Budgeting doesn’t have to be scary or difficult. It doesn’t have to be giving up all of your “fun” stuff. It doesn’t have to mean eating ramen every day. It is just a tool to help you spend your money wisely and keep you on track to your financial goals.

Why budget? Keeping track of your money helps you to know where it is going. It is only when you truly know how you are spending it that you can begin to make changes and begin to reach your financial goals.

Your financial goals can be anything from moving beyond living paycheck to paycheck, to paying off your debt, or even retiring early. Whatever your financial goals are, budgeting should be easy!

Basics of Budgeting – Track your Money

In order to start budgeting you need to start by keeping track of all of the money.

This includes all of the money you have coming into your bank account or any cash you are receiving. As well as all of the money going out including any cash spent, automatic payments paid out of your accounts and all receipts.

Step 1 Know your Income

First, add up all of the income you have coming in on a monthly basis.  In some cases, you may have to average it out if it fluctuates a bit.

If you have irregular income, such as overtime, and it doesn’t make sense to average it, then include the minimum amount you receive. That way you know your budget is safe even when you make the minimum amount and the rest will feel like a bonus!

If you occasionally receive larger amounts of money, such as bonuses or refunds, you can leave that amount out of your regular budget. You can then adjust your budget when you receive these occasional streams of income.

It is this step of knowing your income that you begin the process of knowing where your money should be going. Once you have determined your income, take the total amount and multiply this total to get the amount for each category.  Your needs should be 50% of your income, your wants should be 30% and savings should be 20%.

For example, let’s assume your monthly income is $2,500

Needs – In our example our needs would be $1,250 ($2,500 x .50).

Wants – Our wants would calculate to $750 ($2,500 x .30).

Savings or debt repayment – We would save or repay our debt in the amount of $500 ($2,500 x .2)

You will now use your income total amount to calculate your needs, wants and savings/debt repayment by multiplying it like we did in the above example. These will be the amounts you are striving for in each category. 

Step 2 Categorize Your Expenses

Next, you will be categorizing your expenses. I know it can seem overwhelming, so let’s keep it simple. Now we need to take all of our expenses and break it down into one of three categories – Needs, Wants, Saving/Debt Payments.

• Needs are payments you cannot live without. It includes things such as rent/mortgage, necessary utilities, vehicle or transportation costs, groceries, medical care, daycare costs, etc.
• Wants are things you would like to have but are things you don’t have to have to live. Examples include entertainment and social life expenses, gifts, nonessential home improvements, manicures, clothes, travel, non-grocery food and drink items, gym memberships, or hobbies.
• Savings and debt repayment could include items such as paying credit card debt, retirement savings and investing, savings to educational funds for your children, extra mortgage payment, building an emergency fund.

Breaking down your expenses can seem difficult, and it doesn’t have to be 100% accurate. However, you do need to try to be honest about the categories you are putting expenses into.

For example: electricity is a need, but cable/satellite television is a want. Purchasing a pair of pants because you have a hole in one of them (and you don’t have another in your closet to replace it with) is a need, while on the other hand purchasing a shirt just because it is super cute is a want.

Remember it’s not that you can’t have the things you want, you just need to make sure it fits into your budget. If you want new shoes because they are cute, what is something else in the wants category you would be willing to switch with it.

Step 3 Analysis Your Expenses

Then, we will need to analysis what we have calculated.  Don’t worry, this will be easy!

Compare your total income to your total expenses. If you are spending more than your total income, you will need to start by taking a hard look at your list of wants and decide where you can make changes. If your total expenses are less than your total income, fantastic!

Now compare your budget by category which you calculated in step 1 to your expenses calculated in step 2. How do they compare? Where can you make adjustments to get them more in line?

Be sure to prioritize your needs, then your savings and then follow that by your wants.  If your wants category is too high you will need to find ways to reduce it so that you are still able to meet your savings category.

One thing to remember is that it’s ok if the wants and needs are lower than those calculated in step 1, that just means you have more to put towards savings or repaying your debt. Not to mention you will meet your financial goals even quicker.

Step 4 – Set Your Budget

Now that you know how your expenses should be broken down, lets look forward to the next month or year. Will you be able to meet your financial goals? If not, what changes can you make now so your future self will want to thank you for it? If so, then it is just a matter of continuing to make budgeting easy so you will stick to it.

Making a Budgeting Can be Easy

These are just general guidelines and a basis for where you can start. In the end you will need to make the budget work for you. Be flexible, your budget is going to be constantly changing based on the money you have coming in and the expenses going out.

Remember it doesn’t have to be difficult to create a budget. This approach is simple and easy to use to get a rough amount on how you are spending your money, and will make it easier to determine where you can find some room to save more money or pay more debt. Just like any new task, as time goes on you will be more familiar with your expenses and this task will become easier. But making budgeting easy will help you reach your financial goals!

Where will your budget come in compared to your spending? What simple changes will you be making in order to reach your financial goals?