May 6, 2021

How To Budget: A Monthly Budget Guide That Actually Works

How to Budget: 4 Easy Steps on How to Automate Budgeting For Beginners

 

All financial books and consultants would always say this: start a budget. The next question is, how to budget? There are age-old ways on how to budget, but you probably know them by now. With the advent of technology, you can do almost anything with just a few clicks and so does budgeting.

If you're tired of reading the same budgeting principles but not actually doing the actual budget, you came to the right place. We're here to tell you the ways on how to budget with the help of tech without losing the basic budgeting principles. Start automating your budget like a pro with these easy and helpful steps. 

 

What a Budget Does

how to budget

A budget is a financial management tool used to track spending and how much money you save (if there's any). The goal of a budget is to let your money work for you, not the other way around. Budgeting is definitely not an overnight process and making a budget is not usually taught in the four corners of the classroom. Budgeting is one of the things a person learns with planning and discipline. 

 

Why do I need to Budget: Set a Personal Financial Goal

 

If you're wondering where all your money goes, you definitely need a budget. Ask yourself first: why do I need to budget? The "why" always comes first before the "how" and it is important to know your personal financial and budgeting goals. A goal pushes someone to do better, and it always provides direction. Set a SMART goal and determine why do you need to start budgeting.

These are the three types of financial (and can also be budgeting) goals according to Financial Industry Regulatory Authority (FINRA): 

 

1. Long-term Budget Goals (more than 10 years)

These long-term financial goals are the things you set aside for retirement or mortgage. Any financial goal that would take 10 years or longer belongs to this category. Your long-term goals include smaller ones: mid-term and shorter goals. Conversely, your budget is also designed for your long-term goals or even the smaller goals. 

 

2. Mid-term Budget Goals (3 to 10 years)

Mid-term (or intermediate) financial goals have a time frame of three to ten years. These goals are often a stepping stone to a larger goal. These goals may include endeavors such as saving the premium payment for an annuity that will provide you with a lifetime income, improve your credit score, or obtain the capital to start your own business. 

 

3. Short-term  Budget Goals (less than 3 years) 

Short-term goals are more specific and smaller financial goals you aim to achieve in the immediate future. For instance, an office renovation or a trip to Japan. These narrowly focused goals contribute to your long-term goals which help you visualize more thrilling rewards. According to financial psychologist Dr. Brad Klontz, “we need to give our financial goals specific, exciting names that conjure up images and feelings that thrill us.”

 

The Hard Truth About Budgeting

Most financial advisors and budgeting books would tell you to manually track every penny you spend, but the truth is, who has all the time and patience to do this? Human as we are, we can't do the detailed "how-to budget" plan. Having a budget is good, but we often underestimate the unexpected expenses we often have. 

Sure, there are things we pay for every month, such as housing, transportation, utilities, food, and debt payments. We can't deny the fact that we have unexpected and irregular expenses such as holiday gifts, car repairs, home improvements, and vacations. 

The point is this, stop obsessing about manually tracking everything and focus on a stress-free spending plan. Manual budgeting is the thing in the past and so does the way we do budgets using the use of technology. 

 

What is a Spending Plan? 

how to budget

A simple spending plan is the easiest way to budget that helps you save money, get out of debt, pay your bills on time, and still gives you the freedom to spend money on the reasonable things you value. 

Let's face it, one of the major things we always stress about is money. Having a detailed-track-everything budget plan can be even more stressful. There's a psychology behind detailed budgeting to help us understand this statement: 

“Money (or its lack) is the nation’s most common source of stress, reports the American Psychological Association. Making a detailed budget — a widely advised fix — only makes things worse, says Cleveland financial planner Kenneth Robinson, based on a decade of work with clients; the problem is that people hate to think about where they’ll need to cut back.”

The added stress would often overwhelm us which can take a toll on our health, emotions, or even relationships. The key to budgeting is a simple spending plan. 

 

How to Budget: The Simple Spending Plan Way 

 

1. Set up an automatic spending tracking

Most financial gurus would tell you to track spending, some to the extent of tracking everything. Let’s face it, we can’t track every penny and there are times when we forget as human as we are. The good news, there’s an easy way to do to budget with the help of technology. 

The goal is to set up an electronic system that tracks spending without any tedious work from you. You can do it easily if you own a debit or credit card by using a single-card method. This one card is used for all purchases which enables you to track with the use of technology. 

Doing this eliminates the use of cash which has usually no trace except for receipts. Chances are, receipts are usually thrown away. Cash is always bound to spend anyways and minimizing the use of it, helps you spend lesser. 

 

2. Identify where your money goes

As long as we live, we will always use money, and identifying where it goes is an essential skill for surviving. We have these so-called “fixed expenses” or monthly recurring payments. 

Examples of these fixed monthly expenses we find in most budgets are the following: 

  • Rent/mortgage
  • Utilities: water, Internet, electricity
  • Loan payments (auto, student, personal, etc.)
  • Minimum credit card payments
  • Desired savings
  • Investments
  • Other debt payments

To find what’s left, just do these things: 

  • Sum up all of your fixed monthly expenses
  • Figure out your net or take-home pay per month
  • Subtract the fixed monthly expenses from the net pay

The amount is what’s left to spend, or the so-called spending allowance. This is where you can do everything with your money: dine-outs, travel, shopping, etc. Careful though, there are variable expenses we're not aware of, so it is best to be aware of what we are spending every month. 

 

What if I have no money left? 

The most common problem today is having no money left to spare. What do we do then? 

If you just recovered from a financial problem, you may have limited or no money left after everything is allocated. You may struggle to save at this point and this is only normal. However, if this is done long-term, there is something wrong. 

Chances are, you may be overspending on things like takeouts, entertainment, shopping, etc. You may want to revisit your transactions while not depriving yourself of too much. 

These are the things you can do to solve this problem: 

  • Getting a roommate
  • Earning more money, do side hustles
  • Refinance your loans or mortgage

3. Set your money on autopilot

how to budget

Putting your money on autopilot is way easier and hassle-free. Setting your money on autopilot eliminates worry and the likelihood of forgetting if the electric bill for this month is paid. 

The number one culprit of overspending is you and your discipline. Setting up auto payments or auto savings makes it easier to control spending because you only have limited money left. Doing this also avoids late payments and penalties, making you save more. 

Automating your money makes a lot of difference. There are apps and software that can help you do this such as Mint, or You Need A Budget. 

 

4. Set aside a spending allowance

Let’s go back to the spending allowance. For a recap, this is the money left after all your expenses and savings are allocated. Simply put, spending allowance is the money you are allowed to spend without worry if there is anything left for the essentials. 

From the concept of setting up automatic payments, you can see all of your spending in black and white. Everything is laid out, transparent, and you never have to worry about late payments or penalties. 

 

In Summary: How to Budget 

Okay, all of those may be too overwhelming, so here’s a summary and key concepts for you to ponder on. 

1. Manual budgets are a thing in the past.

It becomes really stressful when you don’t stick to it. The key is to set up a simple spending plan where you don’t have to worry about everything. 

2. Don’t manually track everything on your budget.

The key is to set up an automated system where everything is electronically tracked. Choose a single debit or credit card where every purchase is centralized and easily tracked. To do this, you can use your online banking transactions or a trustworthy app. 

3. Set up a realistic spending allowance.

A spending allowance is the allowable money for spending after all the necessary expenses and savings are allocated. This way you don’t have to worry about spending on unnecessary things while focusing on the essentials. 

 

The hardest step of budgeting is the adjusting phase because you are introducing new habits to your system. There may be sacrifices along the way, but always remember that everything will soon pay off.

Read more on how to budget for beginners in our other article. 

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