Building a budget is one of the most important steps in your journey to financial freedom. Many people hear the word budget and imagine eating beans and rice like Dave Ramsey says, but it doesn’t have to be like that. You can make a budget and still have fun, I have managed to do it for years while travelling and moving multiple times. The main key is living below your current means.

What is a budget?

A budget is a plan to reduce debt and increase net worth by having a plan for your money and tracking your income versus your expenses. 

How Do You Build a Budget?

Define a Financial  Goal

This could be paying down debt, building an emergency fund, increasing investments, or saving for a down payment on a house. You are not confined to those three, the choice is yours.

Review Recent Spending Habits

After defining your goal, you should take a deep look into your current spending habits. Take at least 2 months of bank statements and break everything into these categories:

• Housing (Mortgage/rent, utilities)
• Groceries (essentials purchased from stores)
• Loans / Debt (credit cards, student loans, personal loans)
• Transportation (vehicle payment(s), gas, maintenance, ect.)
• Personal Care (supplements, clothing, haircuts, ect)
• Entertainment (subscriptions, movies, concerts, anything where you go and have fun)
• Donations/Gifts (holidays, birthdays, charity)
• Miscellaneous (Any expense that does not fit in the categories above)

Review Your Income

Calculate all of the money that you have as take home income for the month. You do not want to use your total earnings before taxes, that is not your true take home pay.

Find Your Budget Approach

There are many different ways to make a budget and they are not one size fits all, you can select one and roll with it or you can find a way to incorporate aspects of each in your own way.

Some common approaches are:

50/30/20

50% of income goes to needs, 30% to wants, and 20% to savings. 

In this style 50% will go to housing, transportation, groceries, the things you truly cannot live without. 30% will go to things that you do not need to survive, but they are nice to have. 20% will go to savings, investing, or paying down debt. 

Zero-Based Budget

Every dollar of income is assigned a job in expenses or savings. If you have an income of $4,000 each month, your budget will account for every penny of that. There should be no excess money at the end of the month.

Envelope System 

You physically or electronically place your money into envelopes that are dedicated to each of the categories you reviewed in your spending habits. The money that is in the envelope is what you have to spend for that category each month.

Pay Yourself First

The first use of the money each month is paying yourself, meaning savings, not fun money to blow. After that, you make sure all of your bills are covered and have a little fun with whatever is left over. 

Personally, I like this approach paired with one of the others above since it makes you put the money away before spending. If you apply this to the 50/30/20, the first payment each month will be the 20% to savings/debt. Then you would make sure your necessities are covered in the 50%. Whatever is left is your 30% of wants spending.

After determining the best approach for you, it is time to build the budget! Write or type out the budget for the next 3 – 4 months and stick to it as best as you can. During each month, keep track of your spending categories at least weekly to make sure you are not overspending in one area, after all that is what the budget helps you prevent.

You should review it at the end of each month to see how well you stuck to it. See where you spent more than expected and less than expected. You can make small tweaks to the budget along the way, but remember that you have your financial goal. That is the reason you are doing this.

Once you are through the first 3 – 4 months, you should review it to see how you are doing and if any big changes should be made. After the changes (if needed) are made, repeat the process. You should also review the budget during any big life events like getting promoted, getting married, deployment, PCS, or anything that will cause a big shift in expenses.

There will be irregular expenses during the process. That is okay, life happens, just keep going and follow the budget to the best of your ability. 

Lastly, I recommend writing down your net worth before making a budget. Review this every 6 or 12 months to see how far you have made it. Small changes make big impacts, make the small spending changes today so when you are 50 money is not a life stressor for you.