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The Ultimate Guide How to Budget Money Effectively

Maria @ Call It Adventure
How to budget your money | How to Budget Money | Budget Money | how to create a budget | budget plan sample | How to create a budget | Call It Adventure

Having a budget plan is like having a map. Check this guide to find out how to budget your money, and how to create a budget using a budget plan sample.

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A budget plan is a must-have for anyone who wants to take control of their life and finances. A budget can show you a clear picture of how much you make, how much you spend, how much you’d better spend, and how to save money.

It might be frustrating and challenging to figure out how to budget your money. The purpose of this guide is to help you create a personal budget based on your current situation that will answer your needs.

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How to create a budget in 7 steps

Follow these steps to create your budget:

1. Calculate your total income

This is your starting point on the road of how to budget your money because the income frames your expenses and, therefore, quality of life. Not to be discouraged here, you can live a full life no matter the income. What matters is money management and how you budget the money.

So you need the total income after taxes from all the income sources.

If you receive some part of the income as an entrepreneur where you pay the taxes yourself later, I suggest putting aside a part of the income and use what is left to create a budget.

Expert tip: I suggest subtracting some part of the income and putting it in a separate account to keep things easy and stress-free when it is time to pay either estimated taxes or annual taxes. For example, whenever I receive dividends, I put 30-20% on an account called “Estimated Taxes.”

2. Figure out your expenses

This is where you have to be completely and ugly honest with yourself. You need to take into consideration all the expenses you have on a monthly, quarterly, and yearly basis.

The expenses usually include:

Some of the expenses you can pick up from the top of your head may need to look up statements for some. To go even further and find blind spots, I suggest setting up an account with an online tool for budgeting, for example, use Mint.

Mint can automatically categorize most of the expenses and show a vivid picture of income and expenses.

Moreover, you can set up budgets for different categories and set up alerts whenever you overspend.

To go even further, you can see what expenses are way too big and what can be cut without losing the quality of life. In other words, you most probably will see opportunities to implement frugal living tips to manage the budget better.

3. Set financial goals

The main goal of a budget is smart personal finance management. But it is a small financial goal that will lead you to a bigger one. Therefore you need to look at your current situation and set financial goals. It is anything from getting rid of debt, saving for a vacation, or even a house.

If you don’t know where to start, start with Dave Ramsey Baby steps.

4. Set monthly budgeting goals

There are a couple of different approaches towards budgeting and how the money should be allocated:

 – Zero-rule advised by Dave Ramsay.

Dave Ramsey takes advantage of every penny earned. So in his zero-based budget, you plan a month in ahead where every dollar should go. Therefore, your expenses are equal to the income, because every dollar is planned.

You can read more about Dave Ramsey strategies in his book The Total Money Makeover.

 – 50/20/30 rule by Elizabeth Warren.

Senator Elizabeth Warren created and popularized a 50/20/30 or sometimes referred as to 50/30/20 rule that she describes in her book All Your Worth: The Ultimate Lifetime Money Plan. In short, the idea is to set 50% of the income for necessities (housing, groceries, bills, etc.); 20% for saving/paying off the debt/investment/saving for retirement; and finally 30% for entertainment or “wants.”

 – 30/30/40 my personal approach.

Text My personal rule is to use no more than 30% of the income towards housing (rent or mortgage payments): 30% for important and ongoing expenses (car, groceries, dining, entertainment, in general, whatever I can afford for 30% of the income. Important things like food go first of course); and finally I try to save or invest 40% (usually 10% for a rainy day, 10% for investment, 10% for retirement, 10% for big annual “wants” like a vacation or a bathroom remodel)

5. Use a tool to keep track of the budget

You can manually manage the budget, use envelope system, pay in cash. But to me, it is too much overhead. I use Mint and find it priceless, especially because it is a free budgeting tool that automatically does all the calculations. All you have to do is to make high-level decisions about the budget.

6. Adjust your expenses and allocations

Do a reality test check. Live according to the plan for a month and see how it is going. In most cases, nothing changes drastically. You just manage the money with more understanding according to what amount should go where.

In the minority of cases, people set a very tough and unrealistic budget. The reasons can vary. Some spend way more than they should, for example, in a big house they can afford or an expensive car they don’t actually need.

Based on the real picture and your goal, most probably, some of the expenses should be adjusted.

Another option is to increase income. Here are some ideas on how to make extra money:

7. Always follow the plan

Track how you manage the money in real life and compare it to the plan. A little difference here and there is ok considering that the whole cash flow is within the planned strategy. But sometimes we tend to relax under the impression that everything is under control once you’ve set a budget.

How to create a budget is one thing. The most important thing is to follow the plan. Therefore, once in a while audit your budget to see if everything goes according to the plan. An easy way to do so would be to set auto transfers to savings accounts and set up alerts in Mint for the times when you overspend the set budget limits for particular categories.

Budget plan sample

Here is a budget plan sample so that you can see how to budget money using real numbers.

For example, let’s take after tax monthly income in the amount of $5,000. Here is how you would use it according to my personal approach 30/30/40:

30% – $1,500 for rent or mortgage. If your housing costs are higher than you can afford, then consider downsizing or finding a roommate to help cover the housing costs.

30% – $1,500 for groceries, utilities, car expenses, coffee shops, movies, gym subscription, beauty procedures, shopping, dining out and other expenses. Just remember to stick within this fixed amount of dollars to cover all of your expenses except the housing. If staying within this amount is challenging, I suggest incorporating frugal living tips and money hacks to help you manage expenses.

40% – $2,000 for investing and saving:

How to budget your money effectively

Think of a budget as a plan on how to spend and allocate income. It is best to start with monthly budgeting and do a year plan for some big expenses like a car purchase or a vacation.

To budget your money effectively, you need to:

1. Keep track of the income

First of all, gather the information about your income. This is the starting point. The whole budget depends on how much you make.

2. Keep track of the expenses

Be honest about your expenses. It can be tempting to slightly lower the actual expenses to have a nice picture. But the truth to be told, it is better to see the real picture to understand how to manage it. Otherwise, the whole point of budgeting goes to waste. Because if you’re not brutally honest about your real income and expenses, then you’ll just waste time creating an unrealistic budget.

3. Constantly review the budget

Whenever you have an income increase or new expenses to cover, sit down, review the budget, and adjust it to the changes. Think of budgeting as an ongoing process of personal money management. Therefore you have to always be aware of how efficiently the budget works, does it go along with the goals or maybe you’ve created an unrealistic budget that has to be changed.

Many people don’t review the budget whenever changes come. As a result, in many cases, the income increase entails expenses increase. People think that if they make more money, they can afford more things. It is true, but again it is all about budgeting. A new change should always entail a budget review.

In conclusion

The knowledge on how to budget money is the key to reaching any financial goals you may have. From paying off debts to an early retirement, you need to plan exactly how to get there and what has to be done. Therefore, learn how to create a budget and implement a budget plan into your life to control finances and live a life you deserve.

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