Budget Plans: From Anxiety to Financial Relaxation

Developing a budget plan is essential for managing income and expenses. This is true for everyone. Creating a budget plan is the first step to saving money and keeping your financial life under control. Creating a budget plan doesn’t have to be complicated. A simple budget plan can have a big positive impact on your financial behavior.

Let’s face it, it happens to all of us: living paycheck to paycheck, wondering if we’ll have enough money to pay the bills. But as the old saying goes, “Where there’s a will, there’s a way”. If you’ve made it to this article, you’ve already realized that you need to start budgeting. Now you’ll also learn how to produce a savings plan and stick to it.

Gathering Evidence

Overspending is often because we lose sight of what we spend our money on. Usually, we only realize this when the income has already been exhausted and the next paycheck is not yet in sight. What you need to do is determine how much money you are spending and what you are spending it on. The first step to knowing where to save money is to know where the money is actually going.

A popular method for keeping track of expenses is to write them down. You can do this on a spreadsheet, in a notebook, or using a budgeting application. The choice is yours. It’s important to do this at least a month before you make your budget plan.

Start the research

Once you have tracked your monthly expenses, it is essential to make a list of your most essential and least important expenses. To determine which items go on each list, first look at the different types of expenses.

  • Fixed expenses —which do not change on a monthly basis, for example: rent, insurance, bank fees, debt repayment.
  • Variable expenses —those that differ each month, e.g. groceries, personal care items, fuel, clothing, gifts.
  • Emergency expenses —generated by unpredictable situations, e.g. health care, repairing a broken phone or laptop. Ideally, this money comes from your emergency savings account.
  • Additional or exceptional expenses —all expenses that are not essential, for example: dining out, movies, Netflix, subscriptions, snacks, coffee to go.

On your list, the most necessary expenses, e.g. rent and debt repayment, are at the top.

Surviving the inner turmoil

It’s hard to let go of the items on your list. You may not need that expensive cup of coffee in the morning, but it will get you through the day.

To determine how much you can stop spending, prioritize your expenses. Start by separating your major fixed expenses from your day-to-day expenses. This will help you organize your budget plan and establish appropriate spending percentages.

For example, start by making a simple chart. Add your expenses as you receive them and categorize them. You can do this on a sheet of paper or using a spreadsheet or even one of the mobile budgeting apps. At the bottom, add up the figures for each line item or section, which you will then compare to your income.

Working example of a budget plan

Imagine that Alice has an income of 1450 dollars. After 3 months, she discovers that her overdraft has increased by 450 dollar in the past months. How could this have happened? She has no idea because she was believing that she didn’t spend too much. But once you write it down, you quickly see that you were actually spending more money than your income allows.

CategoryMonthly Spending
Housing750
Groceries450
Transportation150
Entertainment250
Total Spending1600

So, Alice actually spends 150 dollar a month too much. After three months, her debt has risen to 450 dollar. Now is the time to change her habits and redistribute her spending pattern. So, Alice draws up a new plan for how she wants to spend her money. This new plan includes paying off her debt of 450 dollars, and caps her total spending on 1450 dollars.

CategoryMonthly expenses
Housing750
Groceries350
Transportation150
Entertainment125
Dept repayment75
Total Spending1450

After 6 months, Alice fully paid off her debt. Alice does not change her new budget. She sets aside the 75 dollar per month to save money. She deposits 50 dollar in a savings account and 25 dollar in an investment account.

Automatic budget

For most people, it is normal to receive all their money in one account. They are not very aware of their expenses. Therefore, it is useful to have several savings deposits or bank accounts. For example, it can be smart to separate fixed accounts from expenses. Transferring a fixed amount each week, or once a month, to a separate spending account can help in this process. This can ensure that you don’t spend too much money on groceries. The same can be true for clothing and entertainment expenses.

Establish budget rules

Developing a budget plan and having a good overview of financial expenses is one thing. Setting a budget is quite another. This can easily be done with some personal budget rules that you draw up yourself.

One of the best budgeting rules often used is 50/30/20. How does it work? Now, this simple budgeting plan encourages you to invest 50% of your income to pay for necessities, 30% for your wants and 20% to save. This rule is great because it allows you to save one-fifth of your money without being too frugal. Discover more about this budget rule.

Different budgeting tactics

Living on a budget doesn’t mean you have to stop enjoying life. It’s about having an overview of your financial life. It means gaining control over what you spend your money on.

If budgeting limits you more than it helps you, you can try another tactic again. With the appropriate attitude and patience, you’re sure to be able to achieve all your goals.

Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities. Read more about Kasper and the whole editorial team at FiFi and our editorial guidelines.