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Ultimate Budgeting Guide

Finding someone who truly enjoys budgeting – and sticking to it – is a bit like finding someone who truly enjoys eating handfuls of hot chili peppers or jumping into quicksand. There are probably some folks out there who do enjoy such things, but it’s safe to say the clear majority do not.

While budgeting itself can be a challenge, it can also be very rewarding. Budgets can not only help with saving money for a sought-after purchase like a car or home, but can also help you prepare for an unexpected expense in life, like emergency medical expenses, or a home or auto repair.

Why Should I Plan a Budget?

In simple terms, the purpose of a budget is to keep track of what dollars come in and where those dollars go out to[1]. This can help you control and keep tabs on your financial health and ensure you have enough money saved up for the things you need. Ideally, your budget should allocate your money in a way that not only leaves a bit of breathing room, but also allows for savings that can grow over time. You may be able to do this even if you’re operating on an irregular budget.

For many, setting up a budget is the most overwhelming aspect of budgeting, even more so than sticking to a budget. Not knowing where to begin, what to include, how to calculate, and how to update a budget are common reasons that cause many who start a budget to abandon it – or not even start to plan a budget in the first place.

But like quitting smoking or going on a diet, establishing a plan and sticking to it is the tried and true way of successfully achieving financial goals[2].

An added benefit of having a planned budget is the reassurance that comes with it. Knowing how much money you have, where it’s going and what you’re doing with it can help you sleep at night.

Many people don’t think to put together a budget until after they’ve already gotten to a place where their bills and spending exceed their income, but it’s never too early to start. Budgeting can be a critical first step to getting back onto financial safe ground. It’s also a great tool for effectively achieving your financial goals, whatever they may be.

With a specific and encouraging financial goal in mind, it will likely become easier for you to follow the steps that an effective budget requires. Examples of common financial goals include:

  • living on your own for the first time
  • paying down student loans
  • planning for a wedding or putting aside money for something fun like a vacation or a new gadget

If you are having a child, you should definitely consider setting up a budget because it will help you to understand your costs over time and how best to manage them.

Different Types of Budgeting Methods

Choosing and maintaining a budget that works for you is a matter of personal preference. Here are a few examples of different types of budgets.

Model #1: Envelope Budgeting

The lesser-known envelope budget system, or the budget envelopes method, is a good budget method for those who do best with physical cash on hand. It’s no secret that today’s world flat-out encourages us to use as many credit cards as possible. Envelope budgeting is the exact opposite: it forces you to use only what’s been put in the envelope for your expenses – and nothing more. It’s a simple but effective way to budget your money and save cash!

Want to learn more about how credit cards work and how using them may affect you? Check out our article on things you need to know about credit cards and how they differ from installment loans!


empty envelope and pencil

So, how does envelope budgeting work?

First, you separate your budget into categories such as rent/mortgage, mobile phone, car/transit, groceries, saving, entertainment, emergency fund, and so on[3].

Next, you assign a reasonable amount of money for each category. Rent is straightforward as it’s typically the same amount each month, but groceries, meals out, laundry, parking, pet bills, and many other expenses may require more thought. You can estimate the cost of feeding the guinea pig or taking public transportation by reviewing your balance sheet and identifying how much you spent in previous months.

As the name “envelope budgeting” suggests, each category of expenses gets its own envelope and you can label each envelop with what it’s for in marker[4]. You can separate your cash into the budget envelopes based on the amount you’ve allocated for each category. Since few people carry physical cash these days, you can be flexible in terms of how you track and spend what is in each envelope – with rent for example, you can write down the amount on a piece of paper or print out the corresponding debit statement from your bank account, staple them together and place them in the envelope. Do the same for your car payment or insurance.

The key here is to set a reasonable amount of cash for each category and stick to the plan. So, if your budget includes $20 a month for coffee, when that $20 is gone – no more coffee.

A tip: track how much you take out of each envelope and what you spent it on by writing it down on the actual envelope. This way you can go back to your envelopes at the end of each month and see how much you spent on the things you budgeted for.

Another tip: create goal-oriented envelopes. Most financial planners and personal finance writers will say “savings” is the ideal envelope to put any excess cash into, though depending on your goals, there is no harm in creating a “vacation” envelope or “new puppy” envelope.

Resist the temptation to empty the envelope for a reason other than what is written on it. Done correctly and consistently, you should be able to cover off all your monthly costs and expenses without having to dip into other envelopes or your personal savings. If you can stick to this plan, then you can stick to a budget, and you may just find that budget enveloping is the perfect budgeting strategy for you – helping you to efficiently save money in the long run.

Model #2: The Five-Point Plan

The five-point plan is exactly what it sounds like: five key steps to creating a budget that you can stick to, and that produces results. While often an eye-opening exercise for most, the true purpose of the five-point plan isn’t to highlight how much more you are spending than you should be, it’s to understand where the money is going and to prepare a plan to manage it.

person on laptop

Here are the five points:

1. Go through your banking statements and/or online banking and create a balance sheet

First of all, do you get monthly bank statements in your mailbox and/or sent to your email? If so, it’s time to start looking at them.

Take some time to go over your bank statement and make a list of your expenses as well as the money you earn. The whole point of this is to see where your money is being spent.

Next, separate your expenses into categories and create a ‘balance sheet’ where you write out what you’ve been spending on each category. Budgeting is all about balance. No one is expecting you to starve yourself or stop driving to work, but there may be ways to trim some of your costs, such as cutting back to one coffee a day or brown-bagging your lunch a few days a week.

2. Take a good look at your spending

Go over your balance sheet thoroughly and separate all your expenses into necessary and unnecessary costs. This is a particularly hard task for most (is getting a haircut a necessity?) but again, the purpose is to show you what you are spending your money on, and how to control it in such a way that it doesn’t overwhelm you. Separate your needs from your wants by writing out two lists to split up your expenses. Needs are things like rent, utilities and transportation, while wants can be anything from buying new clothes to eating out or taking vacations. Wants are basically anything you don’t absolutely need.

3. Trim the fat

If you are to effectively stick to a budget, begin considering which wants to cut out of your monthly spending. Are you using that gym membership? Are you ordering take-out several times a week? Are you able to afford paying for all these things on your tight budget? Be honest with yourself about the items you are willing to part ways with and try to go a month without them, just to see how it feels and to gauge the difficulty of doing so. You may just find that life is perfectly fine without some of the nonessentials and you may decide to go without a few of your wants for good, helping to save more money in the long run.

4. Set a daily and weekly spending limit for your budget

Once you’ve assessed what nonessentials you can cut out of your planned budget, set a realistic limit for how much you will spend each week, and further break it down into how much you can spend each day. This will help you catch where you’ve been unable to stick to your budget and may help you resist the urges to splurge at the grocery store when you’ve already spent your daily budget’s limit. There’s no harm in trying different systems for this. If a daily budget is too hard to manage, then opt for a weekly budget so that you have more leeway – you can eat out one night but pack lunch the following day to make up for that extra money spent. Again, it’s all about balance. Everyone in the household can be given their own spending limits to stay in line – as long as everyone can stick to a budget that you have prepared, then it needn’t matter if the budget is daily, weekly or bi-weekly, as long as it works well and is manageable. After all, there is little value in a strict and tight budget if it cannot be followed properly.

5. Circle back to your balance sheet and compare

Find out what works for you and what doesn’t. If you have found that making a lunch each day proved to be too difficult or time-consuming, opt to put a limit on the amount you spend on lunch each day instead. Or if you really miss the weekly drink out with a friend – add another bagged lunch to compensate. The key here is to visualize where your money is going and set goals as to when and where you may be able to control some of your spending.

budget and calculator

Model #3: The Percentage Budget

For those who find dollars and cents, spreadsheets and lists more than a bit daunting, the percentage budget can be an effective budget option[1].

Simply put, a percentage budget works by assigning a percentage of your income to savings and the remainder to spending. For example, each month’s income could be divided by putting 20% to savings and 80% to spending. This is one of the simplest versions of the percentage budget.

You can further add detail to your percentage budgeting plan by assigning percentages to different specific spending categories: like 35% to housing, 15% to transportation, 20% to food, and so on. You can adjust the percentages for future months if you find yourself needing more money in one category over another.

Consider Making S.M.A.R.T. Goals

The smart goals budget is another approach to managing your money effectively. It’s about basing your finances around your goals. “Smart” in this instance is actually an acronym that stands for:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time-based

This type of budget is particularly effective because your goals act as your motivation to save money.

For example, if you are plagued with debt (be it from school, buying a home or just daily expenses), you may prefer a budget that focuses directly on paying off that debt.

If debt repayment is your primary goal, the first step is to ‘take stock’ of your debts, which entails laying out all debts by writing them in a list, organized, for example, from highest annual percentage rate (APR) to lowest. This is because generally speaking, if you repay your most expensive debts first, in totality, you should end up paying less money than if you repay less costly debts first.

If you are lucky enough to be debt free, focus on another goal that motivates you. Are you saving for a home? Do you have a child on the way? Are you hoping to travel soon? Whatever it may be, make sure you make it a priority.

Whatever your specific goals are, make sure to frame them in a way that aligns with the five components of a “Smart” goal. By following this framework, you can give yourself a more realistic shot at achieving your goals.

What Happens When your Planned Budget or Budgeting Strategy Fails?

Roads are generally paved with the best of intentions, but potholes are an unavoidable part of life. So, what happens if your budgeting doesn’t go as planned and you break your budget?

First and foremost, don’t panic. It’s important to understand that you’re not going to be a budget expert right from the get-go, and while it gets easier with time, budgeting can still be a difficult process at the start. Small improvements and changes to how you spend your money are still wins – and they may still be helping you to save more money.

If you’re having trouble with following a certain part of your budget, the best thing you can do is figure out why and tackle the issue head-on. For example, if you’re using the envelope budget and you have found that you were unable to stick to the designated amounts, then think about what the extra money was spent on and the reasons behind it. Maybe that month was particularly busy with birthday parties or other social events. If this is the case, then your budgeting may not be the problem.

Second, remember that for everyone, life is full of surprises. Your budget should include an emergency fund that you contribute to regularly. Having an emergency fund will help you stay on track and stick to your budget even when there’s a surprise expense.

Considering starting an emergency fund? Check out our article on how to best prepare for financial emergencies before they happen!

The key thing to remember is that budgeting is a bit like dieting: one slip-up does not mean that it’s time to give up.

If you are having difficulty sticking to your budget, you may need to try something new. For example, if you find you can’t meet your original food budget, ask your mom for some family recipes you love and make a batch of food that you won’t mind eating for lunch a couple of days that week.

Either way, don’t be afraid to adjust your budget to fit your lifestyle – and don’t give up after just one month of trying. Instead of thinking of budgeting as a means of helping you to save money, make it a part of your lifestyle. Not only does budgeting help you save money, it also helps you be prepared for the unexpected. While no one can plan for absolutely everything, having a budget and sticking to it can make unexpected emergencies much easier to deal with. 

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