How to Set Up a Budget
It’s important to have a good budget that will help keep your finances in check. The right budget doesn’t just help you know where your money is going, it helps you identify flaws in your spending habits and ultimately allows you to be more efficient with money, while possibly having fun.
It isn’t easy to create a good budget, but in this article, we’ll be covering the basics and a few tips that will get you on the right track. Keep in mind, everyone has their own style, and what looks great for some people can be extremely impractical for others. Moreover, there are various types of budgets, so we’re just looking at a few general guidelines.
Before setting up a budget
Before we start, it is important to understand your financial behavior first, in order to set up short and long-term goals. These goals will allow you to determine what subcategories will be included in your budget. For example, if you want to reduce your yearly expenses in the office, an “office” category won’t cut it, it will need to be divided into various subcategories.
People use various budgeting systems and it is up to you to determine which one fits your style:
- Pen and paper – This is certainly the most straightforward way of setting up a budget, but it is somewhat risky, as misplacing a notebook, for example, can be disastrous. On the other hand, this is a great way to backup a budget you created somewhere else.
- Spreadsheets – Spreadsheets are, to my knowledge, the most common way of setting up a budget, as they can not only do a lot of math for you, they are also fairly safe, especially if you make backup of your files regularly. The most common spreadsheet software is Microsoft’s Excel, but Google Docs and Open Office are great free alternatives.
- Desktop Software – Desktop software is a somewhat recent alternative to spreadsheets. These programs don’t just do the math for you; they create charts and, in some cases, even give you recommendations that will help you notice small details. Most are paid programs that will need you to link your bank and investment accounts in order to give you proper recommendations. Mint is an excellent example.
- Smartphone Apps – There are smartphone apps for most desktop software programs, but there are also free apps that can do what the paid ones do, and a lot more. A great advantage apps have is allowing you to keep track of income and expenses on the go. Again, you might have to provide more information than what you are comfortable with. Money Lover, Wally+, and Toshi Finance are worth mentioning.
Creating categories & subcategories
As said above, it’s important to have short and long-term goals. According to some experts, a budget should be divided into three main categories: income, fixed expenses (housing, gas, healthcare, etc.), and variable expenses (gifts, car maintenance, etc.)
Each one of these will have its own subcategories. These are usually very basic and should be adapted according to your goals. Following the “office” example given above, I could add the following subcategories: office supplies, hardware, software, decorations, and so on.
This type of division can be done with any budget, and will certainly help you see where you can save. Personally, I believe it is always better to make money than to save money, as there is only so much you can save, and there are virtually no limits to what you can make, so try to split your income into subcategories as well.
If you use desktop or smartphone programs, you might find out that these already have a few subcategories to help you out. Always adapt these and use descriptions that are as specific as possible. Here’s a small example of what a spreadsheet budget would look like for an individual. [“*” is used to mark specific subcategories].
In the example, the individual has $80 to spare at the end of the month. However, it is clear he can reduce entertainment expenses.
Finally, here are a few tips that can help you be more efficient and make the best out of your budget:
1. Keep track of every cent
Always keep track of everything. You will always remember how much you earn, but it’s hard to remember small expenses that, at the end of the month, may represent a decent chunk of your money. Smartphone apps make it easy to register every expense, so we’d advise you to at least use a program that will allow you to take notes on the go. Google Keep and Evernote are pretty reliable.
2. Build a safety net
You probably noticed the example above treats savings as a fixed expense. That is because they should be treated as such, in order to help build a safety net in case anything happens. According to experts, your safety net should be the equivalent of 6 months’ living expenses and should be built with whatever you can. Even $10 a month help.
3. Keep working on your budget
A good budget is going to have to be updated on a daily basis, and should be analyzed at the end of every month. Using a small amount of time looking at the data is going to help you know where you should cut expenses, and allow you to know how you can improve your budget so it fits your goals and needs.
4. Investing as a fixed expense
You can also add a subcategory called “Investing” as a fixed expense where you put 1% to 10% of your monthly salary in an index fund. Index funds are always the safest bet when starting to invest your money. Call it an expense and let the money grow by itself. Only withdraw when you really need the money.
Do you have a budget or will you create one? Leave a comment below.