Although it may seem like common practice for adults to create a household budget, just 35 percent of people are active budgeters who follow a strict budget and don’t regularly overspend, according to a recent Willis Tower Watson survey.
“A budget that provides for regular saving and investing will pave the way for life’s rough patches and significant expenses,” according to Warren Ward, certified financial planner and founder of WWA Planning & Investments.
Ward describes budgeting as the “most important thing someone can do.” However, a budget will only be effective if you can live by it, which is easier said than done. Find out how you can create a successful budget for your lifestyle.
How to make a budget that works for you
If you want to make a budget you can actually stick to, here are five key budgeting tips you should follow.
1. Before you make a budget, track your spending
When you make a budget, you’re not making a wish list. You’re creating a document you can follow. This means it needs to be realistic based on what you’re currently spending. U.S. News & World Report recommends tracking your expenses for at least 30 days before trying to make a budget.
After all, if you don’t know what you’re currently spending, then you’ll just be making a bunch of guesses and likely set unrealistic goals. For example, if you’re spending $600 a month on food right now, budgeting $100 a month is setting yourself up to fail.
Tracking your spending for a month will give you a framework to make a budget that works for your lifestyle. If you find you’re spending too much on a particular category, such as eating out, you can adjust those numbers in your budget.
2. Consider a simple budgeting approach
There are lots of different approaches to budgeting. Financial expert Dave Ramsey recommends a zero-based budget in which your budget accounts for every dollar of income you earn. While some people need this level of discipline, others find that type of budgeting stifling.
“Often creating a budget and sticking to it can be overwhelming,” said Magdalena G. Johndrow, certified fund specialist and associate financial advisor at Farmington River Financial Group. “After all, who wants to track every single latte they drink?”
Johndrow’s recommendation is to use a 60/40 budgeting approach, which involves allocating your money into different “buckets” (categories) as follows:
- 60 percent of your money is allocated to required spending items such as housing, utilities, taxes, and food.
- 10 percent of your money is allocated towards retirement. This money may be in tax-advantaged retirement accounts, such as an IRA or 401(k), which come with tax penalties for early withdrawals.
- 10 percent of your money is allocated towards long-term savings. Although this money is invested, it should be accessible.
- 10 percent of your money is allocated towards short-term savings for things like vacations or car repairs.
- 10 percent of your money is yours to spend on anything you want during the month.
- 50 percent of your money goes towards covering needs (groceries, rent).
- 30 percent goes towards covering wants (traveling, dining out, entertainment).
- 20 percent of your budget is put towards savings and debt repayment.
The big benefit to this approach is you don’t have to rigidly adhere to strict rules about what each dollar is spent on, which can be difficult to stick to over time.
3. Build in some wiggle room
Unexpected expenses are bound to crop up during the month, which is why Dave Ramsey and other financial experts recommend providing a buffer in your budget.
If you’ve assigned every single dollar you have to a savings account or a specific category of spending, you won’t have enough money available to cope with a surprise expense. By planning to have at least some money go towards “miscellaneous” expenses every month, you’re less likely to go over your budget.
The amount to allocate towards unexpected expenses will vary depending on how much money you have. Many experts recommend anywhere from around $50 to $200 as a buffer to cover surprise expenses.
4. Don’t forget irregular expenses
According to a Prudential report on the State of Financial Wellness in America, 43 percent of employees surveyed never or rarely planned for irregular expenses. Irregular expenses are bound to crop up, though, whether you’ve planned for them or not. Irregular expenses could include everything from holiday or birthday presents to an oil change or car registration.
To account for irregular expenses, look at your calendar or look back at credit card statements over the course of several months. Look for annual, bi-monthly, or occasional expenditures, and account for these if you make a detailed budget.
If you have large expenses that come up periodically throughout the year — like high costs for holiday gifts — you can also avoid blowing your budget by using a savings account to put a small amount of money aside throughout the year. That way, you won’t have to come up with a huge amount of money all at once that makes it impossible to stick to your budget that month.
5. Automate spending when you make a budget
One of the key ways to make sure you stick to your budget is to make it effortless.
“Reviewing budgets each week or each month is hard to do. Especially if you have a young family,” explained Michael Solari, a certified financial planner for Solari Financial Planning, LLC.
Instead of manually monitoring spending and moving money to where it needs to be, Solari and many other experts recommend automating many financial transactions.
“If you can set your paycheck to automatically flow into each of your buckets, you are guaranteed to save,” Johndrow said. “Having your money automatically withdrawn from your paycheck will also limit your spending, making it more likely you stick within that 60 percent budget. You’re paying yourself first before spending your paycheck.”
This doesn’t necessarily work for every person, though.
“Some people like to be more in control day-to-day and may not be comfortable being certain there will always be enough funds to cover their bills on autopay, “ Ward said.
However, for many, it’s much easier to automatically transfer a desired amount of money to savings accounts then live on the leftovers rather than watch every dollar.
Choosing budgeting tips that are right for you
Ultimately, everyone handles money differently. If you want to make a budget you can live on, the key is to try out different budgeting approaches until you find one you can stick to for the long haul.
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