Creating a budget plan is essential to manage your income and expenses. Making a budget plan is a first step into saving money and getting ownership over your financial life. Making a budget plan does not have to be overcomplicated, an easy budget plan van already have enormous imact on your financial behaviour.
It happens to the best of us: living paycheck after paycheck, asking ourselves whether we will have enough money to pay for our bills. But as the old English proverb says: ‘where there’s a will, there’s a way’. Being here means you have already figured out that you need to start budgeting. Now, you’ll also get to learn how to make your savings plan and stick to it.
Overspending often comes paired with losing track of your expenses. Most of the time, you realize this after your income is already gone, while the next paycheck is still far from sight. What you need to do now is determine how much money you’re spending and on what. The first step in order to know where you can save money, is to know where your money actually goes.
A very popular method of tracking your expenses is writing them down as they come. You can either keep a spreadsheet, a notebook or use one of the existing budgeting apps. The choice is yours. It’s important to do this for at least one month before setting your budget plan.
Starting the Investigation
Once you have your monthly spending tracked, it’s vital to make a list of your most important to least important expenses. To determine which items go on which list, let’s take a look at the different types of expenses first.
- Fixed expenses – which do not change on a monthly basis – e.g. rent, insurance, bank fees, dept repayment.
- Variable expenses – which differ each month – e.g. groceries, personal care items, fuel, clothing, gifts.
- Emergency expenses – generated by unpredictable situations – e.g. health care, a broken phone or laptop. Ideally this money comes from your emergency savings account.
- Extra or ‘whim’ expenses – all of the expenses that are not essential – e.g. dining out, cinema, Netflix, subscriptions, snacks, coffee to-go.
On your list, all of those expenses that are most essential – e.g. rent and debt repayment – should come first.
Surviving the Inner Turmoil
It’s not easy to let go of any items on your list. You may not need that expensive morning cup of coffee, but it surely makes your day great.
In order to determine just how much you need to let go of, the secret is to prioritize. Start by separating those important fixed expenses from daily ones. This will help you organize your budget and set proper spending percentages.
For example, start by creating a simple table. Add your expenses as they come and categorize them. You can do this on a sheet of paper or with the help of a spreadsheet or even with one of the mobile applications for budgeting. On the bottom you add up the numbers by category, which you then compare with your income.
Working Example of a Budget plan
Imagine Sally with an income of 1500 dollars. After a month she discovers her credit card debt has increased 700 dollars over the past 4 months. How could this happen? She has no idea as she had the impression she was not overspending. But once she writes it down, she can really know she was actually spending more money than her income allows her.
So Sally basically is overspending 175 dollars a month. After four months she has a 700 dollar debt that she has to repay. It is now the moment to change her habits by allocating money that she is allowing herself to spend per month. Sally draws up a new plan on what to spend money on. This new plan also includes paying off her new credit card debt.
Now that the budget plan has been designed, it is time to allocate the money to the different categories. A very simple way for doing this would be setting up weekly budgets for categories groceries, transportation and entertainment. This weekly budget would look like this:
One way of going further is to use separate bank accounts, or simply separate wallets (remember though that each month on average counts 4.3 weeks) that you can use for those purposes only. Also, Sally does not have to spend all the money in week 1. We all know that some weeks are harder than other weeks. She can therefore use the money that was not spend to either save it up for a nice present to celebrate the saving or use the money for the next week when things may be tougher, or maybe because she wants to go to the cinema an extra time.
After 12 months Sally paid off her debt, including interest. She can now decide where to spend the extra 60 dollar on that she was using for debt repayment. The best advice for her would be to save up this money to use for unforeseen expenses ("emergency savings"), but maybe she would feel like giving herself something extra first to congratulate herself and finally be able to get that new dress.
Because yes, we did leave some categories out, like clothing. We did this on purpose. The example above is a simplified version of reality. But in creating budgets, simplification is often a good way to success. What matters is the overview it gives you.
Setting Budget Rules
Creating a budget plan and having a good overview of your financial expenses is one thing. Another thing is allocating budget. This can easily be done with some personal budget rules that you put in place.
One of the best budgeting rules that are commonly used is 50/30/20. How does it work? Well, this simple budgeting plan encourages you to invest 50% of your income in paying for necessities, 30% for your wants, and 20% for savings. This rule is great because it allows you to save a fifth of your money, without making it too austere. Disover more about this budget rule.
Different budget strategies
Remember, living on a budget does not mean you have to stop enjoying life. It is about creating an overview of your financial life. It means getting control over what you spend your money on.
If making a budget limits you more than it helps, you could give it another go by using a different strategy. With the proper mindset and patience, you will definitely be able to reach all of your goals.
- How to Create a Working Budget
- 5 Simple Strategies for How to Save Money
- The 50/30/20 Rule of Thumb for Budgeting.
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.