While the idea behind budgeting is simple, finding a way to manage your finances successfully can take a great deal of work. Budgeting is much more than creating a monthly spending plan and following it. For a budget to be effective, it must work with your lifestyle, increase your available finances, provide you with a rewarding experience, and most importantly, be a plan you can follow long-term. After all, when done correctly, budgeting is your portal to experiences, financial health, and an expanded quality of life. However, when done incorrectly, budgeting is often a negative experience that brings stress and frustration—but it does not need to be. There are steps you can take to assure the budget you create not only works to save you money but supports your lifestyle.

Budgeting helps you to:

• Pay your bills and meet your responsibilities on time
• Decrease financial stress
• Pay for unexpected expenses
• Create a savings account and plan for your future
• Save for experiences and expand your quality of life
• To keep a clear picture of your finances so you do not overspend
• Improve your bottom line
• Develop a positive relationship with money

You work hard for your money and budgeting helps you make the most if it.

How To Create A Budget

Step One: Be Realistic

Before you start crunching numbers and calculating totals, it helps to get yourself into the correct mindset. One of the reasons budgeting so often fail is because they are not realistic. If you are dependent upon your half-calf-double-no-foam-mocha in the morning, do not go into budgeting thinking you can or will give it up! Not that you should have to. In fact, if you do not give yourself any allowances, chances are your budget will fail before it even begins. Why? Because of reinforcement. Your quality of life coffee creates a better, happier, efficient you, which in return allows you to keep moving toward your goals. Without little boosts, quality of life can suffer. Yes, budgeting will require you to change your spending behaviors—but you will need to hold onto a few of those reinforcements for this to be successful. 

Be honest with yourself. If you cannot give up your daily coffee, or Friday night tacos, or give up Stranger Things on Netflix—plan to create your budget with those unshakeable expenditures in mind. In truth, a budget should not reflect your best-case spending scenario, because it is not realistic. However, do not plan for your worst-case scenario either. Instead, aim for a budget that best represents your everyday life. Be honest about the items you cannot forfeit, but also ready yourself to become flexible and get creative to achieve your goals.

The difference between a Grande and a Tall at a coffee stand is over a $1.50. Meaning you could recover $10.50 a week, $42 a month, or $504 a year just for drinking four ounces less of your daily perk than you normally do! With $500, you could travel, pay off a major credit card and improve your credit, go on a shopping spree, put a down payment on a car, upgrade your living quarters, buy 134 half-calf-double-no-foam-mochas! And this is with just one minor adjustment.

Remember It is a lot easier to change or modify our behaviors than is to cease them all together. Before you build a budget, be realistic with yourself. This way you will create a budget that will work best with your lifestyle.

Step Two: Total Your Finances

Now that you are in the mindset to create a budget that works for you, it is time to discover your true discretionary income by taking these steps:

• Calculate your Net Income (that is your monthly take home pay)

It is best to not include irregular income as part of your total income unless you want your budget to be dependent on it. Budgets work best with predictable truths that way you do not think you have more than you do or come up short.

• Calculate Your Total Bills, All Financial Obligations, and Items of Regular Spending

During this process take note of the items that are necessities (utilities, rent, car payments, grocery shopping, student loans etc.) that cannot be negotiated, and place all your extracurricular bills together (Netflix, Amazon, etc.) in the other column for future reflection.

• Subtract Monthly Expenses from Your Net Income

(Monthly Income) – (Total Monthly Expenses) = Discretionary Income

• What is Disposable income?

Although disposable and discretionary income are often used interchangeably, they are not the same. Disposable income refers to the amount of money you have left after you pay taxes, while discretionary income is the money you have leftover after you meet your monthly financial obligations.

• Discretionary Income

Discretionary Income is your bottom-line as it stands and what budgeting will help to grow. You are not alone if you find this total to be extremely low, or in some cases in the red. It is not uncommon to know how much we are spending. All those little things add up. This is how budgeting helps individuals get ahead and develop healthier spending habits.

Step Two: Categorize your Expenses

Now that you have your expenses and totals, you will need to categorize them.  

There are four types of expenses:

1. Variable: expenses that have varying totals but are always spent (gas, grocery shopping, electricity, water bill, etc.)
2. Fixed: any expense with a payment that does not change, like your car loan, rent or house payment, student loan payment, etc.
3. Intermittent: payments that occur throughout the year but not every month, such as tuition, oil changes, birthdays…
4. Discretionary: these are your quality of life expenses! Items such as Starbucks, Netflix, Redbox rental, restaurants, entertainment, etc. This is also the money you use for savings.

This list is important because it establishes your priorities and identifies your next steps for moving forward. This is also the point in budgeting where we may find ways to increase your discretionary income.  

1. Variable:
   • You can reduce these totals:
     • Often power companies will let you pay an average over the year, this could save you money toward the end of the month. 
     • Consider lowering your credit card payments to a single card with a lower interest rate
     • Spend less on groceries or shop for clothes at a cheaper price
2. Fixed:
   • Rent or house payments take a lot of our earned money. Therefore, considering a place that is even $25 cheaper can save $300 per year. If you drank a Tall instead of a Grande at your local coffee stand and lived in a home that was only $25 cheaper—you just saved $750 a year.
   • If you can refinance your car, this can save you up to $100 a month.
   •  Taking a good looked at your variable and fixed incomes is likely to save you the most in the quickest amount of time.   
3. Intermittent payments:
   • These payments may not have much wiggle room as they are payments that come up as needed or that you plan for. However, putting away for things like car repairs, home repairs, major tuition payments, etc. before they are due helps to alleviate stress later down the road. In truth, one reason why people turn to budgeting is not only to save or create money, but to have access to funds when they need it most.
4. Discretionary:
   • When most people hear the word “budgeting” they automatically assume this is where they will cut most the costs and regain most of their money. Why? For starters, it is the one and only category you have most control over and that you create yourself. For example, you can choose to not eat out (discretionary), but you cannot choose to not eat food (variable), but you can choose to spend less on the food you buy and where you eat out, if at all (budgeting).
   • Unless most of your funds are drained by this section, the impact to your bottom-line will be slow going. Thus, if you are needing to acquire funds at a faster rate, it is recommended you find ways to reduce your fixed and variable expenses first and then use discretionary budgeting to be sure you do not spend the money you recovered.
   • Another way to create more income is cut down on your unused entertainment apps. These cost upward towards $10 a month. Pick two to get you by for a couple months (they are relatively the same) and enjoy your extra $50 a month.

Step Three: Establish A Goal

This one is easy! In this step, simply declare your goal.   

Here are some quick tips for creating an attainable goal: 

• Make sure your goal is realistic
• Make sure your goal is important to you
• Scaffold multiple goals and establish one goal at a time, with the simplest first   
• Be sure your goal is a solution to a problem

Step Four: Making the Cut

This is the last step before creating a physical budget. Now that you have your nicely categorized totals and goal, it is time to do some soul searching and find a way to make it happen.

Here is where you look at your income, your financial obligations, and decide:

• What expenses will stay
• What expenses will go
• What are you willing to be flexible on?
• If you can lower any of your fixed and variable expenses

Your removals, recoveries (saving money by lowering your monthly bill), flexibilities, and kept commitments need to provide you with enough money each month to meet your individual goal. Budgets are a solution to a problem.

If you find yourself still in the red, even after you worked these numbers every which way and decreased some of those fixed and variable expenses, then it may be time to consider boosting your income by taking on a side gig, generating some passive income, or developing your niche.

Step Five: Choose A Budget Platform and Design Your Monthly Budget

For this step, you must choose what method of budget you will use, how your budget will be maintained, and what holds you most accountable.
Four Main Budgeting Methods

1. Cash-Only/Envelope Methods

This system works well for physical and visual learners, or for those who deal better with hands on solutions in comparison to online transactions. The cash-only method is when you put your debit card in a drawer and deal only in cash. Some even opt to create different envelopes for specified financial obligations—as to remove the cash from the possibility of being spent. When you have cash in hand, you are continually confronted with its limitations, which reinforces saving and helps to reduce spending on items of non-importance. This kind of budgeting technique works particularly well for those who need help to maintain their finances and meeting their monthly obligations.

Considerations and limitations: While this might sound perfect, cash-only budgeting may prove difficult within the construct of our spending culture. Most financial institutions do not offer cash payments as a viable option. Another factor to consider is that money can be loss, stolen, and taken easily. If someone steals your money via virtual banking there are protections to recover your loss funds. This is not in place for lost or stolen cash.

Alternative Suggestions: You could simply get around both of those features by only keeping discretionary cash on hand, which could have the same benefit for maintenance as cash-only with less risk. There are also apps we will discuss that allow you to take this same principle and apply it to a virtual budget.

2. Balanced Money

First popularized by Elizabeth Warren and Amelia Tyagi, the balanced money budget system helps individuals keep their spending in perspective through the process of allocation. Basically, you give 50% of your income over to necessities, put 20% into savings, and place 30% towards discretionary expenses and free spending. One of the most appealing aspects of this method is that it turns budgeting into a lifestyle choice and promotes financial health. Those who adopt this method are given less restrictions on their discretionary spending as their saving account expands exponentially.

Considerations and Limitations: One major limitation to this type of budget system is not everyone can follow it in the beginning. Your financial obligations, debt, or debt-to-income ratio might prevent you from abiding by the percentage rule. Another strange aspect of this type of budget is that your debt falls into the savings category, which as previously stated, the percentage allocation may not be robust enough for some who are struggling with this aspect of their finances. Lastly, because you are dealing with percentages and not categories, you can easily overspend. The accountability factors are low within this type of budget and not for people who need stronger boundaries.

Alternative Suggestion: if you like aspects of this type of budget—do not be afraid to create your own with percentages that work for you.

3. No Budgeting Solution

Yes, you read that right! Not budgeting is an actual budgeting method. This method is designed for people who hate to budget, despise crunching numbers, and have zero interest in maintaining a spreadsheet, let alone something more complex. All you must do to stay on track within this method is set up automatic bill pay for every expense, or better yet, pay all your bills from one account and spend from another.

Considerations and Limitations: This is obviously not great for those who are trying to save money or those who have limited funds where they need to constantly be tracking their spending. This technique does not work to lower your payments or work to get you ahead. It is basically a streamlined way of assuring your financial obligations are being met. Of course, this again would not work if you did not have enough money to meet those obligations—wherein an actual budget would create more possibility.

Alternative Suggestions: Bill pay is a great envelope system that works well for most people. It not only removes funds that may cause you to think you have more than you really do, but once set up, it eliminates possibilities of missed payments, which could drive down your credit score.

4. Zero-based Budget
I consider Zero-based budgets to be more of a mindset as it works to change the way you think about money and its primary function. Zero-based budgeting assigns every one of your dollars to a purpose. In zero-based budgeting nothing is discretionary—everything is accounted for, basically eradicating unnecessary spending all together. You would not spend ten dollars on a movie, if that ten dollars were already serving a purpose elsewhere in your budget. This is ideal for an individual who needs strict financial boundaries and rules to keep their spending and saving inline.

Considerations and Limitations: Unless you possess a strong Type A personality and have the ability to look at your finances as if you were a business corporation, this type of budget may  become too tedious to track or sustain for long periods of time. Not only would you have to create an overly complex, dollar-to-dollar budget, but it works to limit your quality of life by restricting your ability for spontaneity in any fashion. This is by far the most restrictive option on this list and for most, may be the most unrealistic.
Alternative Suggestion:  While I feel this budget type may present too many obstacles for the everyday budget, assigning your discretionary income a purpose and limitation is exemplar advice. Creating a label “Whatever you wish” might be too lenient for some and providing it with more direction can help you to not overspend and keep you working toward your goal.

There are many apps that have these functions built in or present new ones that might work better for your goal. Apps like Mint, Trim, Tycoon (for freelancers), Simplifi, PocketGuard and more, work to provide you with a budget that fits your lifestyle. Some even assist with lowering your bills and other monthly costs. However, some apps are not free. Before you pay for a budgeting service, be sure it fits your goals, budgeting style, and will help you stay on track.

Step Six: Maintain Your Budget

Seems easy enough, right? If you created a realistic budget true to your lifestyle and abilities, it should be no issue at all. Simply follow your budget as planned, save money, or follow your goal, and adjust when needed.

If you find a certain type of budget does not work for you, do not become discouraged. It is a learning process. Simply try another one.

Final Thoughts

Budgets provide solutions to financial problems. When done correctly, they work to expand your quality of life, improve your financial health, work to create a positive relationship with money, decrease monthly stress, and expand your life experiences.