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Budgeting 101

Are you tired of crunching numbers each month, trying to figure out how you’re going to pay your rent or medical bills? Or, do you build up a little bit in your savings just to blow it when you run out of cash? These are two common consequences of not having a budget. In this course, you will learn why budgeting is so important — and how to do it. We’ll even throw in a few resources to help you stay on track each month (there’s an app for everything these days!) and advice on how to get your spending under control. Let’s get down to the nitty-gritty in this Budgeting 101 course!

01 Why You Should Make a Budget

When you make a budget, you’ll be able to see exactly how much you owe and spend each month. When you finally get a handle on these two things, you’ll spend less time stressing about money each month and spend more time living.

You can even budget your savings each month — meaning you’ll finally stop having to start over when you dig into them for extra cash.

If you have debt, you’ll want to budget for that as well. Imagine being debt-free… With a budget, you’ll be well on your way to it.

Now that you know all of the benefits of budgeting, let’s get down to it!

02 How to Make a Budget

OK, don’t panic — making a budget isn’t as terrible (or boring) as it sounds. It can be done in as little as an hour or two, and it only requires basic math. No calculus here!

Grab a cup of coffee and follow these six steps to make your budget:

  1. Gather your bank statements

    The best way to make a budget is to take an average of a year’s worth of your monthly expenses. If your records only go back a few months, take the average of as many of them as possible. Costs of things like electricity, groceries and water can vary, which is why this is an important step.

  2. Record all of your sources of income

    This is especially important if you freelance or work a lot of side gigs. Take the average of your income, and use that as your monthly take-home amount.

  3. Make a list of your monthly expenses

    If you spend money on it, write it down! This includes everything from auto insurance payments to groceries and trips to the coffee shop. Again, you can take an average for each of these categories — not every month will be the same, and that’s OK.

  4. Divide your expenses into two categories: fixed and variable

    Fixed expenses are things like rent, car payments and credit card payments that are around the same each month. Variable expenses change each month. Think eating out, groceries and gas.

  5. Total your monthly income and expenses

    Add up all of your expenses, and then subtract them from your total monthly income. Hopefully, your income will be more than your expenses. If they aren’t, it’s time to do some adjusting! Taking a deeper look at your small expenses can help you re-evaluate overspending. Those daily coffees or snacks can add up! The goal is for your total monthly income to exceed your expenses.

  6. Set goals

    What are you hoping to accomplish with your budget? Pay off debt? Build your savings? Creating specific goals with deadlines (think: save $1,000 by the end of this year) can help you benchmark your progress along the way. And remember: If you fall off at some point, that’s OK. The important part is picking right back up where you left off.

03 How to Overcome Common Budgeting Obstacles

You might run into a few roadblocks while making your budget — and that’s actually super normal!

There are a few common budgeting obstacles. But the good news is, you can overcome them.

  • Weird pay schedules

    Most folks get paid monthly, twice monthly or biweekly — but what about the months when you end up getting three paychecks? Usually, this means something will probably be thrown off the next month, so don’t go blowing that extra paycheck. Hold on to it, and if you still have some of that money left over next month, try to save it, or use it to pay down debt.

  • Irregular income

    Are you a server at a restaurant? Do you freelance or work side gigs? If so, you’re no stranger to your income fluctuating each month — and how in the world are you supposed to make a budget off of it?!

    Find your average weekly income by adding up the last 10 weeks’ pay and dividing it by 10. Use this number as your weekly income to build your budget around. For more info on budgeting when you live off cash tips, check out this post.

  • Emergency expenses

    An emergency expense (something unexpected, urgent and necessary) can throw an entire month’s budget off course. When this happens, it can be tempting to charge these to credit cards — but you shouldn’t, unless it’s absolutely necessary or you have the money to pay it off immediately. Need some help creating an emergency fund? This post can help you get started.

  • Accounting for irregular expenses

    You just checked your bank account and saw a giant withdrawal for your auto insurance — yikes! You totally forgot that you pay your premium in full twice a month, and now this month’s budget is blown. Bummer.

    It’s important to incorporate these irregular expenses into your budget. To do so, add them up from the past year and divide by 12 — this is the amount you’ll need to set aside each month so you can cover them when it’s time.

Pro-tip Icon PRO TIP:

Open a separate bank account for that money and set up an automatic transfer each month — or let Digit take care of it for you. (It helped one Penny Hoarder save over $4,000!)

  • Keeping track of due dates

    It can be difficult to keep up with bills, especially when your due dates are all over the place. Either everything is due at once, or it seems like every day you’re paying something off. If you’re a responsible credit user, you might be able to get your due dates adjusted on things like internet, cell phone bills and credit card bills. Just don’t change that due date to the first — that’s usually when rent or a mortgage payment is due! Another helpful way to keep track of it all? Automate. Tons of service providers and banks provide automatic withdrawals for bills, meaning they will automatically take money out of your account to cover a bill.

04 Different Types of Budgets

There are tons of budgeting methods out there — do a quick Google search and you might be surprised at how many come up!

Here are two popular methods:

  • 50/20/30 rule

    Tired of feeling like you have no fun money left after creating your budget? This rule is for you. Here’s how it works:

    Your essential living expenses account for 50% of your budget. These include rent, mortgage, utilities, groceries, auto payments/insurance, phone/internet, gas, and minimum credit card and loan payments.

    Spending on your financial goals should equal about 20%. This includes investments, savings and debt-reduction payments above the minimum payments.

    Here’s the best part, though: Spending on things you don’t need gets a whopping 30% of your total budget! So go ahead and dine out, take that vacation, see a movie or grab a drink.

    Need more help getting started with the 50/20/30 rule? This post lays it all out.

  • Zero-based budget

    This budget is great for folks who have been, err, winging it with their money up until now. Under a zero-based budget, every penny you make will be used in a productive manner. With this budget, you should have $0 left over after spending in each of your budget categories.

    Not sure where to funnel the last few dollars after paying all your bills? Start a savings account or emergency fund. This post gives some great tips for starting a zero-based budget.

  • The Envelope Method

    If you tend to overspend, envelopes could be your secret weapon against blowing your budget.

    With the cash envelope system, you create a budget. Then you label an envelope for each category where your spending varies (think groceries, gas, clothing and entertainment, but not your rent or utility bills) and fill it with the cash you’ve budgeted.

    When the cash in your envelope is gone, you’re not allowed to reach for a credit card. Abracadabra! No mindless spending.

05 How to Stay on Budget

It’s one thing to make a budget — and it’s another to stick with it. At the end of each month, sit down and take a look at your actual expenses compared with how they look on your budget. Did you spend too much? Spend less than expected? Taking the time to check in with yourself will keep you on the path to financial success.

There are tons of apps you can download and link to your bank accounts. They’ll keep you on track with alerts, graphs, reminders and more. We have a few favorite money management apps — give them a try!

Another great way to stay on budget? Write down everything you spend. Keep a journal, a page of notes on your phone — anything to make you aware of how much you spent. It usually adds up to more than you think!

06 Keeping Your Spending Under Control

Do you use a debit card for everything? Or a credit card, so you can get rewards points? If so, you might be setting yourself up to blow your budget.

Think about it: How many times do you swipe your card for a cup of coffee? You think to yourself, Oh, it’s only a few bucks! But those three or four dollars can seriously add up.

If you’re struggling with overspending, consider using cash instead of a card. In doing so, you’ll have a tangible representation of how much money you have at all times.

Action plan checkmark Action Plan

Congrats! You now know the ins and outs of budgeting and how to stick with it. We’re proud of you!

Here’s a handy checklist to keep you on track toward your budgeting goals:

Figure out your monthly income.

Decide which budget strategy is best for you.

Keep an eye on it!

Consider switching to cash instead of swiping a credit or debit card.

Keep track of your spending daily — it’ll help you conceptualize how much you’re really spending.

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