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This is one of those deceptively simple questions that can be surprisingly tough to answer. Is a budget a spreadsheet, a money-tracking app or a paper ledger full of black and red ink? What constitutes a realistic budget? How exactly do you follow a budget without feeling overwhelmed?
Even though there are general budgeting principles, every budget is unique and reflects the specific financial needs of the budgeter. Budgets align with your preferences for handling your money. It's less likely that you'll actually follow your budget.
Here's how to start crafting a budget that fits your needs.
Consider How You'll Use Your Money in the Future
The planning stage of budgeting generally involves answering two different questions:
1. What Money Do You Need to Spend in the Future?
You need to spend money on:
- Rent/mortgage payments
- Debt payments
- Other important necessities
Each of these necessities can be a line item in your budget. It's simple to determine how much money you need to spend.
- Calculate how much you have spent each month (or year) on all of your necessary expenses in the past
- Plan for your future necessary expenses based on those calculations
It can be easy to overlook some necessary expenses, especially if they are unexpected. For instance, replacing a dead car battery is a necessary expense/ It's smart to include contributions to your emergency fund in your budget. An emergency fund is good for necessary-but-surprising expenses.
2. What Money Do You Want to Spend in the Future?
Once you've accounted for what's necessary, you can start planning for the items you want to spend your money on. These include everything from retirement savings to vacations to dining out to the latest gadget. Each of your desired expenditures should also have its own line item in your budget.
There will be things you want to spend money on that simply won't fit in your budget. What is most important to you? If you create a realistic budget that allows you to do/have, things that matter most, you may be less likely to feel deprived if you have to eliminate less important expenses.
Track Your Expenses
Another part of budgeting is monitoring your expenses to make sure that you're on target. Traditional tracking required manual entry in either a paper ledger or a spreadsheet, but smartphones, tablets and computers all make it possible to track your spending automatically. Apps and banking programs can help show you how you're spending and whether you're following your budget.
Tracking doesn't just tell you where your money is going. You can use the information you find from tracking to adjust your budget when necessary. Your budget should evolve with your needs.
This is why the essence of budgeting is developing the habit of planning and tracking your funds. Budgets allow you to make adjustments as your finances change and to help you be prepared if problems arise.
Organize Your Budget in a Way That Works for You
Just as your budget numbers are specific to you, the tools you use to organize your budget can also reflect your needs and preferences.
- Start by deciding whether you would rather write your budget on paper or organize it through a digital tool.
- After you decide which you prefer, you can explore the endless options, including various apps and journaling methods.
What does a budget look like? At its core, a budget is about two things:
- Planning how you will spend your money
- Tracking your spending to make sure it adheres to your plan.
It's all about finding the best way for you to accomplish this in order to make the most of your money.