How to Make a Budget

Today Lizzy Learns…how to make a budget.

My husband and I have always been fairly conservative with our spending and work to live within our means. In the past, we have had a budget that we followed SOME of the time. So in reality…we didn’t have a budget.

Over this last year, we have shifted our focus more to our financial wellbeing and future planning. We have discovered areas where we can adjust because are spending can’t be justified as well as acknowledging areas that we have been doing well in. With a little one joining the family over the last few years, we have had more expenses added to the mix. We realized it is so easy for this little expenditures to fall through the cracks and quickly add up.

When we decided to seriously focus on our budget and work towards paying off any debt we had (student loans, car, house, etc. ) we did a lot of research on what was the best method that fit both our savings and debt payoff goals. There are a few strategies that we looked at that may be a good fit for you:

Strategies

The 50/20/30 | This strategy is pretty simple as it guides you to set 50% of your incomes towards needs, 20% towards savings, 30% towards wants.

Envelope System | This theory is for you to physically label envelopes with a specific focus area (groceries, bills, entertainment, ect) and put physical dollar bills in there. Of course, they have apps now that mirror this strategy so you don’t have to have the cash on hand. Once the cash is depleted from these envelopes, you can no longer spend money in that category.

Zero-Based Budget| Every single dollar that you bring into your household needs to be pre-allocated to a specific thing including your savings account.

Pay Yourself First | Determine a set amount you want to set aside for savings each month. As soon as your paycheck hits your bank account, you push over that amount to savings. This ensures you are consistently adding to your savings accounts.

At the end of the day, we merged some of these methods and developed our own budget strategy

Where to Start When Making a Budget

Determine your Goals

We began by understanding what our financial goals were. Some common goals are things such as :

Increase saving by x amount.
Reduce spending in x area.
Pay off debt by x amount of years

Identify your Focus Areas

What areas of your life do you spend money? These focus areas are things such as :

Housing Expenses
Food
Entertainment

Calculate your Monthly Income

Its great to track what you spend, but its just as important to understand how much income you bring in that month. This is everything that enters your bank account such as work income, child support, property income.

Populate your Predicted Expenses

Now that we have the focus areas, its time to predict how much you want to allocate to each area. There are going to be some areas that you can easily predict as they don’t change every month (think car payment or mortgage) and there are others that will fluctuate (think groceries or medical bills). Overall, you can predict the max you want to spend on each area in order to stay within your budge.t.

Input your Expenses Daily

Now your budget is set up and ready to roll! Each morning, or at whatever cadence is best for your household, we go in and update the budget with any new expenses that we have made. We determine where we are spending to much and need to cut back on that month.

Determine Areas of Opportunity

Once the month is over its time to look back at the spending and learn where you spent more than your predicted amount and where you spent less than what you thought.