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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 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. Consider this method the foundation upon which you customize your own plan upon.

As you develop your personal plan, your goal should be to shrink the bucket we're calling your 'wants' and increase the size of the bucket for savings and debt repayment. You may also be able to reduce the cost of what we are calling your 'necessities'. Consider it an ongoing challenge. A game if you like, in which you work on saving more and spending less on a regular basis.

Budgeting Apps

How people maintain a detailed budget with pen and paper is beyond me. My method wasn't much better. For years 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 at a time before I opened it back up again. It took too much time and effort for me to be consistent with it.

Over the last few years, several companies have popped up that focus on streamlining the budgeting process. The budgeting apps today will not only save you a tremendous amount of time, the apps actually 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, almost fun.

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 and will help categorize your expenses. They will help 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, but each one has

unique strengths. If you are

looking for a more hands-off,

automated budgeting tool,

Mint is a good option.

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 category for every dollar. That is not necessarily a bad thing, since it will keep you more engaged in the budgeting process. This may be a good fit for those that more willing to dedicate regular time weekly 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.

The App I Can Not Recommend

The only 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 all of your transactions, and you cannot auto-sync your bank and credit card accounts with the free version.

My Favorite App

I personally use the Mint app. It is hard to beat free, especially when the features are comparable to other paid-for 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.

The most annoying part of using Mint is the advertising of financial products all over the site. It's everywhere. I choose to ignore it 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 and many of the other budgeting apps offer is notifying you when you've reached your budget on a particular category. These apps will send you an email if they see you have gone over budget or if they detect unusual spending patterns. These alerts can really be a helpful deterrent to overspending.

Getting Started

At first, you will need to help the system categorize expenses to help guide 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 recognize 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 getting everything set up, the only time you’ll spend budgeting is checking in for a few minutes every month to look at your budget and clean up uncategorized expenses. Mint has the added bonus of providing you with your Equifax credit score for free.

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.

Net Worth

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-related accounts, the app will calculate your net worth.

Net worth is calculated by adding up all your assets, which is anything you own of value. Then adding up all your liabilities, which is essentially any money that you owe. You'll subtract your assets from your liabilities to figure out your net worth.

If you're just starting your personal finance journey that number can be severely depressing! When we included all of my wife and I's student debt we looked a little like Pablo below.

Although it can be painful, it is the start of a challenging yet rewarding journey towards financial freedom. It is easy to focus on time lost. 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 random 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 seems 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. For us, this category became the most important 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 of hundred dollars in this category. If you see considerably more spending in this category, consider creating a new expense category by breaking out the recurring expense on its own. For example, if you’re paying for afterschool activities for the kids and it is a considerable and reoccurring 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—one might even say it becomes enjoyable.

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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