For most people, the idea of budgeting is neither fun nor exciting. Understandably, few people want to spend time crunching numbers or clipping coupons.
However, having a personal budget is the most effective way of knowing how much is coming in and how much money is going out of your account.
Do you have a negative view of money management? You might be holding onto some common budgeting myths. Here’s a general overview of personal budgeting, along with seven popular misconceptions about budgeting.
What is a Monthly Budget?
A cash flow system that allows you to stay in control of your money and the seed to create you wealth. It helps you become intentional with your income.
In the case of a household budget, the budgeting period usually runs for one month. This time frame is easy to work with, as you can plan your spending around your monthly income.
When it comes to budgeting, the reality is that most young people simply aren’t doing it. According to Credit Donkey, just 32 percent of American households prepare a monthly budget.
It’s probably no surprise, then, that many Americans don’t know much about their finances. In fact, just 24 percent of millennials — the age group born roughly between 1980 and 1996 — possess basic financial literacy.
And it’s not just millennials who struggle with budgeting meaning. According to the Associated Press-NORC Center for Public Research, two-thirds of Americans aren’t financially prepared to handle a $1,000 emergency.
What are the advantages of having a budget?
In addition to teaching you how to manage money wisely, having a monthly budget can give you important insight into your spending habits, so you can cut out frivolous spending and save more.
Budgeting also helps you eliminate debt faster so you can focus on financial goals like buying a home, starting your own business, or saving for retirement. If you’re one of the 15 percent of Americans with no retirement plan whatsoever, a budget can be a great way to start putting money aside for the future.
Easy Ways To Budget
There is no one-size-fits-all type of budget. One of the great things about budgeting is that you can tailor yours to fit your habits, needs, and goals. If you’re just starting out with budgeting, here are four kinds of budgeting strategies to consider:
This is a simplified budget, after covering all your expenses during the month, any money left over for example $300 left over, at the end of the month, allocate that money left to other budgeting categories for the next month.
Do you have irregular income? A zero budget works just as well for you. List out your expenses in order of importance. Take care of the things you marked out as important first.
When the money comes into your account, allocate it to those important budgeting categories. When another check comes in, continue where you left off.
The general idea behind this budget is that you should spend about 50 percent of your income on essential items like food and housing, 30 percent on personal things such as toiletries and dining out, and 20 percent on savings.
As the name suggests, the envelope budget has you set up a separate envelope for each budgeting category. From there, you add money to each envelope for the month. For each particular category, you can only spend the amount in the envelope.
Following a values-based budget is a good way to understand what’s important to you. For example, if you track your monthly spending and find that you spend a significant portion of your income on entertainment, this helps you truly see how much you’re spending — and whether you’re spending too much.
If your spending doesn’t line up with your financial goals, this is a sign you need to shift your priorities or cut back on spending in a given category.
If you’ve avoided setting up a budget because you think it’ll be boring or too restrictive, you might be falling for some of the most common budgeting myths. Here are seven misconceptions about budgeting.
You Don’t Earn Enough Money to Make a Budget Necessary
Whether you earn a little or a lot, you can benefit from having a budget. If your income is lower than you’d like, budgeting can help you avoid frivolous spending — so you can keep more of what you earn.
In the absence of any kind of money management strategy, you have no real sense of how much you’re bringing in and how much you’re sending out.
Instead, your money just seems to drain from your bank account each month as you pay bills, put gas in your car, and buy the occasional fast food meal on the go.
This is why budgeting is perfect for those with a low income. Once you know exactly how much you spend, you can take steps to reduce your expenses.
Getting organized and taking control of your money can be a rewarding feeling. It can also give you the motivation you need to start earning more.
Budgeting Is Too Much Work
There are many different ways to budget, and many of them are quite straightforward. Moreover, modern technology has made it easier than ever to keep track of your spending.
Free budgeting apps like Mint and Every Dollar let you budget at home or on the go — right from your smartphone.
You can also streamline your expenses by setting your bills to auto-pay. For example, many credit card companies and student loan lenders offer automatic payments to their customers.
Once the payment is set up, the money is withdrawn from your account on a predetermined day each month.
This way, you never have to worry about keeping track of due dates or making a late payment. As a bonus, many creditors offer a small discount if you enroll in their auto-pay program.
Budgeting Means Depriving Yourself
Many people avoid budgeting because they worry it’ll feel too much like dieting. If you have to go without your favorite things, how are you supposed to enjoy yourself?
However, having a budget doesn’t mean you have to ditch your dinner plans or stop buying your favorite coffee on busy weekday mornings. On the contrary, you simply have to keep track of what you spend and set aside money in advance for each type of expense.
For example, if you love grabbing your favorite fast food for lunch a couple times a week, just make sure you create a budget category for lunches.
From there, calculate what you spend for the week or the month for all lunches, including those prepared at home as well as the ones you purchase at McDonald’s or your favorite sandwich shop.
As you get more comfortable with budgeting, you might notice that you spend far more than you realized on dining or lunching outside the house. If this inspires you to cut back on eating out, that can be a positive thing.
By cooking at home more often, you’ll save money and trim your waistline. On the other hand, you can still indulge in a restaurant meal as long as you make room for it in your budget.
High earners do not have to budget.
If you enjoy a high salary, you might think you don’t really need a budget. This is incorrect. Budgets aren’t just for people who struggle to make ends meet. Everyone can benefit from knowing how much they spend, regardless of the size of their income.
In fact, when you deduct your expenses and things like retirement contributions, your take-home pay might not be as high as you thought.
In addition, keeping tabs on your money can also help you identify changes, such as jumps in interest rates or shifts in your spending.
You’re Bad at Math
You don’t need an accounting degree to create a budget. If you can handle basic addition and subtraction, you have all the tools you need to manage your finances.
If you’re still wary about taking on the math, you might try using a budgeting app. There are plenty of free apps out there, along with some excellent pay options.
For example, You Need a Budget (YNAB) has a huge following of devoted fans who say the app has helped them save hundreds and even thousands of dollars a year. YNAB is free for the first 34 days, then $11.99 per month after that.
If you’re into the envelope budgeting strategy, check out Goodbudget. Instead of traditional paper envelopes, Goodbudget gives you virtual envelopes for your monthly expenses.
You get up to 10 envelopes on the free plan. The paid plan gets you unlimited envelopes for $6 a month. Best of all? These apps — and others like them — do the math for you.
Budgeting Means You’re Obsessed with Money
This myth might be true if the goal of budgeting is to amass as much money as possible.
However, this isn’t really why people budget. Instead, they create a budget so they can reach financial goals and enjoy more of what they earn. People also budget so they can afford an emergency expense.
When you lack an emergency fund, an unexpected car repair or sick pet can set you back hundreds or thousands of dollars.
If you’re forced to dip into your everyday household expenses or charge the bill to a credit card, you could end up in serious financial trouble.
Unexpected Expenses Will Always Pop Up
While it’s definitely true that life has a way of throwing curve balls, being prepared for emergencies can help soften the blow. This is the same reason people pay for auto insurance or homeowner’s insurance.
You can’t predict a house flood or rear-end accident, but you can certainly have an insurance policy in place to give you peace of mind.
Budgeting works in much the same way. When you keep track of your money, you get a big picture view of your finances.
You can also look ahead to get an idea of when extra expenses will crop up. For example, holiday shopping happens in December each year. When you have a budget, you can put aside a little bit of money each month to cover the cost of gifts.
Make Your Budget Work for You
Successful budgeting takes some time, but any a budget takes the guesswork out of your financial life. It also gives you control over your spending. As with anything else, forming a good habit takes time.
By sticking to budgeting over the long haul, the process of tracking your expenses will eventually become second nature.