The B word can be terrifying. Budgeting, that is. The idea of allocating where to spend and save money, and sticking to those terms is so overwhelming, that so many just skip the process altogether. My first budgeting strategy out of college, for example, was to spend all of my money on rent, and then use whatever was leftover on food, drinks and the occasional vintage sweater. Needless to say, that is a terrible strategy. Not only is saving for long-term and short-term goals important to your financial future, but creating a budget and planning ahead can help you cut costs, manage your income and better cover surprise expenses when they come up.
Budgeting also makes us feel better in control of our finances, which, for two thirds of millennials, causes stress and anxiety. Personal finance isn’t just numbers — it’s personal — it’s how you live your life, make decisions and treat yourself and others around you.
“The number one benefit of having a budget is the peace of mind factor,” says Keri Danielski, consumer expert for Turbo and Mint. “Having a budget and being able to see where you stand financially whenever you need to will give you a sense of relief. You’re able to take away the unknowing when you have a budget and saving accordingly.”
The first steps to creating a personal budget
Before you decide where your money should, or could go, you’ll want to establish your needs and your wants. “Needs are anything crucial for your day-to-day life and financial well-being. Think food, rent or mortgage and debt repayment or other bills, like water and electricity. These should always be factored into your budget,” says Danielski. “But it’s important to budget for [wants] too, because they can add up pretty quickly!”
The 50/20/30 Rule
So how much should you spend on each category? Look to the 50/20/30 rule, popularized in Senator Elizabeth Warren’s personal finance book All Your Worth: The Ultimate Lifetime Money Plan. The Rule: 50% of your income should go to essentials (or needs), 20% into savings and 30% to wants, like celebrating friends’ birthdays, gym memberships, wardrobe, etc. If your needs are more than half of your income, try and see where you can cut costs, if possible.
To start out, Danielski recommends starting with a weekly budget, “So you can get used to the limitations you’ve set for yourself and can adjust accordingly while still managing to live within your means.” She recommends using the Mint app makes it easy to track spending within various categories like Bills & Utilities, Food & Dining, Personal Care and Health & Fitness. “The app can help you visualize exactly where every dollar is going, remind you of bills and goals, and warn you when you’ve overspent in a category,” she says. Other free apps, like You Need A Budget (YNAB) can also help you track and manage daily spend, and several banking apps categorize where your money goes, to help you see if you’re breaking the 50/20/30 goals. Developing your own spreadsheet to track all of your purchases can also help you feel accountable for all your spending and saving.
SMART Goals & Evolving Personal Budgets
Danielski also recommends setting achievable savings goals following the SMART schematic: Specific, measurable, attainable, relevant and timely. “Instead of saying, ‘This year, I want to save more,’ try, ‘I want to have $1,000 saved for an emergency fund by December 31st.’ Make your goals actionable and also within your means,” she says.
Your budget can also be an evolving rule, not set permanently for any period of time. “Consider re-assessing your budget monthly to get a pulse on how well you’ve been sticking to it and account for any upcoming life events, like traveling or changing jobs,” Danielski says. “If you notice you’re consistently over-spending in one category and under-spending in another, even out your budget to make it more achievable.” She recommends setting time aside each month to reassess your budget
“Planning a budget is a critical step in maximizing your financial health,” Danielski says. “Sticking to the plan will help you get the most out of your income and give you peace of mind that every dollar in your checking account is going to a specific purpose.”