The importance of a budget

The importance of a budget + 6 steps to create your own budget

Many of us have a pretty good concept of what a budget is and how it works however very few of us actually use one. While there are many reasons as to why some people choose not to use a budget, some of the most common reasons are as follows. Fear of seeing how much money is being spent, not making enough money to need a budget, and the fallacy that a budget is synonymous with a frugal lifestyle. While the last one is simply false, all of these reasons are no excuse as to why you shouldn’t have a budget.

We’ve all come across that feeling when we are about to look at either our credit card or bank account statement after a long weekend. Some of us even attempt to avoid the situation altogether. I get it, it’s not the greatest feeling in the world. It’s the worst mixture of emotions that stirs together regret and sadness with a sprinkle of anger at times. However, avoiding that awful feeling will only make matters worse in the long run. This is where a budget comes in.

There are no secrets when it comes to a budget. You can’t hide from your spending habits, however,  a great budget will help highlight your spending habits with vivid details whether your habits are good or bad. The ability to know what you are spending your money on is a key driver of financial success. It may not look pretty at first. Yet, knowing that you are spending way more than what you’d like to on a certain activity or item gives you the power to be able to change that habit simply by being aware. The first step to fixing a bad habit is to recognize it.

Some of us simply think that a budget is only necessary when there is a large amount of disposable income involved. Once again, I’d like to discourage that belief. The fact of the matter is, while there may not be a heaping amount of discretionary income in your picture as of today, that will most likely not be the case forever.

Furthermore, even with the current situation, a budget can still be of assistance to your financial health, as it will help you highlight and prioritize your expenses, as well as, keep you organized financially. A budget alone won’t guarantee you financial success, but it will be the right first step. A budget will have to work in conjunction with self-discipline. It's one thing to set a budget but to follow that budget is a whole other beast in its own, which is why we stress the discipline part. 

Next, if you want to start a budget or just see your numbers in front of you, follow this tutorial on how to set up a simple yet effective budget.


Step 1: Calculate your monthly income

For most people, this comes from your salary or anticipated hourly earnings. Students, you may rely on summer work and loan dispersement (woo 🎉). Entrepreneurs or side hustlers, you may have a more irregular income pattern. If your income is inconsistent, a good practice is, add up your last three months income, divide by 3 and that will give you a good number to work with. 

Example:

  • Take home from work: $3,000
  • Side hustle: $500
  • Tutoring: $200

Step 2: Add up your "Musts"

This is what you absolutely have to pay during the month. Examples consist of: rent, utilities, wifi, (if you still pay for cable, please stop and stream), groceries, car payment, gas, and student loans.

Example: 

  • Rent: $700
  • Utilities: $50
  • Wifi: $70
  • Groceries: $400
  • Car payment: $220
  • Student loans: $Too much 😭

Try to use exact numbers when possible, this will help your budget stay accurate.


Step 3: Set financial goals

This is an extremely important step before listing your wants. Your goals should determine your wants, not the other way around. If you haven't ever written out goals before, start with your financial goals. Do you want to be financially successful? What is financially successful to you? Do you want financial freedom? Do you want to be debt free? Think about what you want in your ideal world and compare it to where you are now. That gap is where you will set your short term, financial goals (one year). Those goals are what you use in your monthly budget. 

Example:

  • Pay off credit card debt
  • Create a 2 month emergency fund
  • Save for an investing portfolio

Once written out, you have to start thinking of those as "Musts". A plan with no action is a waste of your time. Give each bullet point an exact number and add it to your above list.

Example:

  • Rent: $700
  • Utilities: $50
  • Wifi: $70
  • Groceries: $400
  • Car payment: $220
  • Student loans: $(exact amount)
  • Pay off credit card debt: $150
  • Create a 2 month emergency fund: $200
  • Save for an investing portfolio: $50

Step 4: Determine your "Wants"

It's important to note that this is third on the priority list (after "Musts" and financial goals). Examples of wants include entertainment, dinning, wellness fees, clothes, personal care, and vacations. These should be adjusted based on the budget you create.

Example:

  • Rent: $700
  • Utilities: $50
  • Wifi: $70
  • Groceries: $400
  • Car payment: $220
  • Student loans: $(exact amount)
  • Pay off credit card debt: $150
  • Create a 2 month emergency fund: $200
  • Save for an investing portfolio: $50
  • Dining out: $50
  • Supplements: $150
  • Other: $100

Step 5: Subtract X from Y

The hard part is over, now you let math do its thing. 

Positive number: This is great, it means you make more money than you spend. Note that it could also mean some adjusting is needed. Instead of have extra money at the end of the month, it could be added into one of your financial goals like paying off your credit card or your emergency fund. 

Break even: This means you have exactly enough money but no margin. Some adjustments can be made to give yourself some wiggle room when life happens.

Negative number: This is not good, it means you are spending more then you take home. Now that you have your expenses laid out it will be a lot easier to adjust what's important to you. If your financial goals seem to be suffering because of your "Wants" then it's in your best interest to adjust what you wrote down. 

Whatever category, the power of this exercise comes from knowing. It's the first step towards financial freedom. 


Step 6: Implement, stay disciplined, and adjust

Now you just need to follow what you've created... Easier said than done. The first 3 months of any budget are tough. A good tip to try is being as transparent as possible with your friends and family. You don't need to share exact numbers but do share what your financial goals are. This will create accountability on both ends. 


The key to Financial Success

While exploring this app, you might discover numerous new endeavors and rituals that you might want to incorporate into your life in order to make yourself a better you. While all of those things can lead you to success, the absolute key to success is YOU. Specifically, your discipline. This page is no exception.

We will explore an abundance of topics to help you, not only get a good grasp of your finances, but also be able to dictate what your financial picture looks like. Nothing said through here will be helpful without your discipline. The same kind of discipline it takes not to eat that extra glazed donut, will be the same kind of discipline it’ll take to excel with your finances.

Before we began on this journey to a better you, we would like to disclose that none of the writers of this content are financial advisors or licensed. We simply create content that includes best financial practices through both research and experience that we believe can help you be proactive with your finances and avoid hardship down the line. We would like for all of our users to experience holistic health, which includes your finances as well. May your discipline guide you to better health, nutrition, wellness routines and most importantly a better you. 

 

Article Authors:


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