According to a 2023 study by NerdWallet, 74% of Americans have a monthly budget. The staggering reality is that 84% of Americans who create a budget say they've exceeded their budget at some point. Although it's becoming increasingly common for people to have budgets, sticking to them seems to be just as challenging as it always has been. Having a budgeting plan is a great first step toward reaching your financial goals but making and abiding by a budget are two separate things.
Analyze Your Spending Habits
The first step to create a budget you can stick to is being realistic about how much you can save. One way to do this is to track your spending for a set amount of time to gain insight into your spending habits. We would all love to save half of our income in theory, but that isn't always practical in the real world. After you better understand how you spend your money, categorize your most common purchases to help allocate funds to each expense.
Choose Your Budget Framework
Before you select your budget framework, take a moment to determine your income after taxes. This ensures you have a clear picture of all of the money you have coming in each month. After you have taken care of that, there are quite a few options for structuring your budget.
50/30/20 Framework
This simple formula allows you to separate your post-tax income into three categories of spending: needs, wants, and savings. This budget can be personalized by adjusting the percentages, but we will discuss the general idea today. You start by allocating 50% of your income to your needs. Your needs include things like rent, food, and medical care. The next 30% of your income is for your wants, such as subscriptions or daily coffee runs. The remaining 20% of your income is to save. It can be placed in an emergency account, your 401k, or towards debts.
The Envelope Method
This budgeting framework requires you to allocate your budget into spending categories. The name comes from the practice of labeling envelopes with these categories and putting currency into them to keep track. We recommend using a spreadsheet or app to document and manage these categories as a safer option for your money.
Pay Yourself First
This is sometimes called reverse budgeting and entails planning your spending around your savings goals. Instead of focusing on fixed and variable expenses, you first allocate your funds toward saving for larger purchases such as a home or long-term investments such as your 401k. Automating as much as you can is a great way to do this. Giving pre-tax contributions to your 401k or using your credit union or bank's auto transfer features are two methods to automate.
Zero Based Budget
The idea behind this budgeting framework is to give every cent you make a purpose. This is not an excuse to spend all of your income each month but instead, look at the larger picture of where all of your money is going. The goal is for your income minus your expenses equals zero by the end of the month. If you use this method successfully, your financial goals will be met.
4 Methods to Actually Stick to Your Budget
After choosing your budgeting framework, there are some things you can regularly do to make sure you're on the right track. A budget is not something you can 'set and forget'. Here are four methods to ensure you follow through on your saving and spending goals.
- Set Clear Goals: Define specific savings goals, whether it's for an emergency fund, a vacation, a down payment on a house, or retirement. Having clear objectives helps you stay motivated and focused on saving. Ask trusted friends or family to help you keep on track. Check in with these goals frequently.
- Track Your Spending: Keep track of your expenses to identify areas where you can cut back and save more. Budgeting apps or spreadsheets can help you monitor your spending habits and find opportunities to save. Try finding a way to visualize your progress toward your goal - a tangible way to see how far you've come.
- Reduce Expenses: Look for ways to trim unnecessary expenses from your budget. This could include dining out less frequently, canceling unused subscriptions or memberships, or finding cheaper alternatives for everyday purchases. It's important to define what you personally value when deciding where to spend your money.
- Increase Income: Explore opportunities to boost your income, such as taking on a side hustle, freelancing, or asking for a raise at work. Putting extra income directly into savings can accelerate your progress toward your financial goals.
Whatever your budgeting goal is, don't be hard on yourself if you aren't able to do a total 180 on your spending overnight, and stick to it. Make a solid budgeting plan that allows for smaller adjustments over time. Set measurable goals and check in with yourself often to stay on track. Most importantly, don't give up! Vibe Credit Union is dedicated to helping our members reach their financial goals and is always available to answer any questions. Existing members can utilize our budgeting tool in online banking to track expenses and set spending limits.
