How to Create a Budget Successfully

Lidia Staron, author at OpenLoans
Lidia Staron   Head of Content
Personal Finance
I enjoy navigating people through important financial decisions.

Managing your money is part of adulting. It might seem painful and inconvenient, but it's essential to living a happy life. Budgeting is one of the steps of successful money management. Of course, saying it and doing it are two different things. A lot of people are put off just by the idea of calculating income vs expenses and living within the constraints created by such a plan. Moreover, it's easier to create a budget than it is to stick to it. Fortunately, there are ways to make taking this step so much easier. Our budgeting guide should help you understand the need to budget, the rules of budgeting, and how you can create a plan that suits you and helps to ensure budgeting success.

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Why Budgeting is Important?

Learn how to budget successfully.

We all have reasons why we are hesitant about budgeting. But there are also a lot of reasons why we should. And if you want to succeed in sticking to your monthly budget, you need to understand WHY you’re on a budget.

Stops You from Overspending

By creating a budget, you can create a limit on how much you spend, which means you'll be able to determine when you have money for something or not. It's a great way to stop yourself from incurring more debt, especially if you're spending money on unnecessary things such as a daily cup of coffee from Starbucks (or whatever coffee shop you favor). In short, you learn how to spend less than you earn.

Helps with Planning Your Expenses 

We all know that it's important to have money socked away for a rainy day. Well, that money won't accumulate on its own if you don't make a conscious decision to set aside a certain amount every payday. With a budget, you can set aside money for your emergency fund without worrying about dipping into it. After all, if you have a budget, then you should be fine with whatever money you have on hand because you already planned for your expenses ahead of time.

Helps You Reach Goals

Want to pay off your college loan? Save up for a car or a home? Get enough capital to start a business? Creating a budget and following through with it can help you put your money where you need it most. In addition, your budget can help you keep track of your goal, and when you'll be able to reach it.

Lowers Your Stress Levels

Admittedly, a lot of us are not happy just thinking about the restrictions created by living on a budget. It's like a diet. You're not allowed to follow your desires (in this case, buying what you want). You need to stick with what's allowed and only that. However, a budget does not always mean "no fun." You can allow yourself some leisure activities. For example, planning a family vacation on a budget is possible once you're able to put away enough money. More importantly, a budget ensures that you have less need to worry about financial matters. You have every cent of your hard-earned money accounted for. This means that you won't need to worry about where you'll get the money for upcoming bills.

Budgeting Rules

When you’re creating a budget, there are certain rules you can follow to make things easier for you.

The 28/36 Debt Rule

This is the debt-to-income ratio rule that mortgage lenders use when evaluating an applicant for a home loan. For individuals, it's a good rule to follow when determining if you're living within your means or overspending. As an added bonus, following this rule will help improve the chances that you do get approved for a loan if you end up applying.

Now, the 28/36 rule means that you shouldn't spend more than 28% of your income on housing expenses and no more than 36% on debt. When we say housing expenses, we're talking about property taxes, monthly principal and interest, and insurance. All incurred debt means all monthly debt payments, which include housing expenses plus car loans, credit card debt, student loans, and personal loans.

Monthly Budget Planner: The 50/20/30 Spending and Saving Rule

This is another good rule to follow when creating a budget. Not only does this consider your debt and savings, but it also allows you to have some spending money to fulfill "wants." The breakdown goes like this:

50% of your take-home pay will go to paying for all your daily needs, which includes rent, utilities, groceries, transportation, clothing, and the minimum amount for debt payments.

20% of your income will go to your financial goals fund. Now, this could be savings, an emergency fund, or saving for retirement. It could be for investments or for paying down your debts in order to become debt-free. It's up to you how you'll spread your money toward all your financial goals.

30% of your income will be for your personal expenses. Yes, living expenses are "personal," too, but this percentage of your pay is for all the things that are not necessary but will make you happy. This can include entertainment, eating out, hobbies, travel, etc. It will be up to you to determine what you go in this category. Following this rule can help you discover what you really want in your life and what you can live without.

Take note that this rule is more like a general guideline. It will help you become debt-free faster if you lessen the amount of money that goes into your personal spending budget. But it's entirely up to you to set up your parameters based on what you can live with.

Steps to Prepare Your Budget

The road to financial security starts with a budget. So, what are the steps that will take you where you want to go?

#1: Calculate Your Expenses

The first thing you need to know is how much money you spend. Create a monthly expenses list to get a clear picture of where your money goes. Look at your bank statements, receipts, bills, etc. Go back as far as six to 12 months in the past to get a more accurate picture of your financial health.

#2: Calculate Your Income

This is easy enough if you only have one source of income. But some of us have side gigs. Others receive cash gifts, child support, rental income, alimony, and dividends. Don't forget to include money you get for selling your stuff online or through garage sales. All those things are included in your actual income.

#3: Set Goals

You need to set your savings goal as well as a debt payoff goal. Of course, those goals need to be realistic and achievable. Figure out whether you're living within your means or spending too much. If you're in the first category, good for you. The extra amount that you don't spend can go to paying off your debt and savings. If you belong to the 2nd group, then you need to start cutting back on your expenses.

#4: Keep a Record

The only way you can keep to your budget is if you track your spending, income, and progress. If you already know that all your money needs to be set aside for living expenses and savings, then it's much easier for you to stop yourself from splurging. Monitoring your progress will also help motivate you to stay on budget.

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