A budget is a plan that outlines how you’ll spend, save and invest the money you earn.
A budget is a key piece of your financial roadmap to achieving what is meaningful in your life – like buying a house or planning your retirement.
Why Is It Important to Create a Budget?
The reasons why a budget matters to you depend on your situation.
If you’re just starting out or need some help reining in your insatiable need for impulsive spending, a budget might help you get on track.
On this end of things, a budget can help you:
- Determine where your money is going
- Save money every month
- Reduce anxiety and stress around your financial situation
- Make progress on debt repayment
A budget can help even if you’re confident about your finances.
You can use this tool to examine your money choices and reflect on whether they align with your larger goals.
You might use a plan to streamline your spending to help with:
- Planning a significant purchase, like a home or car
- Having enough money to retire well
- Preparing for a growing family
How to Create a Budget
There are many reasons for using a budget and almost as many ways to build one.
Regardless, every good financial plan starts with asking the right questions, finding your inspiration, trying different strategies, and deciding on your priorities.
1. Ask the Right Questions
Asking the right questions will help you develop concrete goals that will guide your decision-making moving forward.
Understanding what you want to accomplish will shape the choices in your day-to-day life.
It can also help you figure out what expenditures are worthwhile to plan for.
For example, you’re setting money aside for your dream destination wedding in Costa Rica.
However this weekend is Black Friday and you really want to buy a new, larger TV.
Doing so however will make you miss this month’s wedding savings goal.
By predetermining your decision – saving $XXX each month for your wedding – choices become much clearer.
This doesn’t mean you deny yourself every pleasure – just that you plan for them and stay within budget.
Take time to think about what you want and make a plan that prioritizes your goals while still permitting yourself to enjoy your life.
2. Find Your Inspiration
Maybe you want to understand where your money is going, pay down debt, or save for a trip around the world.
You need to go beyond reasons and rationales and find your cause because starting a personal finance revolution is not easy.
Your purpose should sing to you like your favourite song and keep it close – money is about psychology, and spreadsheets won’t keep you warm when you’re feeling out in the cold.
For example, what does paying off debt mean to you? Is it that feeling of lightness and possibility that comes with working for money that belongs to you?
However, we need to remind ourselves that emotions are fleeting, fickle things that don’t obey our commands.
If you find yourself floundering and inspiration can’t be found behind that bush or under those rocks, have a plan for how you’ll get through the tough times.
A small something you can do for yourself without derailing your grand plans.
3. Decide on Your Priorities
In 1943, US psychologist Abraham Maslow published a paper on human motivation and the hierarchy of needs.
Often depicted as a pyramid, he argues people must solve each stage before moving to the next – physiological needs (eating, drinking), safety (physical/emotional health), social needs, esteem needs, and self-actualization.
Applying Maslow’s theory to how we decide our financial priorities might serve well as a guiding principle for your plans.
For example, paying down your credit card debts may be difficult if you don’t have an emergency fund.
You may end up just using the card you’re trying to pay off to cover a car repair because there’s no other money available.
Build your financial success one stage at a time, and your foundation will be strong.
Setting priorities will also depend on your stage of life, demands on your finances, and personal goals.
You are also likely to have some things you want to achieve in the short term, while others will take a while to accomplish.
The takeaway is you can have anything you want but not everything – so choose carefully.
There are a variety of ways to budget.
If you’re starting out, try a strategy that resonates with you, but don’t be afraid to change it if you find that it’s not working as expected.
Here are some popular strategies:
1. Pay Yourself First
This is a simple budgeting strategy where you put a percentage of your monthly earnings into savings first – the rest of your money can be spent how you wish.
While it’s simple, for those without any debt or those who haven’t determined their financial roadmap, this strategy ensures everything you earn isn’t impulsively getting spent.
2. 50/30/20 Rule
This method is all about ensuring your budget is about more than paying bills.
The 50 percent represents how much of your after-tax income goes towards necessities.
Next, 30 percent goes towards your wants, and 20 percent is allotted for savings.
Read more to find out if the 50/30/20 method is for you.
3. Envelope Budgeting
In our increasingly digital world, it’s easy to become removed from our money.
You can however go completely analog by withdrawing money from your accounts and putting amounts into envelopes for things like rent, groceries, and utilities.
While it’s not always possible to pay for everything with cash, challenge yourself to thirty days of handling actual money whenever you can.
You can also possibly evolve this to a hybrid strategy of cash + using a tracking app or spreadsheet to bucket out items you want to use your credit or debit card for.
You might find your attitude about how you spend money changes using the envelope budgeting system.
Frequently Asked Questions
- Is a budget necessary?
- What’s the best way to budget money?