Does the mere mention of the word make you…wince?
We get where some of you are coming from. Creating a budget can be daunting – about as fun as a trip to the dentist with a mouthful of cavities. And it requires self-control and time – even when time is used to budget for things you actually want to do.
But our goal for this article is to try and make budgeting more approachable and manageable. We want to help you create a personalized budget that can help you feel empowered with your finances, leaving you with fewer headaches and more free time for everything else you’ve got going on in your life.
That’s why we’ve got a step-by-step approach for how to make a budget that works for you.
Before diving into how to set up your budget, it’s a good idea to start with a plan. There are a number of different budgeting plans out there – the 50/30/20 rule, goals based budgeting, and even envelope budgeting to name a few.
Need some ideas? We’ve got a few creative budgeting strategies you can try.
Start with asking yourself why you are budgeting: Are you trying to set aside extra money for a specific goal like a down payment on a house, or hoping to ramp up your retirement contributions? Or do you really need extra cash to pay down debt? Perhaps you just want a better sense of how money is coming in and out of your life.
Having a clear purpose into why you want to budget in the first place can help as you think about different approaches to budgeting.
Creating a budget should start with identifying how much income you can expect each month. From there, you’ll need to account for your recurring expenses (things like mortgage/rent payments, groceries, bills, etc.) so you can focus on the discretionary income that’s left over.
Discretionary income is your magic number – what you have available to save, pay down debt or spend however you’d like. If you go by the 50/30/20 rule for instance – 50 percent essentials, 30 percent wants, 20 percent savings – then your discretionary income should account for half of your after-tax income (your wants and your savings).
With your discretionary income as your jumping off point, set a budget for different categories of spending – dining out, travel, shopping, etc. You’ll want to start with realistic numbers for these categories; start too low and it might take a Herculean effort to keep within budget.
So think long and hard about your numbers. Does your past spending behavior indicate that cutting your travel budget in half is realistic? Can you project into the not-too-distant future and envision whether this is the right amount?
Once you settle on a number, commit to it. You can always adjust it down the road.
If you try to squeeze every last category into your budget, you could end up spreading yourself thin. Instead, try to focus on a few meaningful categories and cut the rest to see what kind of impact that makes on your overall budget.
Of course, there’s a balance to all of this. Say you expect to dine out more often this month with friends who are visiting from out of town, are trying to save for a vacation nine months from now, and want to schedule a few date nights with your significant other. You might need to prioritize and make some decisions about what matters most.
If there’s something in your budget you derive pleasure from, the last thing you want is to feel deprived by not having budgeted enough. Think you’re overspending in another category that’s not meaningful to you? Maybe a goal is to stick to a specific dollar amount for that category.
Say you’re most comfortable setting a manual budget in Excel. And you check on it a week or so later, only to see you’ve blown past your budget in a certain category. That’s never fun. And it’s probably the fastest way to get annoyed and give up on your budget altogether. We get it, managing your money can be hard.
We’re not saying you have to scrap your personalized budget, but if you monitor more frequently, you’ll start to see where you may need to adjust either your budget or your spending behavior to make sure you have a good budget for your needs.
It's okay if you set too aggressive of a budget and need to adjust the numbers. No shame in that. Whoever said budgeting is static? Remember, the point is to make a budget that works for you, wherever you are in life.
But try to resist wholesale changes to your budgeting plans after just one or two weeks; consider monitoring your budget for a month or two. That way you can spot trends. Then figure out what adjustments need to be made.
If you find yourself consistently going over in a specific budget category, see if there are a few dollars you could borrow from another category. Again – you shouldn’t feel bad if you’ve gone over your budget. Budgets are meant to be adjusted.
If you’re able to, make sure you're also rolling some money into savings and have a savings goal. For example, if you’re going by the 50/30/20 rule, then 20 percent from your budget should go into that pot. Using a budget to help you reach your goals is one of the many benefits of budgeting.
Not overspending, earning interest on savings, finding a budget that works for you – we’d like to think those are solid pillars of long term financial health.
Budget. Save. Rinse. Repeat. You’ve got this.
Reaching your goals starts with saving for it.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.