How to Budget and Save Money
How to budget and save money quickly. No matter what your financial goals are, a budget serves as a tool to achieve them. Whether you are trying to pay off debt, save for college, or hoping to free a little more cash each month – settling for the best way how to budget your money is the first step you need to take.
Some people are deterred from budgeting, viewing it as a tedious and time-consuming process. But the truth is, budgeting is incredibly simple. The hardest part is setting it up. Fortunately, there are plenty of tools to help you – here is a super simple guide on how to create a budget and save money.
How to budget and save money efficiently
Table of Contents
1. Estimate your monthly net income
The first step to budgeting is to know what you’re bringing in each month. If you work a job with regular hours, your income is likely fairly similar to each paycheck. This makes it easy to estimate how much income you receive each month after taxes. However, if you work various shifts, have the option for overtime, or are an entrepreneur, your income is sure to vary, making it challenging to estimate.
If you aren’t sure what your monthly net income is, take a look at your previous pay stubs. You can take an average of the last three to estimate what your income looks like during a typical month. Remember, if you’re not quite sure, it’s always better to err on the conservative side.
Further, don’t forget to add in any additional income sources you may find throughout the year, such as money from a side hustle or sale of a household item.
2. Prioritize your expenses
Next, you need to look at your current expenses to see where your money is actually going. Look through your last credit card bill or debit card statement to make a list of all of your expenses. You may be surprised to see where your money is actually going.
If your expenses are more than your income, you will need to seriously reevaluate your spending before you risk your entire financial future. Ideally, your income should be more than your expenses so you can save a significant portion of your income.
Now that you have a list of all of your expenses, you will need to sort them in order of what’s most important. If you’re constantly feeling tight with your money, it’s likely your spending is to blame. Obviously, expenses like your mortgage, car payments, debt payments, and food should all be at the top of your list. Optional spending, such as eating out, entertainment, or cable should be towards the bottom of your list because they aren’t required for your wellbeing.
When you’re creating a list of your own priorities, don’t forget to budget in at least some fun money! If you feel too restricted in your budget, you aren’t likely to stick to it. So, make sure you have a little extra cash each month to spend freely.
3. Set your financial goals
Now that you have your income and expenses in order, it’s time to set your financial goals. What are the goals you find most pressing?
It’s easy to get overwhelmed with your financial goals, so one tip is to take it one goal at a time. By focusing all of your energy on just one goal, you are giving that goal more attention and can likely accomplish your goal a lot sooner.
If you’re not sure where to start, consider your current financial situation. For example, if you have credit card debt and student loans, it would make sense to prioritize repaying this before you start saving for a vacation. If your credit card debt carries high interest, you will want to focus on that before your lower interest student loans.
Once you decide on your goal, write it down and put it somewhere where you can see it. That way, you are constantly reminded of your goal and will remember it when you are faced with spending your money in perhaps a less-wise way.
4. Select a budgeting method
You are on a roll! The next step is to select the budgeting method that works best for you. There are dozens of various budgeting methods out there, but try not to become overwhelmed.Here’s a list of various types of budgets and how to save money.
Pick out the best budget method that works for you.
5. The Zero-Based Budget Method
The goal of a zero-based budget is to have your income minus your expenses come equal to zero. That means you have a purpose for every dollar coming in. For instance, if you have $3000 a month of income, you will need to budget for $3000 of expenses. Now that doesn’t mean you necessarily go out and spend all of your income. Any money you save, invest, or donate should also be included in your budget as an expense.
How to put together a zero-based budget
- Write down your monthly income.
- Determine your monthly expenses.
- Get your income to equal zero at the end of the month.
- Decide where to spend a positive difference
- Track your spending
This method works well as it can be used with either an all-cash or a credit card. The important thing is to simply track where your money is going so you aren’t overspending in a specific area. You can track your money by using a spreadsheet, a pen, and paper, or apps such as Mint or you need a budget (YNAB). If you aren’t committed to tracking your spending this budgeting method doesn’t work well.
Pros of Zero-Based Budgeting
It keeps you accountable– You know exactly how much money is flowing in and out of your budget every month. You can easily point out areas of excessive overspending and see areas where you possibly can save more money.
You are in control of the budget – Easy to change the whole budget around should the need arise. This is awesome for emergencies or other unplanned expenses. On the flip side don’t make it a habit to overspend in certain categories.
Easy to implement – It’s easy to assign every job to a dollar and play with the numbers. You don’t need fancy spreadsheets or programs as a pencil and paper will get the job done. It makes calculating how much you will save, spend and give each month pretty straightforward.
Cons of Zero-Based Budgeting
Fairly inconvenient – Each and every month you have to re-evaluate your budget. Even with fixed income, your expenses may be unequal every month. Therefore, it takes time to get to master the art of zero-based budgeting and is harder to stay on track.
Difficult for irregular income earners – If your income is irregular, then its difficult to budget. In addition, you can’t copy and paste the budget from month to month. As a result, you need to make total adjustments according to your income at the end of each month.
Easy to miscalculate irregular expenses – If you miscalculate variable expenses, it can affect your entire budget. You may resort to borrowing which may lead to less disposable cash on hand for essential needs down the road.
The budget method is fairly flexible so it’s ideal for people who are planning a budget and save money even on a small or irregular income.
6. The 50/30/20 Budget Method
The 50/30/20 budget breaks down after-tax income into three expenditure categories.
How to budget with 50/30/20 method
First decide your three basic categories: needs, wants, and savings. Then you figure out the actual net income to pay for 50% of your needs, 20% savings and 30% wants.
Once you’ve established your net income, then it becomes a basis for the 50/30/20 budget.
Here is how the budget divides expenditures: Needs: 50%, Wants: 30% Savings:20%
You allocate 50% of after-tax net income to Needs:
- Housing rent or maintenance
- Insurance, for instance, Health, Medical, and Life
Then you set aside 30% of the after-tax net income to Wants:
Lastly, allocate 20% of the net income to savings
- Investment account for instance – Guaranteed Investment Certificate
- Down payment for a home
In so many ways, The 50/30/20 budget method assists you to find the easy way to spend your money. If you follow it carefully it truly reduces unnecessary overspending, boosts savings and speeds up debt elimination. To achieve awesome goals with the 50/30/20 budgeting method. You need to be deliberate as far as where you spend your money and always follow your budget.
Pros of 50/30/20 Budgeting Method
- It’s easy and quick to calculate. The budgeting rules are easy to follow and it does not need extensive planning for the budget to work.
- An awesome starting point if you’re new to budgeting and just starting to seriously take managing your finances seriously.
- The structure is easy to follow. The budget is broken down into needs 30%, wants 20%, and save 20%.
Cons of 50/30/20 Budgeting Method
- Lacks Clarity. Setting aside 30% to wants can be easily misinterpreted and could result in reckless spending on unnecessary stuff.
- Hard to track how much you’ve already spent your cash on.
- Difficult to use the method to get out of debt as some sections have more money allocated than others
In summary, your first job should be to determine your net income and total expenses, once it’s done then categorize your money into the 50/30/20 budget. This budgeting system is brilliant for an individual that’s starting out and discovering how to budget. Because it teaches you how to save money on budget while sticking to the plan.
7. Pay Yourself First Budget
How does the pay yourself first principle works?
Pay yourself first is a fundamental lifelong money management principle in personal finance. It emphasizes the need for putting your savings as a priority. A reverse method to a traditional budgeting method where you build a spending plan for the entire household and add saving items into it. It forces you to save money on a budget, therefore, boosting and accelerating your net worth.
Heres how it works:
1. Decide Your Financial Goals
You first decide how much you have to put away for yourself – you pay thyself first then assign funds for an emergency, retirement goals, variable expenses and the like.
2.Create a Budget or Monthly Spending Plan
First, write down the take-home amount each month. For example, let us assume your monthly aftertax paycheck is $4000. This method begins simply by writing and breaking down how much you want to save.
Only after paying yourself first, then your expenses are budgeted for and paid from the leftover funds. Write down the monthly savings you want to put away for yourself and basic necessities.
Here is how your budget might look like but it can be tweaked:
How you’re going to distribute the funds is very personal but as the money comes in, it is automatically allocated exactly to where you have planned it to go.
See example below:
- $400 for the retirement account eg. 401K, RRSP or IRA/Roth.
- $200 for emergencies
- $100 student loans
- $300 day to day checking account.
- $200 saving for college.
That adds up to the $1200 that you have decided to save from your monthly payment. Now calculate the amount left after deducting $1200 from $4000, which comes out to be $2800. Now this will be the amount which you will have to spend for the whole month by keeping the savings already in hand for yourself. You will now be free to spend this money on any portion of any number of items or commodities.
Pros of pay yourself method
- This method requires less maintenance and precision.
- No detailed record to be maintained.
- Half of the stress is already relieved when you have savings already cornered.
- It helps focus on the bigger picture and reduces impulsive purchases.
Cons of pay yourself method
- If you save too much then there is less left to cover your expenses.
- You will have to prepare yourself to make this budget successful
- Savings for vacations over high-interest credit card balance will not always be the best financial decision.
Paying yourself first is a great way for a hands-off budgeting system. Only remember to automate your savings for an easier experience which will only take 10-20 minutes to set up for the first time and then the whole system runs on autopilot. Clearly, this is one of the easiest way to budget and save money.
How to use the anti budget method
With this method, you don’t plan expenditures a month ahead, instead, you look behind at last month’s expenses. Then consider which categories need adjusting to maintain your balance budget accordingly. You look back a month on how you did and plan for the future how to save money on a current month’s budget.
Let’s peek at easy steps on how this method works.
Select between 4-5 categories and set a goal such as saving for retirement to be part of the plan.
After a month is done, calculate the amount you spent on the 4-5 categories and check if you met the goals for the month or not. It is at this point where you decide whether to decrease the percentage of expense on any of it or vice-versa.
Repeat this process each month and continue achieving your goals.
For example, if a family decides to save 10% of their monthly income apart from all the fixed rents and expenses. And after the end of the defined month, the expenses came out to be like: The family spent 70% of the income on their living expense, 15% on leisure activities, 10% out at restaurants and could only save 5% at the end of the month. Now, in the next month, they can alter their expenses on different categories to bring up the savings to 10% again simply by altering the percentage of their variable expenses. The flexibility that this method brings makes it the best way to budget and save money for your household.
Pros of anti-budget method:
- Works best for the people just starting out in budgeting world.
- Helpful in both the cases of monthly income and weekly income.
- It simplifies the whole process by making it less complex and restrictive.
Cons of anti-budget method:
- It cannot be a replacement for the traditional budgeting method.
- Categorization is not very easy for variable expenses.
Some form of budgeting is required in life for everyone. And Anti-budget comes to the rescue even for the beginners to help save the stress coming on the way. For those, who hate getting into records and calculations but do have debts on hand, try this method to manage your expense properly. If you’re just starting out and would like to live on a budget and save money give this method a try.
9.Cash Envelope Budget System
The cash envelope budget is a method of placing cash into an envelope for a specified category for monthly spending. At the end of the month, you see how much money is leftover in the envelope but you don’t allocate any more cash once it is used up. You can apply the principles if you want to live on a budget and save money.
How does it work:
Start by establishing your net or after-tax income. From the cash, you have on hand after taxes – decide how much is going towards spending for the set categories.
Determine Monthly Budget Limit for Each Account
Decide on a budget amount to pay monthly bills, for instance, groceries, rent or mortgage, insurance, medical, shopping, pay down debt and savings. It’s key to establish the limits for each account every month.
If you have irregular income, from month to month it’s difficult to budget with this method. However, if you’re on a salary or have a fixed income, it’s much easier to budget each month. Withdraw the cash amount from the bank account and stuff it into the designated envelopes. Spend the money as per your requirement specified on each envelope.
As a rule of thumb aim to spend approximately 25% of your income on housing, 10% on utilities, and 10 – 25% on insurance, and 10 – 15% on food. Every person’s budget will be different, but these principles can assist you to see your actual financial position. Also, helps you to live on a budget and save money in the process.
Once you have developed your budget, make an envelope for each category. Write the amount of cash on each envelope that you have created.
Withdraw Cash From Main Account
Once the budget is set withdraw the exact amount of cash required for each category and stuff it in your envelopes. Label the category outside of each envelope with the category name and the exact amount of cash you have placed in the envelope.
Spend cash from the envelopes correctly. Make it a point to pay a bill when it’s due from this account. This process works best for purchases you make in-person, for instance, food, gas, and groceries. It gets tricky if you would like to purchase items or pay for a bill online, in this case, combine it with a digital cash envelope system. Here is how you can fulfill this set goal.
You have two options:
- Set aside some cash in your bank account for a specific bill.
- Withdraw cash from the main account and deposit it into your bank account for a bill payment to avoid using funds from unintended categories.
Track Your Spending
Tracking your spending is key as it reveals if the cash envelope system work. Besides it shows you how to properly budget and save money every month.
- Here is how you can track your spending
- Pencil and paper –You can track your expenses with a standard log
- Electronically –Use free apps, for instance, Mint or You Need a Budget app
It doesn’t matter how you track your spending but it’s very important to do it. Check out how much cash is left in each envelope at the end of the month. Although it doesn’t tell you exactly whether you overspent or underspent in a category but this is where a paper and pen comes in handy. Write down expenses paid on the face of each envelope for tracking.
Advantages of the cash envelope system
- It keeps you on track since you’re only using physical cash. The internet-based money transfer system is not applicable here. So, the chance of unnecessary spending is minimal.
- The cash envelope system keeps and forces you to be disciplined with expenditures
- It is pretty hard to overspend as you work with what’s in the envelope
Disadvantages of the cash envelope system
- You are viewed as too old-fashioned since you are only comfortable using cash than debit or credit card.
- You miss out on travel rewards, cashback and other perks that you can get from using credit cards
What if you have to pay for services online and don’t like carrying cash around. Well then opt for the digital envelope system or create a cash envelope budget with a hint of digital envelopes – open a bank account specifically for online payments to satisfy the requirement. Although this budget method is fairly restrictive as it pressures you to save money on a budget. Once ance an envelope has run of money there is nothing left to spend.
10. Digital Envelop Budget System
It’s a budget system where you deposit cash in several bank accounts (make pretend envelopes) then you make payments for a range of monthly expenses. A digital envelope method is just like a cash envelope system but instead of using a physical envelope you deposit cash in a bank account.
Here is how it works:
- First, calculate a suitable monthly budget.
- Then create several bank accounts for each budget category.
- Transfer net income to each bank account allocated for each budget category.
- Use a debit card linked to your bank account to pay for your bills or make purchases.
- Download a digital app of your choice on your smartphone.
- Your actual budgeting work starts now. Write down all spending and purchases in the app as per categories.
How does it work
The digital envelope budget system works just like the cash envelope system. You make a budget for each category and open up bank accounts for each grouping. You then move the set amount of cash to each account every month – these are your ‘make pretend envelopes.’ All you have to do is track your monthly spending from each account to ensure that you spend the budgeted amount.
How do you allocate funds to different categories:
- 50% of your net income is assigned to essential expenses, for instance, rent or mortgage payment and groceries
- 30% is allocated to personal expenses for instance entertainment, eating out and gifts
- 20% is set aside to go to financial priorities like repayment for debts or investing
The key difference between the two is that with the digital envelope system you may want to combine some of your categories together. You may assign one account for housing expenses, one for monthly bills, one for groceries, and one for fun/eating out.
This step is pretty important. You must open bank accounts for every category of your ‘envelopes.’ Many financial institutions offer free savings accounts we advise opening between 3 or 4 free savings accounts. Ensure that the bank offers online banking and issue a debit card that you may use to pay for expenses.
Why Digital Envelope Budget System
Many people are fond of the digital envelope budget system because they continue managing their finances without handling cash. Managing several envelopes is insecure and difficult to manage.
The digital envelope budget system is perfect for those that do most of the shopping online. It’s super easy to track your expenses when you spend online as you can refer to the bank or credit card statement.
Which budget method is better
The digital cash envelope budget system has its advantages and disadvantages. If you don’t like handling cash go for the digital budget system but make sure you stay on budget and use budget apps like Mint and YNAB to keep track of expenses on a regular basis. However, if you prefer cash in hand then the traditional cash envelope method may be a better option for you.
11. Review your progress regularly
In reality, no two months look exactly the same. It’s impossible to predict your budget accurately each month. Understanding this, reviewing each month’s budget can be invaluable in your journey to financial freedom. Constantly review your spending to see where you went over, and where you are in relation to your financial goals. By reviewing your budget frequently, you will know exactly where your money is going. It’s critical to learn how to budget properly and save money to improve your financial well-being.
In Conclusion to How to Budget and Save Money
Considering all the above-stated budgeting ideas, if you know where you stand with your money then you always have a greater chance of financial ease and success. Budgeting has always been a tool to plan for emergencies, pay off your debts and most importantly sleep better at night knowing that in the end, you have the control of the situation instead of your money having the control of you. Pick out a budget method that suits you best. It’s the best way to manage your money and also guides you on how to save money while staying on budget.
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