How often have you logged on to your bank account only to find less money available than you anticipated? You’re not alone. Digital payment methods like direct deposit, debit cards, credit cards, electronic money transfers, and virtual wallet apps (think ApplePay and GooglePay) have distanced us from our money. Digital transactions make it easy to spend a few dollars here and there without thinking about how those purchases add up.
Creating a plan to manage your money is the best way to finally take control of your finances and eliminate mindless spending and overspending. Whether you’re new to budgeting or simply hoping to develop healthy spending habits, I’ll walk you through how to budget and everything you should do to gain control of your personal finances.
Get your budget under control in 3 easy steps
Managing your money doesn’t have to be complicated. In fact, this process can be as simple or detailed as you’d like. While some people prefer to check in on their accounts weekly, others might want to monitor every transaction. Whatever your preferred approach, follow these three steps to get started on your way to success.
Step 1: Figure out your net income
Before analyzing your bank account or seeking out popular budgeting techniques, you first need to understand how much money you have coming in. I recommend calculating your net monthly income (monthly income after taxes) rather than your yearly income. Here’s a quick cheat sheet to help you calculate the correct figures depending on when you get paid.
- Paid twice a month. Simply add up the two paycheck amounts (post-tax) you receive during the month to calculate your net income.
- Paid every other week. Multiply your paycheck amount (post-tax) by two to get your net income. Keep in mind, you’ll be paid three times in one month twice a year. Figure out which months this will happen in and multiply your paycheck amount these months by three instead of two.
- Paid weekly. Multiply your paycheck amount (post-tax) by four.
Keep in mind, some months will have five weeks in them, during which you’ll be paid five times. Figure out which months this will happen in and multiply your paycheck amount for these months by five instead of four.
If you are self-employed or own your own business, your income will likely fluctuate. If possible, calculate the average you were paid per month over the past year or few months. Make sure you account for taxes and remove them from this figure.
Step 2: Determine your monthly expenses
Next, you’ll want to figure out how much you need to pay in bills and other fixed expenses each month and add them up. You’ll want to include:
- Rent or mortgage payment
- Utilities
- Cell phone and internet bills
- Insurance
- Medical bills
- Student loans
- Other loans
- Credit card payments (minimums)
- Groceries
- Gas/transportation costs
This will give you a baseline for what you should see coming out of your bank account each month. For instance, if you make $3,000 a month after taxes and have $1,500 in monthly expenses, you should still have $1,500 left over to spend on non-essential items and move into savings.
Step 3: Track your spending
Most people find they’re spending much more than what their living expenses actually cost. The only way to get to the bottom of your spending habits is by reviewing your transactions. You can do this manually by reviewing bank statements or by exporting your bank activity to a spreadsheet.
Want to make this step even easier? I recommend using a budgeting app to help, like Mint or You Need a Budget (YNB). These apps will not only track your spending but help categorize your transactions into categories, so you can quickly see where your money is going. You can even set your budget up overall or by category so you get notified when you’re close to going over it.
Having an alert sent to your phone is a great way to stop you from ordering GrubHub again when you know you have plenty of food in your kitchen.
Not interested in tracking digitally? No problem. Save your receipts from all purchases and track everything you spend the old-fashioned way to balance your checkbook.
Types of budgets you can follow to get your spending under control
Now that you know the basics for balancing your budget, you may want to jump into a more strict or comprehensive budgeting method. There are many popular budgeting options to try, and I’ll run you through a few of the most popular below.
The 50/30/20 budgeting strategy
This popular budget developed by Elizabeth Warren and her daughter is a flexible method ideal for beginners or more hands-off budgeters. The way this method works is pretty straightforward — 50% of your post-tax income should go to essential expenses, 30% to non-essential spending, and 20% to savings. It’s an easy way to begin to build up an emergency fund or additional savings account while practicing good money habits.
Keep in mind, your essential spending should not include subscriptions, memberships, dining out expenses, or anything else that’s optional. This will fall in your 30% spending bucket. You can also be flexible with the categories and save 30% and only spend 20% on non-essentials.
For example, if you make $3,000 a month after taxes, you should be spending around $1,500 a month on essential expenses, $$900 a month on non-essential purchases, and $600 a month should go into savings.
You might find you’re spending less on expenses, which means you can move that excess into your savings account. If your essential spending is over half of your take-home income, see if you can find ways to decrease your expenses by negotiating bills, finding a more affordable place to live, or switching providers. If you can’t reduce your expenses right now, adjust the other two categories as needed, but strive towards lowering your costs down the line.
An easy way to ensure you save money while using this method is by automatically transferring savings from your checking account to a savings account each time you get paid.
Zero-based budget
The next budget you could consider is the zero-based budgeting method. This strategy requires you to assign all of your money to a category. The exact categories can range depending on your needs, but the goal is to zero out your income vs. expenses at the end of the month.
If your monthly take-home salary is $3,000, here’s an example of what a zero-based budget might look like.
| Category | Cost |
|---|---|
| Rent | $800 |
| Utilities (gas, electric, and water) | $240 |
| Groceries | $400 |
| Gas | $100 |
| Insurance | $80 |
| Credit Card Debt | $120 |
| Takeout | $200 |
| Clothing | $150 |
| Student loans | $200 |
| Streaming apps | $50 |
| Internet | $60 |
| Emergency fund | $400 |
| Retirement savings | $200 |
I love this method because it gives you a comprehensive view of where your money is going and can help you make smarter money decisions and reduce non-essential expenses with clarity.
On the downside, while this budgeting method is easy to start, it can be extremely time-consuming to maintain, particularly when you have variable expenses that weren’t accounted for. Some people enjoy knowing where every dollar is going, while others might be overwhelmed by the amount of tracking this method requires. If you’re highly detail-oriented, you’ll probably enjoy this method.
Separate bank accounts
While not entirely a budgeting method, this strategy allows you better transparency and insight into your spending habits. With this method, you’ll open separate bank accounts to match your spending and savings categories. You’ll have a primary bank account that money comes into, and then you’ll transfer money out to your separate savings and checking accounts.
For instance, you’ll open a separate bank account for paying monthly bills, where you’ll transfer a set amount of money each time you get paid. I recommend having this amount auto-transferred from your checking account, if possible. I also suggest keeping a small cushion, just in case your gas bill, for instance, is a bit higher one month.
Next, you can set up savings (emergency fund, short-term, long-term, goal-oriented, or retirement savings) and even savings accounts to help fund any investments you’re interested in.
After that, you can set up one account for discretionary spending or multiple, depending on your spending categories and habits. This allows you access to one account for non-essential purchases, making it easier to ensure your bills and debts are paid on time.
You could efficiently utilize the 50/30/20 or zero-based budgeting methods along with this strategy.
Envelope method
The last popular budgeting method I’ll run you through is the envelope method. This budgeting strategy gained popularity in the past decade and has helped many curb their spending and take better control of their finances.
The envelope method was initially developed by Dave Ramsey and is a cash-only form of budgeting (with some flexibility that I’ll touch on later). The premise is similar to the zero-based budget but with physical money.
To start, you’ll divide your expenses (and savings goals) into categories that you’ll divide using separate envelopes (color-coded works best). You can separate by bill type and even keep an envelope for spending money (for non-essential purchases). The goal is only to pay these expenses using the money you’ve placed inside the envelopes. If you run out of money, you’re not supposed to pull from any other envelope — you should wait until you’re paid again to replenish the envelope.
This works well for anyone who finds it easy to spend money digitally and harder to part with cash. It’s also a great way to see where your money is going visually.
On the downside, putting your savings in a physical envelope prevents you from taking advantage of savings account interest rates that allow you to grow your money. I recommend following this method with a few tweaks, including automatically pulling cash into a high-yield savings account. Like the no-spend method, this budgeting option also doesn’t allow room for one-off or unexpected expenses, which can become an issue. Likewise, if a bill is higher one month, I’d advocate pulling from your non-essential spending envelope or savings to avoid a late fee.
The other glaring downside to this strategy, particularly during the pandemic, is that cash is not always accepted everywhere. With many of us quarantining and working from home, this isn’t the most convenient or realistic budgeting method.
Budgeting apps to help you stay on track
Mint – best overall
This budgeting app has been around for nearly fifteen years and is an entirely free way to help you manage your money. Mint connects to all of your banking accounts and tracks your purchases. You can set up a budget within the app or even budgets per category, and Mint will notify you if you’re close to going over budget. You’ll also receive payment due date reminders and be able to track all of your expenses in one dashboard. I also love that Mint offers free credit monitoring services so you can keep an eye on your credit progression.
You Need a Budget – best for zero-based budgeting
Another top app to consider is You Need a Budget or YNAB. This tool is a great digital platform for anyone interested in zero-based budgeting. This paid platform allows you to connect to your bank accounts, set up financial goals, create customized categories, and add money to savings automatically. I also love that YNAB offers financial literacy resources, including access to free workshops and budgeting guides.
PocketGuard – best for overspenders
If overspending is your main hurdle, you might want to look into PocketGuard. This app has a free and paid version — if you typically have a high number of transactions per month, I’d recommend the paid version (a one-time payment of $34.99). The free version requires you to track transactions manually, while the paid will integrate with your bank account. This app allows you to set an overall spending limit or spending limits per category or “pockets.” Once you’ve established these categories, it will automatically calculate a budget on your behalf and allow you to track your progress throughout the month easily.
mvelopes – best for envelope system fans
If you love the envelope system but need to transition back into making transactions digitally, Mvelopes might feel the most familiar to you. This e-envelope system allows you to set specific limits on your digital envelopes so you can manage your money the same way you would using the cash-only method. This app is free to try for over a month, then offers monthly plans between $5.97 and $19.97.
Pros and cons of budgeting
Pros
- Insight into where your money is going. Gaining control of your wallet starts with identifying where you’re spending your money. Budgeting can help you take control of your bank account and increase your awareness of your spending habits.
- Ability to maintain savings. I love that most of the popular budgeting methods focus on building a savings account, no matter how little you can afford to add to it. Whether it’s 20% of your paycheck or $10 here and there, budgeting will teach you to grow your savings accounts.
- Visual progress. When budgeting and managing your finances, you’re able to see how much you’ve grown as the master of your own finances. Whether it’s paying down that credit card that’s been looming over your shoulder for years or growing an emergency fund for the first time in your life, developing financial health allows you to easily chart and witness your progress.
Cons
- Time investment. On the downside, budgeting does require time in order to figure out your net income, determine how much you should be spending on different categories, and tracking your progress. While there are some methods that require a lot less time than others, you’ll still need to spend time in order to see healthy financial development.
- Might encourage overspending. Although budgeting strategies are designed to stop spending more than is necessary, in some cases they can backfire. Take the 50/30/20 method, for example. If you find you are only spending 15% of your paycheck on discretionary purchases, that might encourage you to spend another 15% on items or services you don’t need, in order to fit this plan’s profile. The same thing can happen with extra money when using zero-based budgeting or the envelope method.
The bottom line
Budgeting is essential if you hope to take control of your finances this year. Although budgeting can feel complicated and cumbersome, the good news is, there are many budgeting approaches to choose from. The 50/30/20 method offers great flexibility and little oversight, while the zero-spend method grants you better insight into your finances if you’re willing to put the effort in. I also recommend keeping it simple and just paying attention to your expenses out and money coming in if you’re not ready to commit to a budgeting method.
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