Most of us are familiar with a certain feeling: that sense that you don’t know where your money is going. You go into the grocery store and whip out your credit card. You charge your bills to your bank account, you buy dinner for a friend, you order that pair of boots you’ve been eyeing—and suddenly, you’re in debt.
Sometimes it feels like we have absolutely no control over our money! This isn’t a new phenomenon. In fact, way back in the 1700s, Irish philosopher Edmund Burke stated, “If we command our wealth, we shall be rich and free; if our wealth commands us, we are poor indeed.” So, what’s the answer? You probably know this already, but the solution is budgeting.
Many of us cringe when we even hear the word “budget.” But this doesn’t have to be painful! In fact, in its own way, it can be glorious. Imagine this: It’s the end of the month. You’ve tracked your spending these past four weeks, and you’re aware of exactly where all of your dollars went. You’ve had to forego eating out a couple of times to avoid going over your food budget, and you didn’t allow yourself to splurge on records to stay under your entertainment budget. Now here you are! You’re on top of your bills, your rent is paid, and you even have some money left in your account. Feels good, doesn’t it?
The fact is, budgeting can be a great tool to help you unlock opportunities and gain and peace of mind. And we’ve got some fantastic tips to get you started on your way to financial freedom. Sound good? Then read on!
First, let’s go over a few key concepts.
Reading about finance can often make our eyes glaze over. So many dry terms! Don’t be afraid, they’re all easily explained. For this post, we’re only going to use some very simple ones.
Your income is the money coming into your bank account.
- Your expenses are the money leaving your bank account (for example, money spent on bills, groceries, etc.)
- Creating a budget means making a plan for how you’ll spend your money. Budgets can (and should) also include financial goals, like “I will put $50 from each paycheck into my savings account,” or “I’ll have $400 by October, in order to cover my car insurance bill.”
So, what kind of budget should I make?
Budgets can be made for entire households, but it’s best to start with a personal budget before expanding your net.
So, what’s a personal budget? A personal budget should account for your individual income and all of your expenses. Examples of personal expenses include groceries, entertainment, gas, and debt payments. If you split rent or utilities with other people, your personal budget should include the portion you’re responsible for. For example, if your rent is $1,200 each month, but you and your roommate split it evenly, track $600 for rent in your personal budget.
If you live with other people, encouraging everyone to create personal budgets while also maintaining a larger household budget could be helpful. A household budget can help everyone plan and track spending on things that are beneficial to the group—such as a new couch, shared groceries, or a weekly group meal. Having a household budget can prevent any one person from taking on too much responsibility for shared expenses.
Do I need a personal budget?
Are you dreaming of a vacation? Looking to build your retirement fund? Trying to pay off debt? No matter what your goal is, a personal budget can help you spend with more intentionality and give you a plan to make these dreams a reality. There are a number of strategies to create a personal budget. Some of our favorites include:
- The 50/30/20 rule: Set 50% of your budget for personal “needs” like rent and bills. Set aside 30% for “wants,” like dinners out and movies. And the final 20% goes toward your financial goals (such as debt repayment).
- If that sounds too complicated, simply set aside 50% of your income for your needs.
- The envelope system: With this popular plan, you get rid of your credit cards entirely. Everything is run through cash, placed into various envelopes designated for “groceries,” “entertainment,” etc. This tactic goes really well with the 50/30/20 budget!
- The “Zero Budget.” The idea with this one is that all of your income, plus all of your expenditures, should equal zero by the end of the month.
Can I budget if I’m in debt?
YES! In fact, if you’re in debt you will benefit the most from budgeting, as personal budgeting can help you build a plan to pay off all of your debt. To get started, simply add a line item to your budget for “debt payments.” If you want to pay the debt off faster, consider paying as much as possible toward the balance each month. By tracking your income versus your expenses, personal budgeting can also help prevent you from accumulating more debt by shining a light on your spending habits.
If budgeting feels out of reach because you’re struggling to keep up with debt payments—or if you feel like you owe too much to be able to pay off all your debt—a service like debt settlement could be a great option for you. Debt settlement companies negotiate with your creditors to help reduce what you’re required to pay back, thus freeing up more room in your budget and expediting your financial freedom timeline! Find more info in these posts: