be a financial goal. Whether that is paying off debt by a certain year, retiring at a certain age or saving up for a certain down payment or family goal, write down and prioritize what financial success means to you.
Note you haven’t gone through your expense list yet. This will be part of the budgeting system you land on, so for now, keep your planning to a higher level before getting into the nitty gritty of your spending habits.
Step 2: (Realistically) Allocate Your Budget Time: unlike a lot of tasks in life, you get to decide how much or how little time you’d like to allocate to your budgeting activities. For some, a very hands-on approach tracking every dollar is necessary to hold yourself accountable and feel in control of the entire financial picture. For others, a tool or app could be the driving force behind tracking financial activity and keeping it all organized. If you don’t feel you have enough time to manually track your budget, then this may be a sign to find an online tool to support you.
Also think through how often you should check in on yourself, and your budget. Depending on your financial goals and the budget system you go with, this could range from weekly, monthly or even quarterly.
Remember, you aren’t getting graded on your budget system – this is entirely to set you up for success. So, choose what works best for you and be willing to adapt as you go to keep on track.
Step 3: Research and Compare Your Options: now that you have an idea of your financial health, where you want to go with it and how much time you’re willing to spend on it, you can now start to narrow down the different budget systems. There are countless ways you can go about creating and managing your budget, but to get you started, here are a few common ones:I
- If you’re more of a guidelines-type, rather than a formal structure-type person… try the 50/30/20 rule. This guideline splits your money into 3 categories: 50% goes to necessities (think: rent, groceries, internet, etc), 30% to wants (think: bar tab, exercise class, shopping) and 20% to savings and debt repayments. Of course these numbers can shuffle a bit, but this gives a general rule of thumb on how your income can be broken down to support your overall financial health.
- If you’re a little bit old school and have difficulty reeling in that spending… try the envelope system. This one has been around a long time and is great for the very hands-on-type person who needs that extra structure to stay on track. This system requires setting aside cash every month for each category of spending (such as groceries, shopping, lunch, entertainment, etc). You’ll stuff the envelope with the cash you have available to spend. When the envelope runs out, no more spending.
- If you’re living a digital life and are comfortable leveraging online tools… try a personal finance software app or program. This allows you to automatically track your spending, categorize it and even connect your accounts to schedule automatic payments. The key here is to find the right tool that you feel most comfortable using to enhance your budget management. Ensure you set it up to fit your needs so it’s relevant for your particular budget and situation.
With so many options out there, it’s common to feel stuck and avoid finding a budget system at all. Although there’s no perfect recipe for success, it is a very important facet of your life which takes a conscious effort to build, manage and maintain. Luckily you’re the judge to decide if it works or not, and can adapt as your needs evolve over time. The key is to just get started so you can later reap the benefits of effective budgeting.