Have you tried to create a monthly budget in the past and found that it’s just not working for you? Or have you found that you just don’t know where to begin? Some may have made suggestions for you, such as people who suggest the 50/30/20 rule. The 50/30/20 rule suggests budgeting 50% of your money on needs, 30% on wants, and storing away 20% for savings. However, you may still find this to be confusing. Personally, I find the rule to be unhelpful.
What if your needs are more than 50% of the money you make? Where does debt fit into the equation? How much of those savings should be for retirement? As you can see, it leaves a lot of room for questions, not to mention the percentages don’t work very well.
Now that begs the question: is there a better way to budget? The answer is yes! Anyone can make a budget, and the best way to do it is to give every dollar an assignment. First, we’re going to look at why budgeting is important. Afterward, we will discuss the more practical side of preparing a monthly budget.
Why is it important to create a monthly budget?
Believe it or not, there are people out there who argue that creating a monthly budget isn’t necessary. Some people believe they are too broke to budget while others think they make enough to get by without keeping track of everything. Both of these philosophies are wrong. On the contrary, creating a monthly budget will help you regardless of your situation.
Budgeting helps you control your money
Budgeting gives you a sense of control over your money. Essentially, you are telling your money what to do as you write it down. A budget isn’t a chain, nor is it restrictive. On the contrary, a budget is permission to spend money. For example, let’s say you really want to stop by your favorite fast food place after work. You check your budget and you still have $45 left to eat out. Score! Go ahead and grab that chicken sandwich on the way home.
Budgeting helps hold you accountable
On the flip side, a budget will also keep you in check. A budget will help hold you accountable for what you’re doing with your money. Let’s look again at the example above. You’re on your way home and you really want that chicken sandwich. You check your budget and find you’ve already used all the money for eating out. It’s a bit of a bummer, but then you realize you’re towards the end of the month and soon you’re budget will reset.
Budgeting will help you meet your short-term and long-term goals
Do you have dreams for your future? Do you need money to reach those dreams? Your answer to both of those questions is probably yes. But perhaps you’re not quite sure about your goals. Let’s look at a couple of examples of short-term and long-term goals.
An example of a short-term goal might be purchasing a car. Let’s say you need about $10,000 to purchase the car you want. If you want to avoid going into debt, you’ll need to set aside a certain amount of money every month. You can then purchase the car you want without having to take out any loans!
An example of a long-term goal would be saving for retirement. This is not something that happens accidentally. You want to make sure you have enough to retire in 30 years or more, so you set the goal of contributing 15% of your income into retirement. This is a long-term goal that is obtainable if you budget and know where your money is going every month.
Budgeting ensure you have enough money for your needs
Not only does budgeting give you permission to spend money, but it also ensures you have enough to live. You need to buy food, shelter, pay for utilities, and more. It’s far too risky to spend your money only on the things you desire and forgo the things you need. Budgeting will help you get a grasp on your situation so you know where to send your money.
How do I get started on a monthly budget?
Okay, so we know that creating a monthly budget is important. But how do we get started? Below is a step-by-step process for creating a monthly budget.
1. Plan based on your monthly income
First, you need to know how much money you have coming in each month. How much is it and how often do you get paid? You’ll also want to include you’re spouse’s income if applicable. However much you bring home every month is the amount you’ll use for your monthly budget.
2. Plan for your needs
There are things we want, then there are things we need. Before anything else, you need to plan for four things:
- Food: You need to eat. Eating is essential for life, therefore it’s essential to your budget.
- Shelter: You need a place to live so you can be protected from the elements.
- Transportation: You need to get around so you can get to work and make more money.
- Utilities: You need to keep your lights on and your water flowing. It’s bad news if these things are shut off.
Dave Ramsey often refers to these things as the “four walls”. That’s because these four things come before anything else and are essential to your livelihood and your well-being. Therefore, they come first when it comes to your budget.
3. Plan for your fixed expenses
Take a look at your monthly statement and determine your fixed expenses each month. Examples of fixed expenses include your internet bill, gym membership, or insurance. These things should be easy to plan every month since they rarely change.
4. Plan how much you will give
I always advocate for giving, regardless of how much debt you have. If you’re a member of a church, then I strongly recommending giving to them. If not, then consider giving to a charity or a cause that does some good in this world.
5. Pay down your debt using the debt snowball method
Okay, I hate debt. I believe debt is restricting and keeps us from reaching our dreams and goals. Therefore, I recommended kicking it to the curb! Get out of debt as quickly as possible. Personally, I advocate for the debt snowball method.
Order your debts from smallest to largest, regardless of the interest rate. Throw everything you can at the smallest debt and pay minimum payments on everything else. Once you pay off the first debt, tackle the next one with everything you have. Eventually, you’ll have everything but your house paid off! Now you can really begin to have fun with your money!
6. Plan for your long-term and short-term goals
Think about where you want to be with your money 5, 10, 20, and even 30 years from now. You’ll also want to think about where you want to be next year! Do you want to buy a car in two years? Start a sinking fund where you can save a small amount each month. Want to take a dream vacation? Calculate how much it will cost and set aside some money each month until you meet your goal.
This is also a good time to start thinking about retirement. Once you’re out of debt and have 3-6 months of expenses in an emergency fund, I recommend saving 15% of your yearly income for retirement. Find an investment professional in your area and talk through your options. I recommend Dave Ramsey’s SmartVestor Pros for this.
7. Plan for some fun!
Don’t be a stick in the mud. Have some fun every month! Spend some money on things you want rather than the things you need. Go to the amusement park, do some shopping, buy a few books to read, or whatever floats your boat. Enjoy your life, especially if you’re debt-free!
Give every dollar an assignment
As you create a monthly budget, it’s important to give every dollar an assignment. In other words, spend every dollar on paper before the month begins and you will be successful! Remember, a budget is you telling your money where it needs to go. You’re the one in control. It’s time to make your money behave!
Are there any tools that can help me create a monthly budget?
In this modern age, many of us have moved beyond pen and paper when it comes to budgeting. Although, you can certainly use a pen and paper if that’s your thing! But most people probably want something that can help them account for their expenses with much less effort. Thankfully there are plenty of apps out there to help you create a monthly budget.
The one I personally use is EveryDollar. EveryDollar has both a paid and free version. The free version is very intuitive and allows a lot of customization. The paid version links to your bank account and also gives you access to Dave Ramsey’s Financial Peace resources, which makes it totally worth it.
Another great one is You Need a Budget or YNAB. YNAB does not have a free version, but they do have a free 34-day trial. YNAB excels in helping you set goals and think about where you want to be in the future.
Finally, Mint is another decent option. The best part about Mint is that it’s free. It will connect to your bank account and download your transactions for free. However, you’ll have to put up with ads, and I don’t like ads. Especially stupid credit card ads…
Are you ready to take control of your financial future?
You take the first step in seizing control of your financial future when you create a monthly budget. But you may still feel stuck and unsure of where to begin. Maybe you’re looking at your situation and you feel hopeless. Consider working with a Financial Coach to come alongside you and to help set you on the path to financial freedom.
As a final note, give yourself some grace! Learning to do a budget can take some time. Now go and chase after financial freedom so you can pursue God’s call in your life unhindered!