Achieving personal financial freedom is the goal of most individuals, and we have provided a lot of tips and tricks in many of our articles found here. Budgeting is an important part of achieving your goal of financial freedom, and we will talk further on that in this article.

Even though budgeting isn’t how most people enjoy spending their free time, but it’s a necessary part of adulting. And once you’ve mastered the art of the almighty budget, you’ll feel as if you’ve gained a superpower.

Being able to know and control how much you spend on different parts of your life will lead to better prioritization and, ultimately, less stress. Getting started may seem daunting, but we’ve laid out a five-step plan for you to budget your monthly income and expenses.

• How can you Achieve Personal Budget Bliss?
• Which Budgeting Method is Best?
• What are the Benefits of Budgeting?

How can you Achieve Personal Budget Bliss?

Whether you’re planning your first budget or re-evaluating your current one, these six tips will set you up for success by changing the way you look at budgeting.

Step 1: Get Organized

Create a personal goal before budgeting. Having an endgame will help you organize your budget right from the get-go. Invest more money into retirement, pay off debts, take your dream vacation, or fill up a bathtub with dollar bills and live the life of luxury! Whatever your goal is, use it to drive your budgeting for the coming month.

Read Also: How Personal Finance is Evolving Through Mobile Apps

Next: Use the right tools. Yes, we’re talking about creating a spreadsheet. But have no fear — even if you don’t have Microsoft Excel listed as a skill on your resume, you can still use technology to your advantage. Apps like Mint and Clarity make it easy to get a better picture of your finances.

It’s all about having more transparency into your spending patterns day by day, week by week, and month by month. If the desktop is more your speed, kind strangers have already created useful budget templates for Google Sheets (a free online spreadsheet tool) so you can simply plug and play.

Step 2: Budget Every Last Dollar

By accounting for each dollar you earn and spend, you don’t leave any margin for error. This isn’t to say you shouldn’t create a nice cushion for unknown expenses, but include that cushion in your budget. Life’s always better with a little wiggle room, so give yourself $100 buffer (or whatever you’re comfortable with) and account for that $100 as a line item in your expected expenses.

If you end up not needing it, then pop it into your retirement, savings or take your sweetheart out on the town for a night. It’s always better to overplan and know where each dollar goes rather than wondering how it all disappears.

Step 3: Anticipate Each Month Individually

It’s true. Much like snowflakes, each month has its own unique design and (spending) pattern. The obvious example is December, with its holiday spending and potential travel expenses to see family. But you should also take into account different bill cycles and big purchases.

If you pay out your annual car insurance next month, that will put quite a dent in your “normal” spending. Or maybe Fido just destroyed your couch and a new one is right around the corner. Basically, have the foresight to expect these expenses and save up for them. 

Even if you’ve accounted for next month’s expenses, expect the unexpected. If you’re able to, also create an “emergency fund” just in case someone breaks a bone or shatters a window out of the blue.

Step 4: Review Your Spending

What went wrong or right last month? Really dig into your spending (and savings) to discover patterns that you’re either proud of or need to adjust. If you spent $600 on eating out last month, maybe you can deposit an extra $200 into savings right when you get your paycheck.

That way you only have the option of spending $400 on restaurants. Identifying a problem is the only way you can begin to fix it. And If you’ve reviewed everything and it all seems to be in order, give yourself a much-deserved pat on the back — your wallet thanks you for your service!

Step 5: Create a Plan of Attack

You knew this was coming: cutting back! Yes, yes — it’s a lot harder to save money if you continue spending it all. But it’s important to keep budgeting for fun activities, otherwise your plan will never work. So after you’ve reviewed your spending (per step four), pick one to three categories you feel you can cut back on.

Take a good hard look at how much you spend on new clothes, happy hours or any other extravagance you regularly enjoy. This doesn’t mean you need to stop doing those things, just spend less money on them. 

Step 6: Prepare for emergencies

Emergency funds are an important part of any budget and should be a separate category from general savings goals. In order to be effective, your emergency fund can only be accessed for real emergencies like sudden unemployment, a medical emergency, or a critical home or vehicle repair.

Instead of looking at your emergency fund like another savings category, view it as a way to strengthen your entire budget. Not only will it cover tough situations, but it will also save you stress and give you peace of mind.

Which Budgeting Method is Best?

For you to achieve personal budget bliss, you need to do it the right way. Above we have already given some tips on how you can budget the right way and the steps needed to succeed. Let us now consider different methods that can be implemented and which of them might be the best for you.

1. The Balanced Money Formula

This method, popularized by Elizabeth Warren and Amelia Tyagi, is also called the 50-20-30 method.

The idea is to spend 50% of your total income on your needs, 20% on saving, and 30% on wants. The 50-20-30 method is very simple to maintain, which is one of the reasons why I find it to be among the best budgeting methods.

Your needs consist of things like your mortgage, utilities, clothing, groceries, gas or other transportation, healthcare. and gas money. Basically, these are things you couldn’t live without. And by that I mean actually can’t live without.

This does not include things you say you can’t live without, such as Princess Vespa’s (of Spaceballs fame) industrial-strength hairdryer. Your savings consist of your retirement goals, emergency fund, and debt repayment.

So if you are trying to pay off your debt, it would fall into this category. It’s a similar concept to what Dave Ramsey advocates with having only a small emergency fund and then foregoing saving further in favor of paying off your debt.

Your wants are exactly that. This is pretty much everything else.

Cable TV, internet, dining out, clothing beyond what would be considered basic (you do not need that new dress that just came out), vacations, that shiny new iPad, and junk food would all be included in this category.

Who Should Use This Budget?

The point of this method is to not have to budget for every category. You only have the 3 categories to worry about instead of a dozen or two.

So if you are someone who is turned off by the traditional methods of budgeting for every line item or every category, then I encourage you to give this one a try.

What to Watch Out For

Overspending can be a common occurrence with this budgeting method.

Since you aren’t budgeting for every category, it can be easy to spend a little too much on something like food and then forget that you are low on gas in two cars and go a little bit over budget.

To remedy this, I recommend to either overestimate or have some wiggle room in each of your budgets. That way you can freely move your budgeted “wants” money to your “needs” category if you overspend.

2. Cash-Only Budgeting

Also, called “Envelope Budgeting,” Cash-Only Budgeting is where you use actual cash (those are the green pieces of paper you rarely see in the U.S. these days)to use as your spending money. There is no room for plastic here!

What you do is allocate your money to your separate categories and then withdrawal cash out from your bank account. You then put the cash in envelopes labeled to match your categories.

Let’s use a grocery budget as an example.

If you have a $400 a month grocery budget, you would withdrawal $400 in cash from your bank account and then place that money into your envelope labeled “Groceries.” Fairly straightforward.

There are different apps you can use with this method as well.

Who Should Use This Budget?

If you struggle with overspending, this is a great way to help reign that in. Once the cash is gone, you can’t get more. This method requires you to leave the credit cards and debit card at home.

It’s ok to take one credit card strictly for emergencies. Just make sure you are ONLY using it for an actual emergency. This method is also good for those that really like to have control over their budgeted categories and how much cash is allotted to each category.

What to Watch Out For

When you are dealing with cash, there is always a chance that you’re going to lose it. You could drop the money or misplace it. Luckily, Amazon has a great selection of physical wallets and notebooks that can be used to help minimize that risk.

Again, it may be a good idea to keep a credit card in your wallet just for emergencies. However, this is something else to watch out for. It will be tempting to use it for things other than emergencies.

3. Zero-based Budget

This method sometimes comes with the tagline “give every dollar a job.” If you hear that term, you know they’re talking about the Zero-based Budgeting Method. Zero-Based Budgeting is where the money you have in income matches exactly what is going out of your account.

Now, this doesn’t mean that you are literally spending all of your money. This also refers to money deposited in a savings account, 401K, or Roth IRA because the money is leaving your account.

You are essentially “paying” those accounts. This is where the term “give every dollar a job” comes from. Some portion of your money you’re giving the job of paying your electric bill or mortgage and others you are giving it the job of funding your retirement or emergency fund. Every dollar is accounted for.

This is one of the hallmarks of Dave Ramsey’s method of budgeting. He even created an app for it. This is also built into YNAB if you use it the way they want you to.

With this method, if you were to save and spend exactly what was in each of your budgeted categories, you wouldn’t be positive or negative. You would literally be at $0.

Who Should Try This Budget?

Zero-based budgeting is the ultimate budget for those who want to be completely in control of their money. It allows you to micromanage your money—in a good way—as you see fit. You get to decide in advance where every one of your dollars gets to be spent.

You typically wouldn’t spend any money unless it’s planned for. If this sounds appealing to you, this budgeting method may be exactly what you’re looking for.

What to Watch Out For

Zero-based budgeting can be quite time-consuming due to how much planning and tracking is involved. Ideally, you’ll want to find a way to record every transaction as it happens so you know you’re not going over on a budget.

If you don’t have the time to do it, then you may get off track with your finances. This can lead to needing even more time to catch up.

Again, this may not happen for everyone, but it’s just something to watch out for.

4. The 60% Solution

Similar to the Balanced Money Formula, this method uses percentages to manage your finances rather than specific dollar amounts. This method was first proposed by then editor-in-chief of MSN Money, Richard Jenkins.

He claims that budgeting in and of itself is very tiresome with the amount of work involved so he recommends the 60% solution.

How It Works

60% of your income is used for what Richard calls “committed expenses.” These include your mortgage, food, basic clothing, car payments, insurance, etc.

Where this differs from the “needs” category of the Balanced Money Formula is that literally ALL of your bills are included in this category, including such wants as cable TV or your expensive cell phone plan.

These are bills that have to be paid each month.

The remaining 40% of your income is divided into four categories with 10% allocated to each category. They are:

• Retirement– This is your standard 401K, Roth IRA, etc. It’s always best to get these subtracted from your paycheck if you can.
• Long-Term Savings– This is your emergency fund and standard stock purchases
• Short-Term Savings– This category is in a separate account that can be easily accessed to transfer funds to your checking account. The money in this category is used for things such as vacations, irregular expenses, and other bigger expenses. The idea is to be able to use all of this money over the course of a year.
• Fun Money– The last 10% is where the “wants” come in. This is where things like dining out come in. These expenses are things that you can easily manage and don’t have to be paid. Let’s face it, you don’t have to go out to eat so it goes here.

In his article, Richard says that, since only 70% of his expenses are actually seen by him—the 60% of committed expense and 10% fun money—he doesn’t really miss the other 30%.

Most of this is because he automatically deposits the savings money where it needs to go.

Who Should Try This Budget?

So admittedly, this budget sounds intriguing. If you’re someone who likes to automate things—since it makes everyone’s life easier—this is a great way to ramp up your savings.

By only allowing for 60% of your income to be used for bills, you have the ability to save much more than normal. It’s almost like giving yourself an artificial pay cut and living “paycheck to paycheck” on 60% of what your income actually is.

What to Watch Out For

Since you are working with percentages, there may be a temptation to no longer track your expenses.

You have your bills all taken care of with the first 60%, your savings are automated with 30% (divided in 10% increments), and your fun money doesn’t go over 10%. Richard even says in his article that he really doesn’t track his expenses.

In our opinion, it’s still important to track your expenses so you know you’re not going over your budgeted amount.

You won’t have to worry too much about your 60% of committed expenses, but you’ll at least want to make sure the dollar amount equivalent of 10% of your income isn’t overspent. I recommend tracking that 10% at the very least.

The last thing to watch out for is the difficulty, not in using this budget itself, but getting to a place where you can use this budget.

It may be difficult to either limit your expenses enough or obtain enough income in order to get to the point where your bills are only 60% of your income. Definitely doable—just might be difficult.

5. The “No Budget” Budget

This is essentially how it sounds. The only thing you have to pay attention to is your bank account balance. There isn’t even a need to track your expenses. Believe it or not, this actually works for some people.

Some of this overlaps with the 60% solution in that you would automate your savings and make sure there is enough in your checking account for all of your bills. You can spend as you see fit on everything else.

Ideally, you would also want to automate paying all of your bills as well as make them as regular as possible, i.e. the same amount every month.

This way you can simply add up all of your bills, make sure that money is in the right account, and then not have to worry about it from there.

Who Should Try This Budget?

This budget is for people who really don’t like to budget. If you hate figuring out numbers or putting in the time to manage your budget down to the dollar, this method might be for you. It requires very little work and very little, if any, tracking of your expense.

This method may be best for those on a little bit higher of an income level since there really isn’t much tracking involved.

What to Watch Out For

Since you are not tracking your expenses, the “No Budget” Budget can be dangerous if you are prone to overspending. It’s important to make sure you are really prioritizing saving due to the fact that you will need extra money if you overspend or something unexpected comes up. For this reason, having a proper emergency fund is best.

Again, a higher level of income may be needed for a budget of this type. Be careful if you are trying this on a lower income.

6. Values-based Budget

The Values-based Budget is another budget that may be better for a little bit higher level of income. This method relies on quite a bit of soul-searching and self-discovery because the “values” in the name are your values.

The hook of this method—which still involves tracking your spending—is to spend money based on your values rather than worrying about how much you are spending in specific categories.

For this method, you’ll want to write down what you’re allowing yourself to spend your money on based off of what you value.

So if you value travel, write that down. If you value discovering delicious coffee or new cuisine, write that down. Whatever isn’t on your list, you wouldn’t really spend money on.

For example, if having the latest electronic gadget is on your list and not travel, you would spend your money appropriately getting the next Apple Watch (or equivalent) rather than saving up for a trip to Europe.

Who Should Try This Budget?

Erin from Young Adult Money writes that this method is good for “those who are already frugal, very aware of and disciplined with their spending, and those who naturally enjoy saving.” She also mentions that it can be freeing to not have to track every dollar.

What to Watch Out For

We don’t recommend this method for those who are not yet disciplined enough to automatically save their money. If you don’t really like to save your money and really like to spend your money on whatever you want, whether you value it or not, then this method may not be for you.

We also recommend you find out exactly what your values really are. Values that aren’t solidified or are the result of something going on in your life will change.

Figuring out what you value is also a great way to begin to change your mindset as well.

What are the Benefits of Budgeting?

A lot of person has refused to budget because it takes and lot of efforts and they do not really see the benefits and what they hope to achieve. Some of the benefits attached to budgeting has been mentioned to motivate you to budget.

Provides You 100% Control Over Your Money

Think about this for a second. If you are not controlling your money, is it controlling you?

A budget is a savvy way of intentionally controlling your money. Budgeting allows you to live with far less stress without having to worry about those unexpected expenses that come up (way too often I might add). It also allows you to understand where you spending habits are weakest.

The daily cup of coffee can really add up over time. According to ABC news the average American spends close to $1,100 per year on coffee alone. Budgeting will help you decide if giving up your morning cup of coffee is worth the savings to put towards somewhere else like paying off debt or saving for your next family vacation.

Let’s You Track Your Financial Goals

Another advantage of budgeting your money is helping you avoid spending on unnecessary fees, services, and products that are cutting into your financial goals. If you have a fixed income budgeting will allow you to make ends meet much easier each month without all the stress.

Sit down and write out your financial goals. Once you have them written down on paper and you take contorl of your money it’s much less likely not to meet them.

Budgeting Will Open Your Eyes

Budgeting allows you to know exactly where your money is coming from, where it is being spent, and how much you have at the end of each month. This provides you with a complete understanding of your finances.

A budget allows you to understand what you can afford, make the most of buying and investing opportunities and plan for a way to lower your debt. It also shows you what is important to you based on where you spend your money throughout the month. This will allow you to adjust your spending habits in the right direction to reach your goals.

Will Help Organize Your Spending

When starting to budget, start by breaking down all your expenses for the month such as cable, the internet, mortgage, insurance, groceries, entertainment, restaurant, gym memberships. Printing a budget template will help you stay organzied.

This makes it easy to quickly view exactly how much you are spending on your individual services each month. Another reason to break these down into categories it is allows you to see if a bill goes up with a company. Recently our garbage bill was raised by $10 a month. Budgeting allowed us to see this change quickly so I was able to call and get our bill back to the original price.

Will Help Create a Cushion for Unexpected Expenses

A trip to the hospital, car repairs and plumbing problem are all unexpected costs that come up from time to time.  It is important that you have money set aside for these types of events, aka an emergency fund.

The last thing you would want to do is not have enough money to cover the costs and have to charge it to a credit card that you already have a running balance on.

We keep at least $1,000 in a savings account to help cover these unexpected expenses that arise. You should shoot for building up your emergency fund as your #1 priority in getting a hold of your finances. It’s critial in balancing the waves life will throw at you.

Budgeting Makes Talking About Finances Much Easier

Talking about finances to your parents, girlfriend, boyfriend, or spouse can be challenging sometimes. Some may say it’s even “taboo” (which is ridiculous).

Having a budget allows you to have cold hard facts when it comes to communicating. This makes having a calm conversation about money much easier.

Finances are the most common argument between married couples hands down. One of the biggest benefits of budgeting is reducing the overall stress surrounding the “money conversations”.

Talk to your significant other and get on the same page. Open and honest communication always wins in marriage. Set aside a “discretionary category” in your budget, this allows for you both to have a limit but also allows you to spend the money the way you want to (make-up, Amazon, eBay, fantasy football, video games, protein, etc).

Having a Budget Let’s You Save a “Safety Net”

When an issue arises in life like unemployment you will be ready. Hopefully, this never happens to you, but budgeting will allow you to be prepared if it does.

Having a safety net will keep you afloat if your income stops coming in.  The saying goes “have enough in your safety net to last up to six months with no income”.

Allows You to Pay Down Debt Quickly

Going to school, taking out a mortgage, and buying a new car are some ways we people go into debt. Understanding your debt is extremely important! Making sure you understand your interest rates, terms, and length of loans will be critical in controlling your debt.

Budgeting will give you a clear understanding of how to pay down your debt. You will find that you can easily start to cut in other areas so you can afford to make extra payments on your debt.

Budgeting Helps You Invest

Investing is a great way to have your money work for you. Contributing to your retirement early and often should be on your radar so you can retire as planned.

Some people use the rule of “whatever is left at the end of the month I will put in my retirement”. This is backward thinking. Try changing your mindset to “paying yourself first”. Meaning knowing how much you need to put away for retirement and paying yourself before anything else.

Read Also: How to Budget for Personal Finance

Obviously, this takes time to learn how to balance it correctly so all your bills still get paid but this is by far the best way to reach your investment/savings goals.

Allows You to Live Life Better

We have said this before and will continue to say it until someone proves to us otherwise. Controlling your money will have a huge positive impact on your life!

We have a passion for budgeting and with Mint it takes us less than 10 minutes per month to check our budget.

You get to enjoy them for a little while, but that fades very quickly. We are all about experiences and creating lifelong memories together!

Budgeting enables you to have 100%  control of your money, allowing you to travel more, start your own business, quit your job, spend more time with your families, and so much more!

Conclusion

Achieving personal budget bliss is the dream of everyone, but like we have seen from this article it comes with a lot of efforts. However if you are ready to work hard, a lot of benefits await you. So start budgeting.