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A budget can be a powerful tool to help prevent debt. You may be wondering what exactly this means, though. A budget not only helps you allocate what money goes where, but it also helps you manage your spending habits and avoid overspending in certain areas.

What is a Budget?

A budget is a way of allocating your money for what you think is most important. You can use a budget to assign what money will go toward bills, savings, and spending with your loved ones. A budget may also inform what you plan on doing for entertainment or what hobbies are worth the investment of time and funds. Jonathan P. Bednar II, a Certified Financial Planner (CFP) at Paradigm Wealth Partners told The Balance, ”A budget simply tells us how much money is coming in, how much is going out, and where it’s going—and this is essential information for everyone.”

Benefits of a budget

A budget can be a great tool to help you get your financial life under control and start saving for what’s important to you. A budget can create a clear path of what should be prioritized and what money is available that month or year—meaning no more overspending on unimportant things! It also helps you know what to expect at the end of each month or year, what to save for, and what you can give yourself as a well-deserved treat.

Drawbacks of a Budget

The main downside of a budget is that it can feel restrictive and tedious, especially if you struggle with the concept of what’s “enough.” It may not be easy to see how a budget will benefit your life or what might change, but making the commitment to a budget can help you gain financial freedom as it will allow you to reduce your debt by saving more each month.

How to Build a Budget

There are several ways to build a budget, and what works for one person may not work for another. The key is to find what’s right for you. The first step is to figure out what you’re currently spending your money on. You can do this by recording what comes in and what goes out every month for several months, or using a budgeting app that will track your spending automatically.

Next, you will want to figure out what your income is. This could be as simple as just taking your after-tax salary or could be more complicated if you have other sources of revenue. If you don’t have a consistent stream of income, then we recommend finding the average income you’ve had over the past 12 months and using that number in your budget.

Once you have these two pieces of information, you can begin to build out the categories of your budget. During this step, you will want to be very specific. For eating out, figure out how many times per week you typically eat out and how much it costs each time. For what you spend on groceries, include everything from milk to paper towels. It also can be helpful to set up a discretionary spending category to allow you to make purchases that could be viewed as “wants” instead of “needs.”

Budgeting Tips

Beginning the process of budgeting can be intimidating. It is important to remember that the purpose of a budget isn’t what you’re buying, but what you are doing with your money. One tip to help you successfully create  a budget is to keep your long-term goals in mind. If you’re planning for retirement or your children’s college fund, it is important to allow that to serve as your motivation to stick to your plan.

It also can be helpful to use a budgeting app to keep you on track. These apps can automate your budget by syncing with your banks, which reduces the manual effort included in tracking your income and expenses. These apps can also help analyze your spending habits to help make recommendations for what you can cut back on in order to spend more money on what matters.

Budgeting Methods

When it comes to budgeting, there is no one-size-fits-all approach. Your budget should be what is right for you and your financial needs. Your lifestyle and financial situation can contribute to which budgeting method will be most successful for you.

50-30-20 Method

The 50-30-20 Method sets percentages on how much you should spend on various categories. This method recommends 50% of your income going toward necessary expenses, 30% to discretionary expenses, and 20% to your savings or debt payments.

Zero-Based Budgeting

Zero-Based Budgeting is when you account for every penny and where it goes. In its simplest form, this method will have you look at your income and then take that same amount and divide it among spending categories like savings, housing, shopping, etc.

Pay Yourself First

This method prioritizes getting rid of your debts and building up your savings. The first step is to set what percent of your income you need to adequately work to reduce your debts and grow your savings. This percent will be reliant on your financial situation, how much debt you have, and what your goals for saving are. After you have set aside this percentage at the beginning of each month, the rest of the money left is considered discretionary spending.

Envelope System

The Envelope System is similar to the zero-based budgeting method, but instead of just relying on spreadsheets and apps to manage these categories, you rely on cash. Every month you will get the necessary cash and divide it among envelopes that represent each spending category. You then pay in cash for all these categories. Once the money is gone, it’s gone for the month.

The No Budget

The No Budget is a great method if you can be disciplined with your spending habits, as it is less structured than other methods. Essentially this method will have you monitor two things: how much income you bring in and what you must pay each month. Then throughout the month, all you monitor are those two items. This can be a difficult method as it isn’t as specific as the other methods in what you can spend money on.

How Can Credit Associates Help? 

If your budget has you feeling the crunch, you might need to find a way to create more breathing room. One way to do this is to reduce what you’re paying in debt each month. This could free up more of your income to be used in other areas. A free consultation with one of our expert debt consultants can help you find out how you could reduce your debt by up to half.

Common Questions About Budgeting: 

Should I use a budgeting app?

If you don’t want to keep a budget with pen and paper, you can use an app for your phone or computer. There are several software programs that allow users to create budgets on the go. For example, Mint is used by thousands of people all over the world to manage their money in real time from anywhere.

What categories do I need to include in my budget?

While the number of categories can be limitless, some important ones to include are: grocery shopping, eating out, clothing, utilities, transportation, entertainment, and personal care.

Are budgets overrated?

Budgeting may seem overrated because it takes a lot of effort and time to create and maintain. Unfortunately, if you’re not on a budget, it’s more likely that you will stay in your current financial situation and struggle to achieve financial freedom.

Should I invest my money?

Investing money can be a great way to save money for the long term, but can come with some additional risks. The stock market isn’t a sure bet, but a diversified portfolio can be a great way to grow your money over time while minimizing the risk.