Topics we discuss below
Creating a Budget
There are several schools of thought when it comes to creating a budget. One of the most popular methods is the 50/30/20 budget, which suggests you should spend around 50% on necessities, 30% on wants, and 20% towards savings and debt repayment.
Here is an example of what that might look like:
If you have not created a budget or if your old budget is a mess, this is a good place to start. As you dig into your own personal finances, you may want to make adjustments to the percentages above—and that is completely fine. Consider this method the foundation on which you customize your own plan.
As you develop your personal plan, your goal should be to shrink the "wants" bucket and increase the bucket for savings and debt repayment. You may also be able to reduce the cost of the necessities. Consider it an ongoing challenge. In fact, make it a game if you like, in which you work on saving more and spending less on a regular basis.
How people maintain a detailed budget with pen and paper is beyond me, but for years my method wasn't much better. I used an Excel spreadsheet. I would work on it for a day and have everything updated. That spreadsheet would then collect dust for weeks or even months before I opened it back up again. The spreadsheet took too much time and effort for me to be consistent with it.
Over the last few years, several companies have popped up that have developed apps that focus on streamlining the budgeting process. Budgeting apps will not only save you a tremendous amount of time, they also make it fun to keep track of your progress.
Below is a brief overview of some of the most popular budgeting tools out there.
Mint, You Need A Budget (YNAB), PocketGuard, and EveryDollar are all impressive budgeting tools that make budgeting—dare I say— enjoyable!
These apps will save you hours of combing through bank statements and recording transactions.
Each of these apps can link to your bank accounts and credit cards, categorize your expenses, and keep you on track with reminders and alerts if you overspend on a particular category.
Getting a big picture of how
much you are actually spending
on Amazon or Starbucks can be
a real eye-opener.
Any of these apps will help you
tremendously if you are not
currently maintaining a regular
budget. However, each one has
PocketGuard offers a clean user interface that helps create a personalized budget for you in an easy-to-follow step-by-step process. I also enjoyed their "In My Pocket" feature, which tackles the question, "Can I afford it?"
Here is how that number "In My Pocket" number is calculated:
Income – Bills – Savings Goal – Ongoing Spending = In My Pocket
Reviewing this number can help you to avoid impulse spending because you can see exactly how much you have left to spend.
We also very much enjoyed the You Need a Budget (YNAB) app. This app is more hands-on, as you’ll need to assign a spending category for every dollar. That is not necessarily a bad thing since it keeps you more engaged in the budgeting process.
YNAB may be a good fit for those who are more willing to dedicate regular time every week to budgeting. To help you better understand the app, YNAB offers a one-on-one conversation with a coach for 15 minutes to answer any questions you might have.
My Favorite App
I personally use the Mint app. It is hard to beat free, especially when the features are comparable to paid budgeting apps. You can link your bank account and credit cards to your Mint account, and it will automatically categorize your expenses, so you know how much you are spending on shopping, travel, entertainment, and any other categories you create. Mint has the added bonus of providing you with your Equifax credit score for free.
The most annoying part of using Mint is the ads for financial products all over the site. They're everywhere. I choose to ignore them and accept that this is the price for an impressive app that is free to use with all its features.
Another nice feature that Mint offers is notifications when you've reached your budget on a particular category. The apps will send you an email if you have gone over budget or if it detects unusual spending patterns. These alerts can be a very helpful deterrent to overspending.
The App I Cannot Recommend
The only budgeting app I have trouble recommending is EveryDollar. If you are a Dave Ramsey fan, this app follows his Baby Steps program. The app is well made, but we can’t recommend an app that costs you $130 a year to help you budget when there are free or inexpensive options available that offer more features.
EveryDollar does offer a free version, but you have to manually track each transaction, and you cannot auto-sync your bank and credit card accounts with the free version.
Whichever app you use, you will need to help the system categorize expenses in order to teach the app’s algorithms. Once an expense has been categorized, the app will remember what you have selected, and you shouldn’t have to categorize the costs from that vendor again. Vendors like Amazon and Walmart are the exception since the app will not be able to tell whether you're buying groceries, clothes, or toys. These transactions can be adjusted to different categories manually as part of your regular budget maintenance.
After setting everything up, the only time you’ll spend budgeting is checking in for either a few minutes every week or a consolidated review once a month for about 30 minutes. You'll use this time to clean up uncategorized expenses and review whether you're spending is in line with your budget, or whether you need to make adjustments.
All of the paid apps offer free trials, so feel free to experiment and pick the one that works best for you.
If you’re not comfortable linking all your accounts in one place or do not want to use an online budgeting tool, you can enter your budget into a spreadsheet or create a pen-and-paper version. The principle in any version of a budget is the same—track your income, categorize your expenses, and see where you can trim unnecessary spending.
It’s also nice to see all of your accounts in one place; you can get a true sense of your overall financial picture that way. By connecting your financial accounts, your budgeting app can calculate your net worth.
Net worth is calculated by adding up all your assets, which is anything you own of value(house, cars, cash, retirement accounts, etc.) Then add up all your liabilities, which is essentially any debt that you owe. You subtract your liabilities from your assets to figure out your net worth.
If you're just starting your personal finance journey, that number can be seriously depressing! For many of us, it might even be a negative number. When my wife and I included all of our student debt, we looked a little like Pablo below.
Although it can be painful, getting a clear picture of your current financial situation is the start of a rewarding journey towards financial freedom.
It is easy to focus on time lost and what you could have done to make your net worth higher. Brush those thoughts away! You're making changes moving forward and taking control of your finances starting today.
The Miscellaneous Category
Almost everyone has a category in their budget labeled “miscellaneous.” Even if you’re using zero-based budgeting, you will need a category like this to account for the unexpected items you’ve forgotten to budget for, like a friend’s birthday present or a spontaneous lunch date.
This category has been a black hole for us in the past, so be wary of it if you are just starting your budgeting journey. This miscellaneous monster tends to continuously grow and can take on a life of its own. If you are not careful, you can end up just tossing in all of your excessive spending into this category.
This category became the most important one for us to analyze when reviewing our budget. If your budget has very broad categories, you’re more likely to have a larger miscellaneous category.
We personally decided never to have more than a couple hundred dollars in this category. If you see considerably more spending in the miscellaneous category, consider creating a few new expense categories by breaking out the recurring expenses on their own.
For example, if you’re paying for afterschool activities for the kids and it is a considerable and recurring expense, you can create a new category labeled "child-related expenses.”
Tracking Your Progress
Creating your budget is half the battle. (Actually, it’s more like three-quarters of the battle.) Once you have a solid budget, you get to move on to the easy part—maintaining it. It usually takes 30 minutes to an hour a month to review your expenses, celebrate your wins, and identify areas for improvement.
Developing good habits takes regular practice, whether the habit is exercising regularly, focusing on a good night’s sleep, or setting up a time to review your budget. It is often difficult at first, but it does become easier over time—you might even start to like it!
Another significant advantage of utilizing a budgeting app is the reminders it provides. If you are spending too much on restaurants one month, it's very helpful to receive a reminder that you have reached your budget limit for that category before you blow through your allotted amount. As you budget from month to month, you can expect to tweak your expense categories and the amounts you allocate to each bucket.
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