How much money did you spend on food last month? What about entertainment?
For that matter, how much money did you take in last month, and how much did you spend in total? How much did you put away for savings?
What’s your savings goal for the year?
Some folks will have the answers to those questions in a document somewhere, if not in their head. Other folks will read those questions and think ‘Are you kidding me? I have no earthly idea.’
If you’re in the latter camp, this probably isn’t the first time you’ve thought about keeping a budget. But it might be the first time you’ve gotten a good walkthrough, step-by-step.
In this article, we’ll cover how to budget money, where to find a good budgeting template, and how to improve your budgeting skills.
What is the purpose of a budget?
We all know what a budget is: essentially, it’s a plan to keep track of your income and your spending, so you can make sure they’re aligned (and hopefully save money).
Obviously a budget is important to stay out of debt and save for emergencies and the future, but that’s selling it short a bit. Because you might not necessarily need to keep track of your spending to stay out of debt and even save. You might be able to just ‘wing it’.
But when you actually take the time to keep a budget, and follow it, it changes the very way you look and think about money. You become aware of habits you didn’t realise you had. You prepare better for rainy days and retirement. You never miss paying a bill on time, and you feel more in control of your life.
There are countless benefits, and many of them are profound.
Free monthly budgeting spreadsheets
There are loads of free budgeting spreadsheets online.
They both show you how to use their tools step-by-step, and tell you how to interpret the results.
How to budget money?
The hardest part of creating a budget might be gathering the will to start. Once you do, it’s relatively easy to make a habit of it and keep it going.
Here are the basic steps of creating a budget:
1. Calculate your monthly take-home income.
This should be the actual amount of money that goes into your bank account with each paycheck — not your salary before taxes, or your pension, or other expenses are taken out.
If you’re a freelancer, this may not be a consistent number, so use a conservative estimate (check out our article on how to budget as a freelancer). Alternatively, you might want to start by adding up the expenses of your necessities, like rent, loan payments, and groceries. That way, you at least have a consistent target, and when you plug in your take-home pay as it comes in, you’ll have a fair idea of where you stand.
2. Calculate your expenses.
This includes your needs, like rent, car payments, insurance, credit card debt, and groceries. But it also includes your wants, like entertainment, travel, dinners out, clothing, and anything else you like to buy, but technically could live without.
3. Create categories — including saving — and set limits.
This is the crucial part. Divide your spending into different categories, and set limits on each one for how much you can afford to spend based on your take-home income.
Obviously your needs are pre-set, and you should add saving money for emergencies and retirement (especially if you don’t have a pension) to that category.
Then take a good look at your wants, and give each of them a spending limit, based on the money left over after you cover your needs.
One more important thing: Give yourself some wiggle room. Don’t allocate your budget so that your spending equals your take-home pay, and your available money goes down to zero. For one thing, you’re only human, and you might go over certain limits sometimes. And for another thing, life is full of surprises. Your spending is naturally going to go up and down month by month.
4. Track your spending.
In the ‘old days’, this might have meant recording everything you buy, and entering it into some kind of spreadsheet or ledger at the end of the day. But thankfully, this is not the old days, and tech comes to the rescue.
As you’re probably aware, your online banking and app automatically record your debit card spending. But there are even better apps for creating, and sticking to, a budget.
For instance, the HyperJar app lets you divide your money into different ‘Jars’, which you can label ‘Entertainment’, ‘Dining out’, or whatever you like. You can put the amount you want to stick to in each jar, and when you spend in that category with the HyperJar debit card, you can tell the app to draw from it. You can even link jars to popular merchants, so the card automatically takes from the right jar.
The app also tells you how much you’re spending per Jar, category, and merchant, which makes budgeting even easier.
5. Adjust your spending over time.
After two or three months, you should get a pretty good idea of where you’re spending the right amount, where you should spend less, and even where you can spend a little more. You can then adjust your limits, because now they won’t just be estimates.
Then it’s up to you to stay within the limits, and grow your savings.
And if you end up having trouble sticking to your budget, you can always reach out for help. There are countless sites that give free, helpful financial advice, like MoneySavingExpert and MoneyHelper, and there are countless financial advisors and counsellors that will meet with you personally. You might ask your bank for a recommendation, and of course there’s always Google.
How to stick to a budget?
You might be thinking ‘All of this is easier said than done.’
But really, like any skill, once you start doing it, it will become easier and easier. The trick is just to start.
And there are also effective methods to make it easier, like automating your savings, practising paying yourself first, getting an accountability partner, cutting your unnecessary subscriptions, and practising mindful spending.
We detail a lot of great methods in our post 10 Realistic Methods To Stop Spending and Start Saving Money in 2022.
Common budgeting mistakes and how to avoid them
Here are some common mistakes people make when budgeting, and how you can avoid them.
1. You don’t know where your money is going.
If you set a budget, but you don’t track your spending, you’ll still be in the dark and it will be hard to stick to your limits. But this is not something you need to labour over!
To make it super-easy to track your spending, you can use an app like HyperJar, which will show a breakdown of your purchases according to category, merchant, and Jar.
2. You don’t set aside money for saving, and give yourself wiggle room.
Remember, a budget is not just for making sure that your expenses don’t exceed your income. An important part of it is making sure you’re also setting money aside for rainy days and the future, and also that you’re giving yourself a little leeway as well.
If you don’t build those things into your budget just as you would your other expenses, you won’t save anything, and you might even find yourself underwater.
3. You don’t review your budget regularly.
Unfortunately, budgets don’t fall under the category of ‘Set it and forget it’. You have to regularly review your budget, and adjust it according to your spending habits (not to mention adjusting your habits according to your budget!).
You don’t have to do this every day, but certainly at least every month.
4. You’re too hard on yourself.
If you find it hard to stick to a budget at first, don’t give up or beat yourself up. It takes time to change your habits, but they will change eventually. But if you’re too hard on yourself, failure might become a self-fulfilling prophecy.
Any single step you take in the right direction is a step towards a healthier financial life. Those steps add up, and in the long run, you’ll make more progress than you ever thought possible.