Budgeting 101: How to make a budget

Now, these are pretty sad excuses for dodging the budgeting bullet, considering that budgeting is literally the only way that you will ever be able to afford what you want! If you can think about spending your money in a way that makes you happy, you already have an incentive to start budgeting. Outside of winning the lottery, you won't find a more effective way to pay off your debt and reach that goal.

Budgeting makes your life better because

• It allows you to be ready for emergencies. Expensive medical, dental family, pet, car, and home emergencies are unavoidable facts of life. The problem with not having a budget is that you're not able to track your cash flow or put any extra money aside for emergencies. Budgeting acts as a form of protection for unexpected bills and allows you to prepare for them financially. The stress of the emergency itself is unavoidable — but it really helps to not have to worry about where you'll find the money to pay for the bill.

• It keeps you out of debt. In a world where credit is king, some debt is unavoidable and even necessary. Having a budget will give you an idea of how much debt you can only afford to have and enables you to pay off loans. Budgeting helps control debt to keep your credit score as high as possible and prevent a vicious spiral into deep debt.

• It helps you achieve your financial and life goals. Whether you dream to retire early and spend the rest of your years hopping from one country to another, set up your own business and be your own boss, or save up to buy a house or car, a budget is your financial roadmap to achieving these goals. Without a clear-cut budget, there is very little saved for emergencies, investments, or major purchases.

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Keep reading to make your own simply awesome budget.

Basic Budgeting Principles, in Plain English

Budgeting is not just a one-time, five-hour sit down session with a calculator, and budgets aren't meant to be rigid. Budget are actually more flexible and allow for extra spending, minor falls off the wagon, and changes in your life. It's best to review how your budget is working (i.e. if it's realistic!) after a couple of months and adjust it as needed to make sure you're able to buy the things you need, pay your bills, and still have money left over for savings and your personal goals.

Here are some basic guidelines to get you started:

Be conservative

A budget does not work when there's a mismatch between actual money coming in and actual expenses. It's frustrating to realize that the $250 you've budgeted for your groceries isn't enough.

It's crucial to give your budget a bit of breathing space by overestimating your expenses. You should also have an item in your budget called "contingencies" for unexpected expenses. Any extra money left over at the end of the month can be added to your savings.

Don't spend money that you don't have

Even without having actual money in the bank, you can make all sorts of purchases with a single swipe of a magical credit card. This is where overspending begins and debt starts to pile up fast.

In your monthly budget, include every single item you need for the month, including food, medications, personal care items, and recurring bills to pay, and then figure in a certain amount for luxuries and entertainment. If your monthly allocation for luxuries is only $100, then you'll have to resist buying that $200 gadget or accessory you've had your eye on with credit. In fact, a great rule of thumb for using credit is to use it only for purchases that you can easily pay with the amount of money that's accessible with your debit card (AKA money you actually have).

Pay yourself first

The bigger goal of budgeting is to help you achieve your financial goals. This means a budget will help track your money properly and ensure that you're setting aside a certain amount every month for a house down payment, the business you want to set up in the future, or the ‘round-the-world-trip you want to take in the next five years.

Too often, our budget reflects only the bills we must pay, the cost of food and groceries, or transportation. The greatest mistake you can make in your budget is to forget to add payments to yourself: into personal savings, emergency funds, retirement funds, or investment accounts. Include all these items and pay these items first every month. This will keep you motivated and show you the true value of budgeting, which is to make your money work for you.

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Create Your Budget in 3 Easy Steps

Your budget will make sure you can pay for all the most important things in life and still put money aside for the future. So, first off, you need to ask yourself a few questions: What are your genuine needs that you can't live without? What are your wants, or optional expenses that would be nice to have? What expenses change and which ones are fixed and constant every month? While some people genuinely need a gym membership, you need to decide if you really do. Some serious budgeters swear that their daily fancy latte keeps them going. Deciding on your wants versus your needs is not about judging yourself harshly; it's about figuring out where you can cut costs to increase savings — and still be a happy human being.

Once you've figured out your basic genuine needs and your fixed monthly costs, you're ready to draw up a budget.

1. Be Mindful of Cash Flow

Draw up your budget based on your monthly cash flow. Some people get paid every week; others get paid every two weeks; and freelancers and contractors might get paid monthly. Use your payment arrangement as a basis for creating a monthly budget. Figure out how much you make in a month and use that to start subtracting your fixed bills to figure out how much money you'll have left over from your income after you pay your bills. If there's not much left after your estimated food and needs spending, then you'll have to spend as little as possible on extras throughout the month.

If your income fluctuates every month because you work part time, don't have a regular job, you're a freelancer or operating your own business, or you work on a per-project basis, then your budget needs to be based on your worst-case or lower-than-average scenario. This means that your budget should be strictly conservative, underestimating your income and overestimating your expenses.

2. Identify Your Needs

Identify how much money you need every month to reach your financial goals, buy necessary items like food, and pay your debts. Pay yourself first by setting aside money for the first item. Whether it's a retirement savings account or an investment fund, make these payments a priority. How much you put into your goal depends on the dollar target you've set for yourself. If your goal is to save $100,000 for a house down payment in five years' time, then you need to save about $1,600 every month. The longer the time frame you have for your financial goals, the lower the amount you need to put aside every month. While there is no set percentage, you should be able to set aside at least 20% of your monthly income for your personal financial goals.

Secondly, calculate into your budget regular payments for your loans and debts. Regularly paying off debts keeps you out of the vicious debt cycle, prevents you from being saddled with crazy interest rates, and improves your credit score.

Then, take a look at your mandatory (necessary) spending. This covers items crucial to your survival: mortgage or rent, health insurance, utilities like water and electricity, groceries, and transportation.

Finally, identify how much you'll be setting aside for discretionary (fun!) spending on little indulgences like cable TV, shopping, or the occasional dinner and drinks out with friends.

If your main goal is to increase how much money you put towards your personal financial goals or pay off high-interest debts, then you can adjust your budget starting by lowering your spending on extras. If you do this and you still need more money diverted to paying debts or want to work harder on your savings, then you can adjust your mandatory spending by getting a roommate, changing your transportation choice, or changing where and how you shop for groceries.

For example, you might not be able to afford continuing to spend 15% of your income on gasoline and car maintenance, but taking public transport or carpooling to work can save you a lot of money. Groceries and discretionary spending are the easiest to save on. Cut down weekly drinks with friends from four times a month to two. For food savings, you can cook at home, buy less meat, buy in bulk, shop sales, or use coupons.

3. Try the Envelope System

The envelope system is a simple way to ensure that you stick to your budget and make sure that you can pay your bills on time. Take some envelopes and label them each with your budget items, from rent to groceries to your investment goals, and simply put the money inside. If you want to keep everything in one place, an accordion envelope is also a good choice. Use only the money from each envelope to pay for purchases in that category.

The envelope system works to control your spending because once you see that there's not enough money left for your discretionary items, you know it's not a good time to be eating out or going drinking with colleagues after work. At the same time, seeing extra money left over at the end of the month gives a feeling of accomplishment from knowing you can control your spending and live within or even below your means.

Budgeting Doesn't Need to be Complicated

Budgeting doesn't need to be complicated. You should understand that there's no one-size-fits-all approach. Wherever you are in your budgeting journey, the important thing is to not give up on yourself! Budgeting is so vital to your financial health that it really doesn't matter if you're just starting out or if you've tried and "failed" to budget in the past. No matter who you are or where you've been, there's no better time to make a budget than right now. Making the effort is always worth your time.

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