A budget is a personal plan of how you will use money given how much money you make and your financial goals. Budgets help achieve those financial goals by establishing an active and thoughtful relationship with your money.
Generally, there are four different budgeting approaches. In the following example we will take a combination of the Zero-Based and 50/20/30 (also known as 50/30/20) based budgets. This is useful because it gets very specific about your spending, which can show what to change later, while providing space for savings. In any case, the budget you should choose is the one that you’ll stick to.
What you will need to create a budget:
Your net income (net pay) for the year.
A statement on what your personal financial goals are. Some examples are: pay off credit card debt, save for a down payment on a house, save for a 6 month emergency fund, and save for retirement. If you have many goals, that’s great! Prioritize them in terms of importance.
A list of your expenses. Tracking expenses and creating a budget aren’t the same thing, but they are related. We’re going to use our expenses of the past to help clarify what our needs and wants are. After creating your budget, you’ll still track your expenses to see if they match your budget.
In our example, we have Avril whose financial goal is to save for a six month emergency fund, save for yearly vacations, and save for a down payment on a home, in that priority order. Her net income is $36,400 a year. She is paid bi-weekly so her monthly net income on average is $2,800. Note that savings isn’t considered an expense. But since we’re creating a hybrid of a zero-budget and 50/20/30, we’ve added it as an expense to show that it is “outgoing money.”
Table heading titles:
Nd / Sg / Wt = Need / Savings / Want. This identifies whether the item is a personal need, a savings item, or a personal want.
Var / Fix = Variable / Fixed. This identifies whether the item is a fixed cost or a variable cost.
Monthly = whether this expense needs to be paid monthly (within the month) or comes at irregular or unpredictable intervals.
Total Budget: $2800
Total Needs: $1925 (69%)
Total Wants: $155, (6%)
Total Savings: $720, (26%)
(Percentage of total budget are in parenthesis and add up to 101% due to rounding)
According to the 50/20/30 budget, Avril has a high amount of needs and savings, and an extremely low amount of wants. If this works for Avril and her goals, this is OK. Remember, 50/20/30 is a guide and as such should be a starting point for your current realities and not a ruthless optimization target.
Avril has added a "Monthly” column to denote whether a particular expense will have to be paid monthly, like rent, or at some longer and most likely unpredictable intervals, like car maintenance. Just because a payment doesn’t come monthly, it doesn’t mean you should ignore it. Avril has also decided to organize her budget by weeks of the month. This allows her to help match the timing of her pay, which is every two weeks, to the outgoing expense. You don’t want to be in a position where you have enough money for the month but have most of the expenses get lumped into one or two weeks, thereby creating a temporary deficit and incurring potential fees.
You should come back to your budget every month to ensure that it makes sense and that you’re following it. You may also change your goals. In this example, once Avril has saved enough for her emergency fund, she’ll deploy that $100 elsewhere. Given that Avril has such a low level of spending on wants and her financial goals are being met, she should have those lattes that she’s budgeted for worry free.
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