Tips on how to budget

Categorizing items

You want to categorize and subcategorize your budget items. For the categories, the key is not to make them too narrow or too broad. If they are too broad then you are not going to be able to see where your money is going, because everything is in one bucket. If the categories are too narrow, then they will be harder to maintain, and it’s hard to see where the majority of your money is going to. Here are some example categories and subcategories:

  • Food
    • Groceries
    • Restaurants
    • Coffee
    • Alcohol
  • Car
    • Gas
    • Auto insurance
    • Repairs
    • Registration
    • Insurance
    • Car wash and detailing

Keep it simple

When you first start creating categories, it’s tempting to try and make many categories. However, it’s usually best to start very simple and then after you budget for a while break down the bigger categories as you better understand what your actual expenses will be.

Dealing with stores that sell everything

Retailers like Amazon, Walmart and Target sell many things across categories and this can make it time-consuming to know how much of each credit card transaction gets split between each category. It’s much easier if each credit card transaction is tied to one category. One trick to get around this is to use different credit cards for different categories when you pay. For example, I have a credit card that I use for food. If I use that card at Walmart, I know that I bought food with it and not something else. You might even use two different cards at the checkout.

Amazon also has a store card that lists everything out on the credit card report, which makes it a lot easier to understand what category the charge belongs to.

Scarcity mentality

When budgeting, you want to create a scarcity mentality. If you plan to make a big purchase at the start of the month, then hold off to make it at the end of the month to make sure that you actually have the money. It’s amazing how fast money you thought you had, disappears with surprise expenses.

If you overspend in one category, like groceries, then consider taking it from other categories, like clothing or shopping rather than taking it from your savings or putting the money on the credit card.

Setting goals

For each category, set the goal amount that you plan to spend this month. Try your best to avoid going over that amount. When you add up these goal amounts, for all categories, they will represent your total budget spend for the month.

The goals can also be helpful to let you know if you are on track with your spending, for that month. If you set aside $800 for groceries that month, and you have already spent $500 in the first week, then it’s very clear that things are not looking good for meeting that spending goal.

envelope how to budget tips

Put your money in envelopes

When I was younger I would keep all of my money in checking. Much to my chagrin, when I had extra money put aside for something else, I would spend it accidentally. I did not realize that I had less money available than I thought I had. The envelope method of budgeting is designed specifically to solve this type of problem.

The idea with envelope budgeting is that you are putting the money you plan to spend in envelopes, so you know what’s actually available. You do this by putting cash in envelopes, or you can use a budgeting program like YNAB and only taking money from that category from the envelope. For example, if you have $10,000 in the bank and $1,000 is in a Christmas fund envelope and $800 is in an envelope for groceries, then you know that there is only $9,200 left to spend on other things.

Use the past to predict the future

When you first start budgeting, you will have to make educated guesses about how much you are spending each month. After you have been budgeting for a couple of months, you can look at the historical data to make better guesses about what the spending goal will be for the current month.

Handling non monthly income and expenses

My advice to you is to do a monthly budget. The reason is that most expenses are monthly, and it’s the easiest time period to normalize everything to. The other reason is that this will allow you to break up larger bills and help to prevent surprises that will derail your budget. Some examples of expenses that you would normalize:

  • Tally up all the Christmas gifts, birthday gifts and general gifts that you plan to give over the year and then divide this value by 12. Every month you will put this amount aside, in a Christmas gift category.
  • If you get a yearly bonus, divide it by 12 and distribute it to yourself at the start of every month.
  • If you are paid bi-weekly then most months you will get two paychecks. On the two months of the year that you get three paychecks. Divide that paycheck amount by six and then distribute it over the next six months.
  • If you are paid weekly then most months will have four paychecks. For the five paycheck months, divide the extra check by 12 and then distribute over the next 12 months.
  • If you have a yearly subscription, like Amazon Prime or a credit card with an annual plan, then divide by 12 and then save that amount every month.
  • Divide your car registration fee by 12 and save that much each month.
  • Planning on going on your yearly vacation? Figure out the cost and then divide that by 12 months and start saving.

Doing this is one of the best way to have a true understanding of your expenses. No more surprise car registration bill that blows up your budget and forces you to use your credit card. This also helps put what you are spending into more of a perspective. For example, if you are spending a car payment on gift giving to people each month, this could be a place to cut back.

Saving money

After you have got a budget going, and have a good understanding what money is coming in and what is going out, then you will want to put money aside for savings. At first this money will go towards things like an emergency fund, and paying down debt. Later it should go towards investing, to allow your money to start making money for you.

Where to cut back in your budget

When looking for areas to cut back spending on, pick the categories where you spend the most money first. It’s going to be a lot easier to find stuff to cut back on in those categories, simply because there is more money being spent there. For most people, groceries are the number two expense behind rent/mortgage. We have a guide on how to save money on groceries that can help get you started there.

Aging your money

After saving for a while, you want to break the link between your paycheck and the budget. What you will be doing at this point is paying this month’s savings with money from last month or older. This makes it much easier to budget on a monthly schedule.

For example, if you make $5,000 a month, you would make a budget of $5,000. For the current month’s expenses, you would pull from your savings. Paychecks that come in for that month would go into savings.

Slowly ramp up savings

Proponents of the 50/30/20 budgeting method recommend that you save 20% of your money each month. This is a great goal to work towards, but don’t worry if you can’t hit it right away. Start slow and try and build up your savings each month. For example, one month you might focus on spending less on groceries and then dive into another category in the next month.

Your bank account

Before I got into budgeting, I would use bank accounts to create buckets to put my money in. For example, I had a house savings account and a Christmas savings account. However, when you start advanced budgeting there will be many buckets, and it will not be feasible to open up bank accounts for each one.

It’s better to have a single bank account, so you can easily reconcile how much money is available with your budget and let your budgeting system handle the different money buckets that you have.

I currently use M1 Finance Plus for my bank account. It’s a checking account, that has a higher interest rate than my bank’s savings account did, and it allows me to have a single bank account.

Budgeting tools

You can budget fairly easily using a spreadsheet, but budgeting software is going to save you time and give you a better window into your finances.

Budgeting applications

Mint – Free software to automatically track all of your expenses. If you don’t want to spend any extra money, Mint should be more than enough to get you going.

YNAB – You Need a Budget (YNAB) is more focused on budgeting then tracking net worth. It costs 84 dollars a year. There is a steep learning curve, but if you can get past it then people typically find it to be better software then Mint. This is the software I currently use.

EveryDollar – This is budgeting software, by Dave Ramsey. If you manually enter in everything it is free, but to have automatic data entry it will cost you $99 a year.

Final thoughts

There is a lot to take in here, and it can be somewhat overwhelming. The best way to get started is to take one small step at a time. Start off by getting some budgeting software and start categorizing items, then start implementing additional strategies from there.

It wasn’t until I mastered budgeting, that I started to save a lot of money each week and really gained control of my finances. Hopefully this helps you start down the same path as well!