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Budgeting 101

**Adapted from The Motley Fool “Budgeting 101: How to Start a Budget for the First Time

1. Determine why you want a budget 

According to surveys, only around a third of all households live by a strict budget. By deciding to budget, you’re joining a select minority — and your decision will pay off. Budgeters are almost twice as likely to report no financial worries compared with spenders, and they’re less likely to live paycheck to paycheck or struggle with finances. 

2. Do a deep dive into current spending habits

Before you can create a realistic budget, you need to know what your current spending habits are. If your budget isn’t realistic, it’s nothing more than a wishlist.

You won’t know if your budget is realistic until you’ve got an idea of where your money is currently going. Most experts recommend tracking your spending for about 30 days to get a clear picture of spending. There are a few ways to track spending:

  • Enter your expenses into a spreadsheet or notebook: Whenever you make a purchase, write it down or enter it into a spreadsheet. This is the most hands-on approach but can be time-consuming and you might forget expenditures if not entered immediately. It helps to keep your receipts. 
  • Use an app: Apps such as MintDollarbird, and PocketGuard make it easy to track spending by linking your credit cards and bank accounts. Link all accounts and ensure each purchase is labeled correctly to get an accurate assessment. 
  • Use your statements: Credit card and bank statements can help track spending, although this approach is less likely to produce detailed results because you may not remember what a particular transaction was for. Still, if you want to get started with your budget right away, going back over a month or two of old statements will give you a big picture to use as a jumping-off point. 

3. Use a calendar to catch irregular expenses

While tracking spending shows you where money goes on a day-to-day basis, your budget should also factor in funds for irregular expenses, such as holidays and birthdays.

4. Add up all of your income

Budgeting is about making the best use of income, so you need to know how much money you have coming in.

5. Identify your personalized financial goals

Most people who make a budget do so because they want to accomplish more with their money. This usually involves achieving long-range financial goals such as:

6. Decide how much to save

Once you’ve got your financial goals, decide how much you need to save for each goal. If you want $100,000 for a house down payment in five years, save $1,666 monthly. If you want to build a $1,000 emergency fund by next year, save $83.33 a month. If you want to pay off $5,000 in debt at 10% interest by the end of the year, make $440 in monthly payments.

8. Decide what kind of budget you want to make

Now that you’ve done the preliminary work, it’s time to actually make a budget. Of course, there’s not just one type of budget, so you’ll need to choose which makes sense for you. Primary options include:

  • A zero-based budget: This is the approach popularized by Dave Ramsey and it involves making income minus outflow = $0. With a zero-sum budget, every dollar you have is assigned a job, with some of those dollars going into savings and the rest assigned to different spending categories. This type of budget can be restrictive, so it’s not right for everyone — but it helps with avoiding overspending, and meeting goals including debt repayment.  
  • A 50-30-20 budget: With this approach, which Sen. Elizabeth Warren (D-Mass.) helped create, 50% of income is allocated toward needs, such as rent, food, and minimum payments on debt. Thirty percent is earmarked for wants, such as trips or entertainment. Finally, 20% goes toward savings. If you choose this approach, you’ll have a lot more flexibility — but may still up spending irresponsibly in some areas. Automating savings is key to making this budget work so you don’t ever shortchange yourself.

Choose a tool to make your budget

The next step is to decide on the logistics of creating your budget. The sample budget above was made in a simple Excel spreadsheet and this approach can be a great one because you don’t need to download any special apps or learn any new programs.

If you want a tool that will allow you to automatically see if you’re on budget, there are plenty of apps you can use. Popular budgeting apps include:

  • MintMint is free and offers the option to create a budget. When your bank and credit cards are linked, Mint will track how well you keep to budget limits. You can choose categories of spending, set limits, specify how frequently each expense will occur, and specify whether to start each month with leftover amounts from the prior month. 
  • You Need a Budget: YNAB costs $6.99 per month but is billed annually at $83.99. You can try YNAB for free before committing to see if it works for you. You can set spending limits for each different kind of spending, connect your bank accounts to track progress and get detailed reports. 
  • PocketGuard: PocketGuard builds a budget for you, based on income and goals you set. The app tracks where your money is going and alerts you to how much it’s safe to spend. The app is free unless you upgrade to PocketGuard Plus, which is $3.99 per month or $34.99 per year.

**Adapted from The Motely Fool “Budgeting 101: How to Start a Budget for the First Time

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January 7, 2020

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