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Personal Finances

Budgeting

Ready to take control of your finances? See what steps to follow to develop a spending and saving plan and follow through on it.

Jump to: Step One Step Two Step Three Step Four

Embrace The Budget

There are many misconceptions surrounding budgeting. Some might think a budget is time consuming, complicated, restrictive, or pointless.

In reality, it’s a simple, yet impactful, tool used to make deliberate choices about how you spend and save so you can better manage money, do more of what matters to you, and enjoy greater peace of mind. Though it takes some time to set up, it can be painless to maintain.

The equation for following a zero-based budget is: Income – Savings – Expenses = Zero.

This means you save or spend every dollar you earn, with saving being a priority. The challenging part is determining how to allocate funds and ensuring you aren’t spending more than your income.

Use our four-step guide to walk through constructing a budget that works for you and creating a plan to follow through on it.

Budgeting Step 1: Identify Income

Step One: Identify Income

Look back at your records to identify all sources of income, including wages, child support, pensions, government benefits, rental revenue, etc.

You’ll also want to include irregular but consistent earnings such as those from a side job. If your monthly pay fluctuates, look at statements or other documents to calculate a monthly average.

Tips:

  • Look at your net income, which is your earnings after taxes and deductions.
  • Don’t include sporadic income, like tax refunds or bonuses, but set a rule for it. For example, “I will use 50% for emergency savings, 30% for debt repayment, and 20% for wants.”

Savings Calculator

Use our calculator to narrow down your timeline and set a monthly savings goal, no matter what you’re working toward.

Step Two: Identify Expenses

Make A List

The best way to figure out where you’re spending your money is to track spending for a month.

If you only use debit or credit cards to make purchases, you can review your most recent statements. If you use cash, you’ll want to note every time you spend money, no matter the amount.

How you track spending is up to you. You can use a notebook, your phone, or a personal finance management tool, like Financial Tools within A+ Online Banking. This can help simplify building a budget once set up.

Tip: In addition to making note of monthly expenses, you’ll want to make a list of periodic expenses. This can include vehicle maintenance and registration, gifts for the holidays, your annual vacation, etc. If you so choose, you can even create a savings fund just for these items and make monthly contributions to spread the costs over the year.

Fixed vs. Variable

When developing your budget, it’s important to distinguish between fixed and variable costs.

Fixed costs stay the same each month while variable costs fluctuate. Variable costs can be harder to predict, but looking at prior months’ costs to get an average can be a good approach.

Keep in mind, you might need to adjust depending on the month or season. Electricity bills, for example, can climb sharply in the summer months.

Needs vs. Wants

It’s also important to evaluate your needs and wants.

In an ideal world, a need is something you must have to survive, and everything else is a want. The real world is more complex.

Ask yourself whether you’re willing to sacrifice other things in order to pay for an item. If the answer is ‘yes’, it’s likely a need – though that’s not always the case. For example, while you may need transportation, a luxury vehicle is more of a want.

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Work With An Expert

Could you use some help with developing your budget? Our partner in financial education, BALANCE, offers free, confidential one-on-one coaching.

Step Three: Build Your Plan

Now that your income and expenses are clear, it’s time to build your plan. Remember, one of the main goals of creating a budget is having increased control over where your money goes.

Budgeting Step 2: organize spending

Organize Spending

One way to get a better understanding of what your money is going towards to break down spending. For example, shopping expenses can be broken down into subcategories such as groceries, clothing, and household goods.

There are many ways to evaluate spending in order to build a budget; to keep it simple, we’re going to group our expenses into three categories: Essential, Lifestyle Choice, and Financial Priority.

Essential expenses are must-haves. Lifestyle Choices include anything that’s fun or not a necessity. Financial Priorities capture goals and often include debt repayment (beyond the minimum payment required) and saving.

Go through your list of expenses. Next to each item, write either an (E) for Essential, (L) for Lifestyle Choice, or (F) for Financial Priority. See our list of examples below.

Scroll to see more details
Essential (housing, transportation, groceries, utilities), Financial Priority (debt overpayment, retirement contributions, emergency savings, other savings), Lifestyle Choice (clothing, charitable giving, entertainment, pets)
Essential Lifestyle Choice Financial Priority
Housing Payment Clothing Debt Overpayments
Transportation Charitable Giving Retirement Contributions
Groceries Entertainment Emergency Savings
Utilities Pets Other Savings
Budgeting Step 3: Evaluate Expenses

Evaluate

Earlier, you broke expenses up into three categories: Essential, Lifestyle Choice, and Financial Priority.

This corresponds to a popular budgeting method called the 50/30/20 Rule which suggests:

  • 50% (or less) of spending should be on Essential Expenses
  • 30% (or less) should be on Lifestyle Choices
  • 20% (or more) should be on Financial Priorities

Before moving forward, you need to understand where you currently are. Total up your expenses in each of the three categories to see how they compare to the 50/30/20 guidelines.

Budgeting Step 4: Build Your Budget

Build

The next part, building your plan, might seem overwhelming, but you’ve done most of the legwork already. There are different ways to allocate expenses, but the benefit of following the 50/30/20 Rule is having an already established guide.

To calculate recommended totals for each category, take your net income and multiply it by 0.5, 0.3, and 0.2.

For example, if your take-home pay is $3,000, the guidelines would be $1,500 for Essential Expenses, $900 for Lifestyle Choices, and $600 for Financial Priorities. Remember, this is just a starting point.

With your spending history in mind, fill in the budgeting worksheet.

  • Start with the Essential Expenses
  • Next, add your Financial Priorities
  • Finally, insert the Lifestyle Choices

Our budget worksheet has pre-filled expenses to help guide you.

Adjust

As you build your spending plan, you may find that your expenses are nowhere near the 50/30/20 recommendations. How you adjust your budget moving forward will depend on your goals and priorities. Additionally, remember that the goal is to give every dollar a purpose. If there’s any money left over, be sure to add it to a category of your choice.

Tip: While you’re making great strides at this point, budgeting is a process that should continue to evolve as your financial picture and needs change. Set a calendar reminder to help ensure you revisit periodically.

Step Four: Implement

Now that you have a plan, it’s time to put it into action. To hold yourself accountable and ensure you stick to it, you’ll want to choose a system to track spending. Here are a few options.

Traditional and simple, yet effective. Use paper and pen to write down your expenses and build your budget.

Use envelopes to hold the budgeted amount for a specific category. Each time you get paid, you’ll divide the money up based on your budget. As you spend, you’ll need to withdraw from the designated envelope.

For example, you’ve budgeted $200 for groceries for the month. When you get paid, you count out $200 in cash and put it into the grocery envelope. Throughout the month, you’ll withdraw from that envelope; once the funds for that category run out, you’ll need to stop spending or rework your envelopes as needed. Using cash can help better enforce spending limits.

Spreadsheets are another great option for tracking expenses. While it might require more time to set up and maintain, you have more flexibility and control in how you build your budget and track your expenses. Some word processing platforms even have templates you can use to get started.

Using a Personal Financial Management (PFM) app or website, such as Financial Tools within A+ Online Banking is a convenient way to build and follow a budget. When you use these tools, you allow the app/website to have access to your financial accounts in order to aggregate information and spending data in one place.

You’re then able to set up specific budgets, sort and categorize expenses from across checking and credit card accounts, set up notifications when nearing spending limits, and more.

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