Budgeting For Dummies
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Use this Cheat Sheet as a quick way to determine which budgeting method you want to try. It also has tips to help you create a successful budget you can stick to.

Taking the first steps for any budget

Before you begin to explore any budgeting method, you should know your monthly income (after taxes). Then make a list of all your fixed and variable expenses. Fixed expenses are expenses that don’t fluctuate, such as rent or car insurance. Variable expenses, like groceries, can fluctuate or change monthly.

Next, subtract your monthly expenses from your income to ensure you have enough money to cover your expenses. The following figure identifies the three budgeting methods discussed in Budgeting For Dummies.

Zero-based budgeting

Zero-based budgeting is when you assign your income to predetermined budget categories to give every single dollar a job. The overall goal is to have a zero balance by the end of the month and account for all your spending.

You can create your own zero-based budget with the following steps:

  1. Review your current spending and pick an amount to allocate to each category, such as food or utilities.
  2. After you’ve assigned every single dollar to a category, track your monthly spending. Tracking ensures you spend only what you originally planned.
  3. Reassess your spending to see whether you stayed within the allocated amounts.

See what expenses you can cut to lower the amount of money you need and then use that savings toward any financial goals or outstanding debt.

Here’s an easy example of zero-based budgeting for a monthly income of $3,000:

  • Rent: $1,000
  • Debt: $500
  • Utilities: $500
  • Variable expenses, such as groceries, gas, and subscription services: $1,000

With this budget, you’ve accounted for every dollar you bring home.

Envelope budget

The envelope budget method helps you track your spending by using cold hard cash for all purchases. Cash envelopes can also help you become more disciplined by making you more physically aware of the funds you have going out.

Here’s how to make your spending tangible with an envelope budget:

  1. Assign your expenses to categories, such as utilities, entertainment, or groceries.
  2. Write each category on the front of an envelope. Every envelope should have only one category.
  3. Withdraw cash from the bank.
  4. Put the amount of cash you’ve budgeted for each category in that category’s envelope.
  5. As you spend money during your budgeting cycle, remove it from the appropriate envelope(s). Write the amounts spent on the backs of the envelopes as you go. Remember, you can spend only what cash you have allocated in each envelope.
  6. If you have cash leftover at the end of the cycle, put it toward a financial goal or top off another envelope in the next budgeting cycle.

Pay-yourself-first budget

The pay-yourself-first method allows you to take care of your financial priorities without micromanaging your spending. If you often struggle to complete your goals or make progress, this budgeting method may be the right one for you.

However, if you need structure, this approach isn’t your best option. It has too much gray area that makes overspending easy.

Here are some tips for using the pay-yourself-first budget:

  • Figure out what goals you want to take care of. A good rule of thumb is allocating at least 10 percent of your income toward debt and savings goals.
  • Automate a money transfer to ensure prioritizing saving is the first item you take care of after payday.
  • Spend the rest of your income however you see fit. Make sure to take care of the essential expenses, but don’t worry about how much you spend. You’ve already taken care of your future self and can relax.

The 50/30/20 budget

If you’re interested in keeping your spending in check but still want freedom to spend as you want, consider the 50/30/20 budget. It’s a simple way to cover your expenses while meeting your financial goals.

  • 50 percent goes toward needs. A need is something you must have to survive, like shelter and food.
  • 30 percent is allocated for wants. Anything that isn’t essential to your survival but is nice to have is considered a want. So although food is a need, dining out for that food is a want. Entertainment, equipment for hobbies, and new home decor are other examples of wants.
  • 20 percent is for financial priorities. This category can include paying off your student loans, adding to your retirement savings, and anything else you want to put money toward.

Tips for sticking to your budget

For your budget to work, you must be consistent. Most people struggle to budget because the learning curve that typically comes with budgeting makes that initial consistency difficult. These tips can help you stay the course without throwing in the towel:

  • Be realistic. To have a budget that works, you need to be realistic about your life circumstances and your current finances. If you’ve been spending most of your money on dining out, simply deciding you’re only eating home cooked meals won’t work. Going from 0 to 100 is an easy way to start on the wrong foot.
  • Learn to be a planner. One of the ways you can make sure your spending stays within your allocated categories is to plan ahead as much as possible. Decide what you’re eating for the week so you can grocery shop and have food ready to go. Buy birthday gifts in advance while items are on sale. Be prepared to stock up on household items on sale or when you have coupons. Planning ahead can make your money go much farther than buying things spontaneously.
  • Save for emergencies. Start saving in advance for emergencies by creating an emergency fund of at least $1,000. That amount may not seem like much, but $1,000 can go farther than having nothing saved and keep you from putting an urgent expense on a credit card that racks up fees and interest.
  • Create sinking funds. Sinking funds are categories such as car maintenance, gifts, and veterinary check-ups that you know you’ll need to access occasionally. By saving in advance for these expenses, you don’t need to tap into your daily spending or savings accounts.
  • Find ways to cut your expenses. When you start to track your spending, you may realize that cutting back can help you hit your goals faster. Start category by category to see where you can cut your spending. For example, with groceries, you can sign up for rewards programs, find coupons for items you regularly buy, and use apps that can help you cut additional costs.
  • Put money aside for fun. When you put money aside to enjoy time with friends or indulge in your favorite pastime, you’re more inclined to stick with budgeting. The feeling that you’re being deprived is more likely to make you splurge and bust the budget or give up entirely.
  • Use the right tools. The budgeting tools that work for one person don’t necessarily work for the next. Try out different ways of keeping yourself on track. Consider breaking out the old-fashioned pen and paper, making your own spreadsheet, using budgeting software, or downloading apps onto your phone.
  • Remember why you started. Be clear about why you’re on this budgeting journey. Saving money to “just save” isn’t as meaningful as dedicating those savings to specific financial goal, such as an emergency fund or a down payment for a house. Make a list of your budget goals, write a financial mission statement, or hang up a visual reminder such as a vision board.
  • Be flexible. Budgeting isn’t linear. Most people take a step forward and then a step back when they’re starting out, and that’s normal. If your budget isn’t working out, reassess your categories, financial goals, or overall budgeting strategy.

About This Article

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About the book author:

Athena Valentine Lent is the founder of Money Smart Latina, a blog and financial education resource center. She leads workshops and classes on money management, financial resiliency, and navigating finances. She publishes a personal finance column at Slate.com.

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