For just about everyone who is serious about their financial health, creating a good budget and sticking to it is a must. If nothing else, we can all agree that good budgeting tools and habits can help us reach our financial goals faster. Now, everyone has different expenses and sources of income, so every budget will be different. The trick is to find the best system that works for you, and one that isn’t so complicated or tedious that you have a hard time keeping up with it. Learning how to budget doesn’t need to be a crazy process. As with most things in personal finance, it’s best to just keep it simple.
Let’s Talk About Financial Goals
No matter the current state of your personal finances, you always need good financial goals to work towards. Good, specific goals make it easier to get where you want to be and help you keep moving forward. As you knock out one goal, it’s important to set another so that you can keep your momentum going. Now, you probably have a lot on your plate and think your long-term goals are miles away, but you may be surprised. It’s easy to underestimate how much you can accomplish over a few years!
Using The SMART System To Set Good Financial Goals
Let’s keep this simple. After all, it’s not a complicated concept. A financial goal is simply any goal you’ve set that helps you with saving, making, or investing money. These goals are usually influenced by what stage of your life you’re currently in. Events like marriage or having kids can completely change the goals you have!
A good financial goal is generally one that follows the SMART goal setting system – and one that is actually realistic for you to achieve. I’m sure you’ve probably heard of SMART goals before. After all, it is a system that has been proven to work well. For those of you who don’t know, SMART goals are Specific, Measurable, Attainable, Relevant, and Time-Bound. So, you may already know your main overarching goal or long-term dream that you want to see come true. That’s good! However, now it’s time to set serious short-term goals that will help you reach whatever end result it is that you’re looking for.
It’s clearly important to aim high and do your best, but don’t set goals that you have absolutely no hope of achieving. For example, if you make $3,000 per month, don’t make a goal to save $2,900 per month. On the opposite end of the spectrum, don’t make your goals frivolous and easy. Saving $30 per month out of $3,000 isn’t generally something to write home about.
Long-Term Financial Goals
These goals are your main driving force. They’re essentially where you want to end up or what you want to have at the end of your financial journey (or much closer to the end). For example, being set up for your retirement may be a good long-term goal. On the shorter side, long-term goals are probably several years out. On the longer side, these goals could be a decade (or decades) away. Remember, even though it will be a while before you achieve them, use the SMART goal system to help you set them. Long-term goals help you set other goals, and making them detailed is a great way to create a good roadmap to where you want to be.
Medium-Term Financial Goals
With your medium-term goals, aim for achievements that you should be able to reach within 1-3 years. They may seem like they’ll take forever to reach at times, but you can still see them on the horizon. Good examples include saving up for a large purchase, starting an emergency fund, and getting a promotion or raise.
Short-Term Financial Goals
Short-term financial goals should be achievable relatively fast. It may take a month to get them done, or as much as a year. Either way, it’s something you’re actively working towards and should be able to accomplish soon. It could be something like creating a budget or cutting certain expenses.
Track Your Goals
Below, you’ll see a spreadsheet I made for setting your financial goals. If you want to use it, save the image below or sign up for my newsletter and I’ll send out a free copy in my welcome email! As a bonus, the welcome email even includes a budgeting template. If you don’t like this pre-made sheet, I encourage you to make your own or customize it in the way that best suits you. If you don’t want to use a tracker, no worries – use whatever system that helps you stay on top of your goals.
Ideas To Keep In Mind For Your Financial Goals
There are many good goals you can aspire to reach. I’ll list just a few here to help you start brainstorming.
Debt
Eliminating pesky, high-interest debt is one of the best uses of your money. Think of it this way, eliminating debt is a guaranteed return. As a general rule of thumb, I consider anything with an interest rate over 5% too high and an absolute emergency to take care of. Some people may disagree with that, but that’s my personal line. Avoid taking on new debt (which is part of what emergency funds are for) and tackle your existing debt with the best method that works for you.
To be frank, the biggest caveat here is that you need to stay disciplined and be consistent to eliminate all of your debt. It probably will take a good deal of time, so don’t expect overnight success. Take your small victories and eagerly wait for the day when all of your major debt is gone!
Investing
If you want to actually retire at some point, then you need to set minimum retirement investment goals and start reaching them every month. The best way to get started with this is by taking advantage of tax-advantaged retirement accounts. For example, a 401(k) is a great start. There is a cap on how much you can contribute annually, but usually your focus is simply on reaching the amount your employer will match.
In a traditional 401(k), your contributions are deducted from your taxable income. This means that your contributions are made tax-free, but you will have to pay tax on them when you withdraw them in retirement. This can be a good thing since a lot of people will be in a lower bracket when they retire. However, it is always unknown how policies and taxes will change in the future, so you can never be completely sure how it will turn out.
An IRA is another type of tax-advantaged investment account. There is a cap on how much you can contribute annually, which you’ll ideally reach. Roth IRAs use contributions that have already been taxed. While that seems unfortunate now, it does mean you won’t have to pay taxes on them later on, which could turn out in your favor (but it could also work against you too). The main issue for Roth IRAs is that they have an income cap, so once you make over a certain amount of money you can’t contribute to it anymore and you’ll have to use a traditional IRA.
Living With Less Than You Make
I understand that it can seem like a daunting task at first, but cutting your spending and creating a budget isn’t that hard – especially if you keep it simple. The main thing you need to focus on is spending less than you make. Once you have that down, everything else will become much easier! So, if you don’t already have a budget, get to it.
Emergency Funds
I’m a huge advocate for emergency funds. Start off by setting a deadline to save 1 month worth of your household expenses. Then save up 3 months worth of expenses. Keep doing that until you have at least 6 months worth of expenses saved up. If you have a volatile career or business, you may even decide to save up more than that. For the best results, put your emergency fund in a high-yield savings account, like the one Axos has.
Building Credit
Good credit scores can help you get bigger loans with lower interest rates. It is nothing but a boon for your finances, and it isn’t particularly hard to maintain a good credit score. As long as you practice normal, healthy financial habits, then you should be set. If you want more information on how to start building credit, then continue progressing through this set of articles!
Budgeting Needs To Be Framed With Goals In Mind
I didn’t start covering financial goals before going over budgeting for no reason. You don’t have to identify the specifics of every single goal first, but it’s imperative that you go into budgeting with some of your main financial goals already decided and in mind. Having that in your back pocket makes creating a budget suited for your needs much easier!
It’s Time To Think About Your Budgeting Needs
Now that we went over how you can craft good financial goals, let’s break down how you can create the perfect budget for your needs with those goals in mind.
Keep The Budgeting Process Simple
We already know – for everyone who is serious about their financial health, sticking to a good budget is mandatory. If nothing else, I’m sure you’ve heard that. Don’t let the process scare you and deter you from getting started. Budgeting seems scarier than it actually is, so just do your best and run with it. Sometimes personal finance is just a learning process, and that’s okay!
At the end of the day, all a budget does is basically determine where you’re putting your money each month. By monitoring what you have going out and what you have coming in, you’re able to run a tighter ship and save a lot more money. You’d be surprised how much money you can spend when you’re not paying close attention.
Here’s A Free Budgeting Template
Below you can see a picture of my free budget template! It has everything you need in order to get started. All you have to decide is how much you want to allocate to different categories each month. Of course, I highly recommend you use it, but you should also tweak it to perfectly meet your needs. As I said before, if you want to get a free copy, sign up for my newsletter and we’ll send out the budgeting template and a financial goals worksheet for free!
Budgeting Apps
Before we get into some of the nitty gritty details of budgeting, I’ll mention a few of the best apps that you can use to help you budget, save money, or track expenses.
Acorns
For new or low-income investors and savers, I think Acorns is one of the best options on the market. Acorns offers a service that makes it easier than ever to start saving and investing. These days there really are few excuses for not getting your finances in order – you don’t need to be a finance “whiz” to get the ball rolling. Unfortunately, most people still don’t have enough saved up for an emergency!
If any of this resonates with you, I think Acorns could be helpful. However, if you’re at the stage where you routinely save and invest already, and you are exploring new investment options, I’m not sure Acorns would be a good choice for your current situation. The seeds being planted here grow more into good habits rather than the ideal investment portfolio or amount (although it is a great start).
If you’re interested, go to their site and check them out. Right now they are running a promotion where you get $10 when you make your first investment!
Personal Capital
A tool that makes managing your finances really easy is Personal Capital. You can read my review of it here if you’re interested. The short story is this, it has some nice features that do cost money, but it also provides a plethora of financial tools for free. So, you can create an account and link your banks and investment accounts to manage it all out of this one platform (yes, for free).
Spreadsheets – Specifically, Excel
Well, it’s no secret that I love spreadsheets. You can see the budgeting template I use above. During my monthly review, I will make a note of all my expenses. This keeps it all in one place so that I can keep track of it with ease. It works wonders for me, personally. If you want to keep it simple and don’t need the extra tools, just using a spreadsheet is fine as well!
Common Starting Points And Styles When Budgeting – Try Them And Pick One To Run With
Let’s discuss some of the best starting points you can use to help build your budget. Some are better than others, but some are easier to understand and successfully create a budget with. Find one that sounds good to you and try using it as a basis for your budget. Remember, you can always adjust your budget and deviate from it if you find out that your starting point wasn’t the best one for your needs.
50/30/20 Budgeting
The 50/30/20 rule doesn’t work for everyone. I’m not sure I’d even recommend it as the ideal budgeting tactic. However, it may work for you and it can be a great place to start from. If you don’t know what it is, it’s actually pretty simple. You spend 50% of your net income on your needs – things like food and shelter. You spend 30% on your wants, like subscription services. Last, but not least, you put 20% away towards your investments.
It’s not the perfect budget. It isn’t as aggressive as I’d like, and the distribution may not work for a lot of households. That being said, it is definitely something to jump off from, and it gives you a good minimum amount to start investing to set you on the path towards financial independence.
Zero-Based Budgeting
One system I’m a fan of is zero-based budgeting. With it you’re basically making sure that every single dollar you bring in has a specific function. That helps give a much more detailed focus on what you’re using all of your money for. All of your money will be assigned to mandatory expenses, discretionary spending, savings, investments, and debt repayment. In short, your income minus your expenses (including investments) should always be zero. If that sounds complicated or daunting, then zero-based budgeting may not be for you. If you like the sound of an even more structured approach to budgeting, I’d give it a try.
The Envelope Method
This method is a little bit different, but it works for people who need a more concrete, physical budgeting system. You’ll have to create a list of your expenses and how much you’re willing to spend on them, and then put that amount in an envelope labeled for the corresponding category. By doing this it can be easier to see and understand all the money you’re spending. If you don’t want to do this with your entire budget, you could always do it with any expense you have a problem controlling.
Values-Based Budgeting
Values-based budgeting is all about focusing on what’s important to you. Create a list of expenses and then re-order them according to what items are the most important to you. By doing this, it can help show where you’re over or underspending.
Paying Yourself First
This is similar to zero-based budgeting – in a way. You focus on your mandatory expenses, savings, and investments. So, you’ll figure out how much you need to invest to reach your goals and immediately deposit that. After that you’ll look at how much you need to save and set that aside.
Once that is done, you can focus on the essentials of daily life – housing, food, and everything like that. With whatever is left, you can do as you will. I recommend investing more, but if there is little left over it’s perfectly find to spend some on yourself. If you stretch yourself too thin you’ll end up cracking and find yourself unable to stick to the budget. I like this method, but it only works when you’re realistic with what you can do.
Finishing Up Your Budget Is Easy
Okay, now that you’ve made all these fundamental decisions and know the direction you want to go, the rest falls into place more easily.
1. Calculate Your Net Income
If your only source of income is a standard 9-5 job, from which you receive a paycheck (with taxes already deducted), your monthly income is just going to be the sum of that. Generally, this is referred to as net income or take-home pay. For those who don’t know, your gross income is how much you make before taxes. For the purposes of budgeting, net income is definitely the metric you want to use.
If you have multiple different sources of income it may be a bit harder to calculate what you net. If your income is a little sporadic, I would recommend taking a 3-6 month average. You may not like the sound of that idea, in which case you can go with an estimation – but try to steer closer to the lower side of what you can expect to make. It is better to be safe than sorry after all!
2. Look At Your Mandatory Expenses And Check What You Can Reduce
Unlike your net income, if you have to estimate an expense I recommend erring on the side of higher costs to be safer. Of course, if your expenses are more static then that won’t be an issue. It’s crucial to make sure you cut expenses if you need to. A lot of people can cut a significant part of their budget by focusing on housing, transportation, and food costs. In other words, don’t buy more house than you can afford, purchase used cars instead of new, and eat out less if you need to save money.
Factor In Irregular Expenses
Remember to factor in the expenses you may not have every single month. If you’re not sure what those may be, then think along the lines of annual fees, taxes, car registrations, maintenance, trash & recycling services, or any other infrequent expenses. Some people budget for them specifically in the month during which they usually occur. I prefer to estimate my irregular expenses for the year and divide by 12 so I can set aside money for them every single month.
3. Identify Discretionary Or “Fun” Spending
This generally includes things like entertainment, coffee or tea, subscription boxes, streaming services, gym memberships, gifts, dining out, vices, clothes, and other miscellaneous costs.
If you need to cut spending, this category often has smaller expenses that are easy to eliminate – just make sure that in your quest for financial security you don’t forget to enjoy the little things.
4. Solidify Your Budget
Hopefully you’ve reached this point and found that your income is far greater than your expenses. In that case, great, read on after this step! However, if your expenses are greater than your income, you have a couple of options to try.
- Start by budgeting in your minimum saving and investing goals. This way you can look at the rest of your expenses and go through them, one by one, determining what you need to drop in order to reach those goals.
- Cut one of the 3 major expense categories. Again, those are your housing, transportation, and food expenses. If you live in more house than you can afford, move. If you have an expensive car, get a used vehicle (it can save a fortune), and if you dine out frequently then try cooking at home more often. Just taking the time to cut one of those three can give you huge savings each month.
5. Adjust Over The First Few Months
Budgeting may require some time to get it set up perfectly. Monitor it closely for a few months, adjust as you need to, and then get more hands-off as you begin to feel comfortable. Eventually, you should fall into a fairly simple pattern of spending that makes it easy in the long run (despite the initial headaches). Remember, in order to keep it simple, when you make more money simply add it to how much you’re investing each month. Just because your income increases doesn’t mean you should spend more!
Set Aside Time To Review
At least once per month, set aside time to review your expenses and budget. This will ensure that your budget is working for you and that you aren’t spending too much in any specific category.
Don’t Increase Your Budget With Raises – Just With Major Life Events
As I said, refrain from increasing your spending with your income. However, when major life events happen then it’s natural for your budget to change. If you’re getting married, moving, having a baby, or undergoing any other major lifestyle change, make sure you reevaluate your budget and keep it in line with your goals.
Minimalism And Frugal Living
Minimalist lifestyles are good for curbing excessive spending and unnecessary luxuries. There are so many things that our society encourages and says will make you happy, but it rarely does. Minimalism is about cutting out what you don’t need – and removing a lot of headache in the process.
In my experience, when it comes to “things” less is definitely more (assuming your needs are met), so stop forcing yourself to buy what you don’t need or want. If you’re not a huge fan of cars, don’t spend your life savings on a car. Likewise, if you’re not a fan of watches, don’t buy expensive watches. Focus on what actually makes you happy. More often than not, you’ll find that most people are happier when they spend money on experiences (like travel) rather than luxury items like cars and watches.
What’s The Point Of Cutting Costs?
The main point is simple – to take control of your life, focus on what you truly want, and be able to obtain financial security. If you skip all the excess spending, you’ll find it’s a lot easier to accomplish your goals. If, even while leading a minimalist lifestyle, you still have issues, it’s important to focus on increasing your income as well.
Minimalism Is About Having More Of The Important Stuff And Less Of The Rest
For a lot of people, minimalism is the key to financial freedom. That may sound extreme, like I’m exaggerating, but minimalism can help you live a relatively frugal lifestyle without forcing yourself to feel like you’re cutting corners to save money. Minimalism avoids the pressure that others – like family or society in general – put on you to buy certain things, to meet the norm or achieve a certain “status” in a specific social circle. Want financial freedom? Stop letting other people influence how you spend your money.
Basically, you can save money, get serious about starting to invest, and meet your financial goals, while still getting the primary things you want. Minimalism essentially means that you buy what you need, but requires that you only buy what you TRULY want. You can spend money on experiences to expand your horizons, or even buy those nice shoes or that watch you want. The key is to avoid buying what other people expect you too, or things you don’t really want. If you’ll get tired of it after a few weeks, for example, it definitely won’t fit the minimalist lifestyle.
Quality Over Quantity
This is one of the key aspects of minimalism. Drop the quantity. The average consumer doesn’t need what they buy, and they usually don’t really want it. Perhaps they want it in the moment, and buying it makes them happy, but that joy dies off fast. Minimalism is about dropping the things that aren’t serious concerns or wants for you, so that you can spend more on the things you truly care about.
This translates more to just wants and hobbies though. The classic example is work boots. If you buy a $50 pair of boots, that will almost certainly wear out within a year of serious work. However, if you buy a good pair of boots for $200, then you’ll have a set that could last you many years – even a decade. A good pair of work boots is more expensive up front, but it’s cheaper over the long haul. Plus, you get a more comfortable boot the entire time! That’s just one example, but that’s the general appeal of minimalism. There will be less, but what you have will be much better and higher quality compared to what you would get otherwise.
Don’t Beat Yourself Up If You Make A Mistake
The minimalist lifestyle, in an ideal world, is perfectly maintainable. However, sometimes people fall on hard times, or go too far with the frugal aspect of minimalism. When that happens, sometimes they crack and fall off the wagon. Minimalists are only human after all, so they make mistakes too.
Enjoy Life – Don’t Be Too Restrictive With Your Budgeting Practices
It’s a bit of a truism, but if you can’t enjoy the journey, you probably won’t be happy when you reach the destination. Always make sure you’re doing what you need to enjoy your life now. It’s good to plan and use your money wisely, but it’s just as important to make sure you’re actually happy. If you’re in a tight spot, try making a list of everything you’re thankful for and focus on those things rather than what you think you’re missing.
Conclusion
Hopefully this article gave you the fundamentals you need to start making a budget and reach some of your initial financial goals. If you have any questions, or want to share some tips, be sure to leave a comment.
