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Budgeting can be intimidating for even the most financially savvy people, but with the proper guidance, it doesn’t have to be! This Ultimate Budgeting Guide for 2023 is designed to make personal finance manageable and approachable, no matter your experience level.
With this guide, you will get a comprehensive look at how to budget money from start to finish and discover how easy it can be to take control of your finances.
What is a Budget, Really?
At its core, budgeting is simply creating a plan to manage money efficiently and effectively. It provides visibility into where your money is going and what it’s used for, allowing you to make educated decisions about current and future financial choices.
Your budget should consider income sources and recurring expenses, such as rent or mortgage payments, utility bills, food shopping, debt payments, and more.
It also includes optional expenses like entertainment or travel that may not happen every month but are still essential for life. Budgets should also include an emergency fund that helps cushion against unexpected costs or an economic downturn.
Why Budget in the First Place?
For many of us, budgeting can be a daunting task—let alone one that’s necessary!
But here are just some of the reasons why building a budget is worth making an effort:
1) A well-crafted budget helps you stay organized by providing clarity on your monthly income sources and expenses.
2) By tracking your spending habits, you will gain insight into where you are overspending or what areas could use improvement.
3) Planning ahead means having peace of mind, and financial independence is shown to be potentially very good for mental health.
The Core Concepts:
Income, Expenses, and Investment
When developing a budget, there are three key concepts to consider: income sources (wages earned from employment), expenses (mortgage/rent payments), and investments (stocks/bonds).
When determining your income levels—including passive streams like investments—you should consider short-term goals like daily necessities and long-term objectives such as saving up for retirement.
Too often, we need to pay more attention to how much money goes out versus what comes in each month which can cause an imbalance in our finances over time if not accounted for appropriately in our budgets.
When we think about investment, always consider the long-term. Watching your balance grow is exciting, but you shouldn’t consider it available cash until you are much closer to retirement or if you have built a portfolio explicitly for income purposes.
Establishing a Plan
Establishing a budget plan starts with setting financial goals for yourself for the current year. This could mean cutting down spending, paying off debt, or building up your emergency fund.
By setting these realistic and achievable goals, you can better understand where to allocate your money to achieve them. It may help to keep track of your budget through a spreadsheet or personal finance app.
That way, you can see exactly how much progress you’re making toward each goal and adjust accordingly when needed.
Track Your Spending and Income
Once you set some financial goals for yourself, you must track your total income and spending throughout the year. The first step is to get a better understanding as to where your money is going each month.
Print out the last three months of bank account and credit card statements. Write down exactly how much you’re spending each month for different spending categories (examples below).
Once you start to track spending, you may be surprised how much of your personal budget is going to some categories.
Create a budget that details your net income along with all monthly expenses. This includes bills, groceries, entertainment, and any savings contributions you make. Some examples of your monthly expenses include:
Rent / mortgage payment
Utilities (power, gas, water)
Health insurance / medical bills
Car maintenance / gas
Dining / restaurants
Travel / vacations
Saving for a down payment on a car or home
*An easy way to do this is with an app that helps you categorize purchases automatically, so you don’t have to enter data every time you spend money manually.
Fixed Expenses vs Variable Expenses
You may notice that some of these monthly expenses are necessary, or fixed expenses, while others may fluctuate depending on whether you use them or not or variable expenses.
Fixed expenses are an essential part of budgeting and staying financially stable. These fixed expenses remain the same each month, like rent or mortgage payments, health insurance, student loan payments, car payments and car maintenance bills.
While these fixed expenses can put a strain on your budget and take up a large portion of your income, they provide stability as you know exactly what these bills will cost each month. To optimize them, make sure to shop around for the best rates when possible and consider refinancing or consolidating your loans if applicable.
This is also a good time to decide which fixed expenses are necessary. Do you really NEED Netflix, HBOMax, and Hulu? Perhaps you’re paying monthly for a gym membership that you haven’t been using.
Variable expenses can also have an impact on your budget. These include groceries, dining out, filling up your gas tank, and other miscellaneous items. As these costs tend to fluctuate from month to month, it’s important to keep track of them so that you don’t overspend more than what is allocated in your budget.
Strategies for managing variable expenses include making a list before you go grocery shopping and cutting back on food delivery services. if you find yourself spending too much on them monthly.
It’s also important to leverage coupon codes or discounts when available and set aside some additional funds for unexpected costs that may come up throughout the year.
Automate Your Savings and Investments
An essential part of budgeting is automating your savings and investments, so they happen without fail each month or week.
This will enable you to reach your financial goals faster than if they weren’t automated as part of your routine – plus, it removes the temptation of using any extra funds on non-essential items!
One example would be setting aside 10% from your net income every paycheck into a separate savings account or investing platform with low fees.
Larger companies like Vanguard offer these services at competitive rates for those who want more control over their investments (and less stress).
Utilize Budgeting Apps or Software
Budgeting apps and software help users efficiently map their spending habits and manage their finances more efficiently.
These apps often come with built-in calculators which allow users to input variables like monthly after tax income (net income), expenses, savings rate, etc., to gain insight into how these variables affect their overall budget plan; this feature also helps identify potential areas of improvement that could save money over time.
There are several popular budgeting apps available for your phone. Below are a few fan favorites featured in the above video:
- Mint: The #1 most downloaded budgeting app (free)
- EveryDollar: Dave Ramsey’s budgeting app offers a free trial, then $79.99/annually
- NerdWallet: Created by NerdWallet, the #1 personal finance site (free)
- YNAB (You Need a Budget):Highly rated application. $8.95/month with the annual plan
If you’d rather not use an app, some prefer to track everything in Microsoft Excel or Google Sheets. These are all convenient tools that you can start using today!
Research Ways to Reduce Expenses
One of the most effective ways to start budgeting is by researching and comparing ways to reduce expenses. This can be especially helpful for those working with limited resources or just starting in their financial journey. Here are a few tips on how to get started:
Compare Costs of Necessary Items: Before making any purchases, it’s important to compare costs among various vendors or websites. This can help you find the best deal possible on the items you need.
Consider Subscription or Membership Discounts: Many companies offer discounts for memberships and subscriptions, which can be a great way to save money in the long run. Check out clubs like Costco or Sam’s Club for bulk pricing options.
Take Advantage of Free Online Resources: Many free online resources provide tips on budgeting, saving money, and managing debt.
Eliminate Unnecessary Purchases: This can be a tough one, but when creating your budgeting plan, it’s essential to identify areas where you may be spending too much money – such as eating out too often, buying unnecessary items, or spending too much on entertainment – and find ways to trim back those expenses accordingly.
Now that we have a handle on today and yesterday, let’s look forward.
To plan ahead, it’s essential to have a solid understanding of your current financial situation and goals and then use that information to create a budgeting plan for the future. Here are some tips for getting started with this process:
Create an Emergency Fund
No guide on “how to budget money” is complete without a plan for unexpected expenses.
An emergency fund can quickly provide you with the cash needed to cope with unexpected financial surprises, such as job loss, medical expenses, or other unplanned events.
When creating your emergency fund, consider keeping at least three months of living expenses in liquid investments—cash or cash equivalents—in a separate account like a high-yield savings account, so it’s accessible when needed.
What is your net income? Review your total monthly after tax income and use that as reference. Your goal should be to save (at least) three times this amount of money in your emergency fund.
Plan for Taxes
Taxes often come as an unwelcome surprise when you file every year. To avoid unnecessary stress, it’s essential to plan ahead and find ways to save money on taxes throughout the year.
*Check with your accountant or tax advisor to determine what deductions you may qualify for and what strategies you can use to minimize your tax burden.
Take Advantage of Employer-Sponsored Benefits
Employer-sponsored benefits provide additional protection for employees beyond salary and health insurance coverage alone.
Investigate health insurance options, evaluate retirement savings plans, and look into professional development programs offered by your employer, all of which can help maximize your financial security now and in the long run.
● Investigate Health Insurance Options: Health care is essential to any budget planning process because it provides peace of mind knowing that you are covered if something happens unexpectedly.
● Evaluate Retirement Savings Plan Options: Retirement planning should be taken seriously; start early and stay on track! Consider enrolling in a 401k plan put forth by your employer if one is available; this allows you to contribute pre-tax dollars towards retirement savings that grow without being taxed until withdrawal.
● Look Into Professional Development Programs: Review any professional development offerings from employers since many employers offer tuition reimbursement programs and special networking events explicitly tailored towards helping employees build their careers within their organization!
Debt and Credit
Debt and credit scores are often daunting, but managing them is essential for financial health. It’s important to be aware of both, as they can affect your ability to access loans, mortgages, and other forms of credit.
Keep Track of Your Credit Score and Debt Payments
Your credit score is a significant number to keep an eye on as it reflects your reliability when making payments on time. The higher the number, the better your chances of getting approved for loans or credit cards with lower interest rates. Here are some ways to stay on top of your credit score:
Request your free credit report from AnnualCreditReport.com.
Monitor Changes in Government Regulations
Government regulations may affect your finances. For example, suppose a new law makes it difficult or impossible for certain people with low incomes or bad credit scores to get approved for loans. In that case, this could have severe repercussions for those already struggling with debt repayment.
Utilize Financial Advisors if Needed
If you’re having difficulty understanding what’s happening with your debt or credit score, consider working with a financial advisor who can provide guidance and advice tailored specifically to your situation. They can help you create a personalized plan that fits within your budget while helping you reduce debt faster.
Create a Debt Repayment Plan
If you have high-interest debt and want to pay it off, one strategy that might be helpful is creating a debt repayment plan. This involves listing all your debts, their balances, interest rates, and due dates.
Once you have these details in front of you, begin to prioritize your debts based on the total amount owed or the interest rate associated with the debt.
Then decide how much money can realistically be allocated toward repaying those debts each month and create an action plan for yourself that outlines the payments you need to make each month or quarter.
Research Promotions or Discounts from Banks or Online Lenders:
Many banks and online lenders offer promotions such as intro APR periods or special discounts for new customers taking out loans.
Shopping around for different lenders is always intelligent when taking out a loan since various financial institutions offer different incentives and benefits for borrowers depending on their needs.
Saving and Investing Strategies
Income and expenses account for our day-to-day personal budget while saving and investing is integral to long-term financial planning. Investing enables you to accumulate assets for the future and is a great way to build wealth over time.
Consider Investing in Stocks, Bonds, or Mutual Funds
Investing can be a great tool to build wealth over time and is an integral part of budgeting for the future.
Stocks represent ownership shares in publicly traded companies and have the potential to grow in value as the company performs better.
Bonds represent loans made to companies or governments, usually with a fixed interest rate, while mutual funds are bundles of investments packaged together by asset managers.
All three of these options provide different risks and rewards, so it’s essential to research each and understand their individual benefits before investing any money.
Related: How to Invest in Stocks - Beginner's Guide
Take Advantage of Automated Investment Services
Thanks to technological advancements, it’s now easier than ever before for individuals to invest on their own.
Automated investment services make it simple for even novice investors who don’t have much knowledge about stocks or bonds to participate in the stock market.
These platforms allow you to set up your own account to manage your investments without paying hefty broker fees or speaking with a financial advisor.
You can customize your portfolio based on your goals and preferences. You can set up a direct deposit to have funds automatically transferred into a savings or investment account each month.
Some automated services offer options such as tax-advantaged retirement accounts or socially responsible investing portfolios!
Related: Robo-Advisor vs Financial Advisor - Which is Better?
Minimize Fees by Utilizing Low-Cost Investment Platforms
Fees are one of the most overlooked aspects of investing, but they can add up quickly if not managed properly.
Fortunately, there are plenty of low-cost investment options available on automated services which will help reduce costs significantly compared with traditional brokers who charge hefty commissions for trades executed through them.
Where should you open an investment account?
E*Trade is a popular investment platform that’s easy to create an account and get started today.
Get Ahead with the 50/30/20 Rule
The 50/30/20 Rule is a budgeting strategy that helps you manage your money and reign in on your monthly expenses. This rule divides your net income into three categories – 50% for essential living expenses, 30% for discretionary spending, and 20% for savings.
This strategy can help you save money while still allowing you to enjoy life. It also encourages you to prioritize saving money to reach your long-term financial goals.
How to Implement the 50/30/20 Rule in Your Budget
One of the main benefits of budgeting with the 50/30/20 Rule is that it gives you an easy way to track your spending and savings. When you plan out how much money should go into each category, it's easier to track where your money is going and how much you are saving each month.
Plus, having specific percentages assigned to each category helps ensure that all areas of your finances are taken care of. If something unexpected comes up, such as an emergency expense or a large purchase, it's easier to make adjustments because the percentages have already been set in place.
Tips for Sticking to a Budget Using the 50/30/20 Rule
Implementing the 50/30/20 Rule in your budget can be simple but requires careful planning and tracking. To start, figure out what percentage of your monthly income should go into each category using the guidelines outlined above.
Then, create a budget spreadsheet or use a personal finance app to track every dollar earned and spent throughout the month so that you know how close you are to hitting each goal. Be sure to factor in any bills or other fixed costs so that they don't come as a surprise later on when creating your budget.
Benefits of Budgeting with the 50/30/20 Rule
Once you have created a budget with the 50/30/20 Rule, sticking to it may seem like a challenge, but there are several tips for staying on track with your finances. Start by setting realistic goals and regularly evaluating those goals against actual results so that any discrepancies can be addressed swiftly before they become larger issues down the road.
Additionally, focusing on one small victory at a time rather than trying to accomplish everything at once can make it easier to stay motivated throughout the process of achieving financial freedom with this strategy.
Alternatives to the 50/30/20 Rule
The 50/30/20 Rule isn't suitable for everyone as some people may need more flexibility in their budgets due to lower incomes or higher fixed costs such as childcare expenses or student loan payments.
In these cases, alternatives such as the 80/10/10 rule (where 10% goes toward short-term savings) may be more suitable depending on one's individual needs and lifestyle choices since this approach allows greater flexibility in terms of spending priorities while still encouraging saving for both long-term and short-term goals alike.
How to Utilize The 50/30/20 budgeting rule
Utilizing the 50/30/20 Rule is straightforward but requires discipline if it will work properly for individuals seeking financial stability over time. To start, begin by calculating monthly income after taxes, then assigning percentages according to specific categories like necessities, discretionary spending, and savings.
Track expenditures regularly within one’s budget, ideally using tools like spreadsheets or software applications that provide detailed insights about where funds are allocated. Finally, remember not all strategies will work perfectly for everyone — consider alternative solutions if needed based on individual circumstances.
Understanding how much money you have coming in each month versus how much is going out allows for better planning so that bills are paid on time; this not only helps avoid unnecessary late fees but also gives peace of mind knowing exactly where your money is going at all times.
Create a personal or household budget based on your after tax income and follow some of the savings tips and strategies provided in this guide. Budget regularly to stay on top of your habits, and cut back in areas you’re overspending.
Remember, creating a budget (and sticking to it) provides more control over cash flow, making it easier to adjust if necessary, without fear of overextending beyond comfort levels or running out of money unexpectedly.