Budgeting 101

  Last updated by

Budgeting is a way of prioritizing your spending through careful planning and organizing. This planning process lays out where all of your money goes. There are several reasons why tracking and budgeting funds are vital to financial intelligence, all of which we will discuss here. Before we get started, though, it's always good to have an idea what you spend and what you can save. We build a quick budgeting calculator to hep you out.

Simple Budgeting Calculator

What's Your Net Monthly Income? ($)

What Are Your Expenses?

How Much Do You Save Each Month?

Your Budget Deficit/Surplus

$0.00

What is Budgeting & Why is it Important?

At its core, budgeting is extremely important as it determines whether or not you have enough money to do the things you want and pay for the things that are necessary. It is a careful balance between your income and your expenses.

Keeping all of your finances in line has several benefits. For one, you’ll never find yourself not having enough—for bills, groceries, taxes, mortgage, etc. A good budget will incorporate some kind of savings and will be able to manage any debt you may have, as well as prevent future debt from occurring.

An organized budget plan could mean the difference between living comfortably and securely or barely getting by. Read on to learn more about budgeting and how you can achieve a balanced budget.

A General Theory of Budgeting

According to a lengthy and descriptive post found on Reddit by a financial virtuoso, budgeting can be accomplished by this general framework of three parts: money for expenses, money for saving, and money for everything else (sometimes called flex money).

Expenses

The first and possibly most important division of your paycheck revolves around your expenses, namely your monthly expense and your irregular expenses.

Your monthly expenses are bills and payments you make on a monthly basis. These are the most common expenses and include things like rent, car payments, Internet, cable, cell phone, etc. Also included in your monthly expenses are your debts and loans, which are sometimes things that are pushed to the side. It’s important you don’t forget to factor in payments for these two categories because these are things that build interest and can get you in a lot of trouble if you don’t pay them off.

Irregular expenses are those “other things” that don’t get paid monthly, but at other intervals like once a year or twice a year. These things are easily forgotten since they don’t reoccur every month. Expenses that seem to pop up unexpectedly in this category can be your car registration, which is once a year, or oil changes, which usually happen every three to four months.

If you forget to factor in these irregular expenses, there may be times of the year when you get slammed with another bill you weren’t expecting, and it could hurt your finances. If you didn’t factor in the new tires you’ll eventually need, it’s going to hurt when the time comes to replace the old ones.

In order to avoid any surprise bills, take some time to calculate all your monthly and irregular expenses per paycheck. When you get paid, set this money aside to make sure your bills are covered.

Savings

A savings account can be used for a couple of reasons. They can be treated as emergency funds in case something really unexpected comes up, like a car accident totaling your vehicle or an emergency room bill. These things happen; sometimes life throws unexpected crises at us. A savings account helps us be prepared for the unknown.

Savings accounts are also good if you are saving for something specific and want to keep that money tucked away. Maybe you are planning a family vacation a year from now, so you open a savings account and set money aside every month.

Whatever the reason, the general rule of thumb for everyone is to have at least $1,000 in your savings at all times. If you haven’t started a savings account yet, it’s a good idea to do that right away.

While $1,000 is ideal, this doesn’t necessarily mean you’re finished. Lots of people like to split up their savings into different accounts based on percentages or dollar amounts. Some ways to split up your savings are an emergency fund, personal fund, and investing.

Like your expenses, you should total up your savings goals and factor this into each of your paychecks.

Everything Else

Once you’ve set aside your money for the bills, the mortgage, all your savings accounts, and necessary expenses, take a look at what you have left over. This money is often referred to as your flex money. This money is for everything else that wasn’t already covered. There are no restrictions on what you can use this money for.

This money can go towards groceries, clothing, eating out, fun activities, cosmetics, etc. Basically, all the little things you buy here and there that aren’t considered bills. You can use this money for whatever you want, but it’s important to remember that this is the last of your paycheck, so once it’s gone, you’re stuck until you get paid again.

Some people like to micro-budget, meaning they set specific spending limits for things like groceries, restaurants, clothing, etc. This is definitely an option, but it’s also not as easy as it seems. Some months you may find yourself eating out a lot, and others you may find yourself grocery shopping and cooking.

One month could go buy where you don’t step foot in a department store, and the next month you need to buy a new fancy outfit for a wedding. These expenditures fluctuate a lot, so sometimes it’s easier to just have a set budget, develop good habits, and keep a close eye on it.

Also, keep in mind that just because you have the extra money doesn’t mean you have to spend it. It’s okay to have a little extra money in your account at the end of the month!

There are lots of ways and formulas that make up a good budget, but if you’re looking for a good place to start, this is it.

Budgeting Software

Creating a budget on your own can be a bit overwhelming and intimidating. Luckily, there are several budgeting software apps and programs available to make this task a little easier and less daunting. We’ve listed five below for you to review and consider for your personal budget planning.

Mint

The Mint app is a free web-based personal finance program. You can access your account through Mint.com or through apps available on Apple phones, Apple Watch, Android, and SMS. Its top features included are budgeting, investment tracking, credit score monitoring, bill management, and tax reporting.

The app and site make it very easy to set up all your budgeting. Once you’ve created an account, you can add all of your transactions and the app will auto-categorize them for you. You can even create your own subcategories.

Within the Mint app, users can create and manage all of their goals. This can include things like paying off debt, loans, credit cards, etc. The app will track your progress and reflect it on your monthly budget plan.

While you can’t pay your bills from this app, it’s a very useful tool for keeping an eye on all your spending. Since it auto-syncs, your transactions will always be up to date.

YNAB

YNAB, which stands for You Need A Budget, is one of the more popular budgeting apps. This app offers online services that synchronize with your bank accounts. YNAB offers budget planning, bill management, and online sync for $6.99 per month. Users can access these services through the YNAB website, Apple phones, Apple Watch, and Android systems.

This app is very simple, and so it does not offer other features like bill payments, investment tracking, credit score monitoring, retirement planning, or tax reporting.

While it may seem disappointing that YNAB does not include the above extra features, it runs great and is perfect for someone who just wants a simple, easy to use budgeting app. Additionally, YNAB users have access to the YNAB Blog for advice and trends, as well as the YNAB Forum for support and questions.

YNAB is also well known for its excellence in security. The only one who has access to your account is you unless requested otherwise for customer service. And once you’ve deleted your account, all the information is gone for good. It’s extremely difficult for hackers to break into these accounts due to their security system.

Personal Capital

Personal Capital is a free personal finance software that is easy to use and super helpful. Personal Capital is cool because while you are free to use it as just a free financial tracking tool, you can also pay to use it as a financial advisory service as well.

The app offers access through its website, Apple devices, and Android devices. The free features available are budgeting, investment tracking, retirement planning, custom categories, and online sync with all of your transactions and accounts.

Within these features are specific offers such as education planning, 401k fee analyzing, asset allocation, and notifications through email of upcoming bills and summaries.

Personal Capital allows you to have a complete view of your finances in a service that they call “360 Degree View of Your Financial Life.” All of your information is in one place, which adds to the app’s convenience. This combines with an interface that is extremely user-friendly.

To use the paid Wealth Management System, you have to start with at least $100,000. If you use this portion of the app (which is totally up to you-you don’t have to use it), you will start paying fees. These fees are based on how much you have in your account and are figured by percentages. The more money you have in your account, the less your yearly fee will be.

The Wealth Management section offers services in indexing, direct investing, rebalancing, and a few other options.

Mvelopes

If you’re a fan of the traditional envelope system—which we’ll talk more about later, for those who are wondering what that is—then Mvelopes is a good budgeting app for you. Mvelopes takes the idea of the envelope system and integrates it into today’s technology.

This web-based personal finance software allows you to manage your budget and cash flow by letting you control finances, recover hidden spending, actively view your accounts in real time, and eliminate debt. This app is steered towards individuals struggling with debt or who tend to be over-spenders.

Mvelopes enables you to choose what goals are most important to you right from the start. When you sign up, you’ll be able to choose the things you want to focus on, like debt, savings, financial stress, and future planning. With the free account, you can add up to four accounts and use 25 envelopes to organize your spending.

Mvelopes has three different account types. There is a free version that offers standard features in budgeting. The next two tiers offer more advanced features that are good for those in debt and those who have more than four accounts and a lot to manage. For $10 a month, you can upgrade your account to premium.

Quicken

Quicken is one of the most well-known programs used for personal finance and budgeting. While the software seems to have called to attention issues in customer service, syncing your bank, and lack of new features, Quicken has other features to offer that make it popular.

Quicken is not free—it can cost anywhere from $34.99 to $99.99 per year. However, it offers features that other apps and websites don’t offer on their free programs. With Quicken, you can make your budget plan, pay bills, track investments, monitor your credit, plan for retirement, report taxes, and still more. Very few budgeting apps let you pay your bills, and only a handful offer retirement planning and investment tracking. Everything syncs online, and you can customize your categories.

You can access Quicken through Windows, Apple, and Android devices, and the software support multiple currencies.

Quicken has been around for a long time and has made several changes over the years, including a change in ownership. While it seems to cost more, if you break down the price by month, it’s really not different from apps like YNAB in price. Plus, it has more to offer.

Paying Off Debt

Paying off debt can be a scary task to approach, depending on how much you owe. Everyone wants to wish it away or pay it all off, so it’s just gone, but it seems like it’s taking forever to even see a significant dent in the amount we owe.

There are a few ways you can approach debt. The way you handle it and organize your payments can make a huge difference. Read on to learn about the Debt Snowball and the Debt Avalanche.

Method 1: Debt Snowball

The Debt Snowball Method gets it name from exactly what you think: a snowball. When you make a snowball, you start with a small amount of snow. Then, you take that small snowball and roll it through the snow, and it gains momentum and gathers more and more snow. As it does this, the snowball grows and grows.

The Debt Snowball acts the same way as a debt reduction strategy. Using this method, you will pay off each of your debts in order of smallest to largest, and the idea is to gain momentum with each balance that is paid off.

To start, list each of your debts from the smallest to the largest. You’re going to be making the minimum payments on all of your debt except for the smallest one. While you’re making these minimum payments, you’ll be paying as much as possible on your smallest debt. When that debt is paid off, rather than sticking to the minimum payment on your next debt, you’ll add what you were paying on the first debt.

To demonstrate, it’s best to use an example. Let’s say you have these debts:

  • $300 credit card, minimum payment of $25

  • $5,000 car loan, minimum payment of $125

  • $15,000 student loan, minimum payment of $100

Each of these payments is being made every month. Let’s say after paying all of your bills and taking care of your monthly necessities; you have an extra $300 in your account. Take that $300 and add it to your $25 monthly credit card payment. In one month, you’ve gotten rid of one of your debt items.

Next month, take that same leftover $300, plus what you would have paid for your credit card, plus the minimum payment for your car loan. You’ll be putting $450 a month towards your car loan now, while your student loan stays the same. This should have you paying off your car in about 11 months.

Once your car is paid off, take all the money you put towards it (the $450) and add it to your monthly student loan payment. You’re now paying $550 per month towards your student loan, which should eliminate it in just 27 months instead of the 10-year plan your loaner probably had you on.

Basically, the Debt Snowball has you allocating the money you would have still been spending on previous loans after they are paid off. In the end, you’re still paying the same amount you were from the beginning!

Method 2: Debt Avalanche

The Debt Avalanche is another method uses to pay off debt quickly. This method is similar to the Debt Snowball except it works by targeting the debt with the highest interest rates first instead of the smallest first. Debt with high-interest rates can be difficult to get rid of, so if you’re concerned with your high-interest debt, then the Avalanche is a good choice for you.

Start by listing all of your debts in order of highest interest rate to the lowest interest rate. Let’s say it looks something like this:

  • Credit card: $2,000 with a 22.9% interest rate

  • Student loan: $10,000 with a 19% interest rate

  • Hospital bill: $500 with 0% interest

In the Debt Avalanche, your goal would be to tackle that credit card first, since it has the highest interest rate. If you find you are ending the month with an extra $200 in your bank account, start putting that money towards your credit card in addition to its minimum payment.

Once you have paid off the credit card in full, move on to the next highest interest rate. In this case, that would be the student loan. Take the total amount you were paying towards the credit card (the extra $200 plus the minimum payment) and add that to the minimum payments you’ve been making towards your student loan.

After the student loan is paid off, finish off your debt by paying your last total in addition to your last minimum payment.

Pro Tip: Use the Envelope Method

The envelope method is a system that’s been around forever and is widely used by people to keep their budget and expenses in order. It should come as no surprise that the envelope method uses just that: envelopes. In this system, individuals keep cash tucked away in envelopes.

The envelope method works best for items that come from your flex budget (you’ll know what this means as we discussed it earlier!). These items include things like groceries, restaurants, entertainment, gas, clothing, etc. Start by making an envelope for each of these categories, or whatever categories suit your needs. Set a budget for each item monthly.

For example, say you decide to put aside $200 each month for groceries. When you get paid, put the $200 in the envelope. If you get paid biweekly, put $100 in from the first paycheck and $100 in for the second paycheck.

For this system to work, it’s important to discipline yourself. The money in the groceries envelope is for groceries only. Stick to your budget and only use what you’ve put aside. Let’s be real—what’s the point of setting a budget if you aren’t strict about going above it?

If you find you’ve reached the end of the month and still have money in your envelope, that’s excellent; you’ve stayed under your budget. You can do a couple of things here. You can leave the money in the envelope to roll over to the next month’s budget, or you can reward yourself (within reason!). Maybe that extra money can be put towards any debt you may have.

Make sure you stick to the system. It can be tempting to move money around and take money from the clothing envelope and use it to go out to dinner. Stay committed and watch how easy it can be to manage expenses.

Tools and Resources

Spreadsheets:

Budget Blogs

budgetbytes.com 
Identity Theft 101
Bitcoin 101

Leave a Comment