How to Create A Budget that Works for You

Today, I will be providing a simple how-to guide on how to create a simple budget. Remember, everyone's budget will look different based on how they define wants and needs. Even though it can seem tricky and time-consuming at first, budgeting is actually super easy! Continue reading below to create a budget that works for you.

What even is a budget? Before we even begin, we need to fully understand what the meaning and purpose of a budget are. Simply put, a budget is a financial plan for a certain amount of time. Typically, for individuals or families, budgets are created monthly. For large companies and corporations, budgets are typically created yearly. The purpose of a budget is to take your monthly income and assign it to different categories in your life. As I have already mentioned, everyone will have different categories and have different needs and wants, and that’s ok! No two budgets will look the same.

The 50/30/20 rule is a rule that was made popular by senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan”. This rule creates the idea that 50% of your money should go towards essentials, 30% should go towards Non-Essential things (wants), and 20% should go into savings. But what goes into each category? Let’s break it down just a little bit more. In the 50% category, you will find things such as rent, utilities, transportation, gas, and groceries. In the 30% category, there are items such as eating out, entertainment, and self-care. For the 20% category, your money will go towards debt, personal retirement plans, and your emergency fund.

Now let's get into actually creating the budget. First, you need to start by looking back at least the past three months of your earning and spending. If you use a debit or credit card, this can be pretty easy. You can simply look at the recent transactions under all of your accounts, and I find that this is especially easy on mobile apps. If you use cash for some or all of your purchases, this may demand a little more work. I like creating simple spreadsheets on excel that automatically total each category. I like to break it down (a lot) and create categories such as “clothing” and “fast food”, but obviously that isn’t necessary if you aren’t buying in those categories, or if you simply do not make as many purchases throughout the month.

Next, you need to calculate your income for the month. This is super easy if you have one job and get paid once a month, but it can get trickier if you’re like me and have two different jobs with two different pay schedules. Depending on how and when you get paid, you may want to create weekly or bi-weekly budgets. They are created in the same way that monthly budgets are created!

After your income is calculated, you need to determine how much you will have after taxes that you can actually spend. What I like to do is take my average monthly income minus my average monthly spending. The difference is what is put into savings. Seeing how much money you have left could lead you to rethink and redefine your luxuries. For some, a “luxury” may be a new pair of designer shoes, and for some, it could be a donut for breakfast. And that’s all ok! But it is super important to take a step back and to reel yourself in sometimes.

Now that you have your money divided up, it is time to use it! For your essentials category, go ahead and purchase everything you can as soon as you can. Pay your rent, buy groceries, and fill your gas tank. If you still have money left to spend, keep it in your savings until you need to withdraw it and spend it.

For your non-essentials, these purchases will be a little more random throughout the month. This can make it harder to track how much you spend. which is why I like to either a) withdraw cash in the amount that you are putting aside for non-essentials and ONLY use that cash to pay for them, or b) put that certain amount onto a debit card and only use the debit card when treating yourself with wants.

For savings, it is important to determine where you want it to go. I suggest that it goes into the three subcategories that I mentioned above (debt, retirement plan, and emergency fund (33% for each is what I do, once again it is all based on preference)). I start by funding my emergency fund. As we learned with the COVID-19 pandemic, things can happen very suddenly and change everything, but most importantly, they can change your income level. I suggest taking the total amount of your needs and multiply it by a minimum of 3 or a maximum of 12 (these numbers represent months). This will give you enough money to meet the bare minimum for however many months you choose. Next, I put another 33% of my savings category into paying back debt. The only debt that I have right now is credit card debt, and it is very low, so I may decide to put more into either my “retirement plan” or my emergency fund. Because I am only 18, I do not currently have a retirement plan. I have a general savings account, however, to which I put the remaining 33%.

Although this all could seem overwhelming at first, after you begin, it is easy to continue. Just remember, everyone's budget will be different. It can be easy to compare yourself to others and how they spend and save their money, but it is crucial to be focused on yourself and what works best for you.