Creating a budget is much like trying to eat better or exercise more — everyone tells you it’s good for you, but it’s hard to get into the habit, says Colleen McCreary, consumer financial advocate at Credit Karma.
“A lot of people think it’s over-complicated and a hard thing to do,” Ms McCreary says. “Much like going to the gym, the hardest part is showing up, so you just have to decide that you’re going to try it out.”
Even with prices high due to inflation, Elena Pelayo, educator at How Money Works, a financial literacy organisation, says there are small steps you can take to manage your money. These include looking at how many online subscriptions you pay for or how often you eat in restaurants and cutting back where you can.
Here are five important steps when you’re ready to create a budget:
Write it down
Writing down all your expenses is crucial, says Ms Pelayo. She suggests recording every penny that you spend rather than trying to approximate, which can lead to errors.
Ms Pelayo recommends using whatever method fits you best, whether that’s writing it down on paper, creating an Excel spreadsheet or using a website.
Next, she recommends categorising where your income should be spent. Always start off with covering your basic needs.
A well-known budgeting system is the 50/30/20 rule, where 50 per cent of your income is allocated for necessities like food and rent, 30 per cent for things you want, and 20 per cent for savings and debt repayment.
Wiltrice Rogers of Allen Park, Michigan, has used this system for more than 30 years.
“It helped me to see how beneficial it is, and that we have more discretionary funds when I follow this method,” says Ms Rogers, an intake coordinator for a non-profit organisation.
This method works for many people, but it might not be right for you if necessities eat up more than 50 per cent, in which case you’ll need to allocate less for savings or things you want to do or buy.
Writing down your salary and then adding your expenses in a notebook or a blank spreadsheet might be enough to make a plan. But if you need help visualising what’s coming in and going out, there are resources available.
“There are lots of online templates that’ll help you look at spending categories and expense categories for personal finance,” Ms Pelayo says.
Microsoft offers Excel templates for special occasions such as saving for a wedding or home construction. If you prefer apps, Mint, PocketGuard and EveryDollar are among the top budgeting apps.
Make a realistic plan
If 50/30/20 isn’t realistic for you, there are still ways to save and tackle debt. Start setting aside small quantities of money every month or set small goals, Ms McCreary says.
“Small steps lead to progress,” she says. “It’s really about progress, not perfection.”
She recommends starting with one goal each week, whether that’s saving a certain amount or reducing the amount you spend on non-necessities.
“Don’t overcomplicate it, don’t make it too hard for yourself,” she says.
Ms Rogers, for example, usually tries to save as much money as possible when buying groceries.
“I get the sales papers and mark what we need and if it’s on sale. I try to do a triangle of the stores to save time and gas,” she ays.
She also buys in bulk, sticks to her grocery list, and goes shopping by herself to avoid her son and husband convincing her to buy extra items.
Websites such as Flipp, which shows digital flyers from major retailers around you in the US, and Groupon, where you can find coupons for products and services, can make it easier to save money. But keep in mind that this only works when you use coupons for items that you need or were planning to buy anyway.
If your income only covers your necessities, reducing credit card debt can be challenging.
Ms Pelayo recommends that even if you live paycheque to paycheque, you might want to add at least $10 above the minimum payment of your credit card with the highest interest rate.
If you can afford it, she recommends paying 10 per cent more than the minimum payment per month.
Make it a habit
To achieve your financial goals through a budget, you have to change your mindset, Ms Pelayo says.
“You have to look deep inside yourself and say, am I willing to change my habits?” she adds.
Once you are mentally ready, you can start setting goals.
Set a time goal: building new habits can be hard, and it’s even more daunting to think about having to maintain them for the rest of your life.
Ms McCreary recommends that your first goal can be two weeks of keeping a budget. After achieving that, you can set a longer timeline until it is embedded in your routine.
Gamify your budget: if you’re still struggling, Ms McCreary recommends that you gamify your budget and turn it into a challenge.
“Maybe there’s an outcome involved. Like ‘Hey, if we save enough money, we can get a new TV or go on vacation’,” she says.
Examples of gamification include giving yourself a small reward after a certain amount of time or money that you have saved.
Apps such as Mint, which rewards the number of times you check your budget, and Acorns, which allows users to invest with their spare change, can help. Yotta and Save to Win allow users to create saving bank accounts that rewards them for the amount that they save.
For accountant Tiffona Stewart, gamifying her savings meant using the envelope system, where you put cash in envelopes for specific expenses.
“This is tailored to your life and what you want to save for, so that’s what I like about it,” Ms Stewart says.
She also started a business selling envelopes and budget binders on Etsy as a way to encourage and promote financial literacy. She sells “one month challenge” packages meant to help save $1,000 in cash.
“You play those games and you make these things your own. You’re trying something new, there’s nothing wrong and right, you might get it wrong one month and then get better the next one,” she says.
Involve your family or friends
As with any lifestyle change, having people around you to support your decisions and encourage healthy habits is crucial, Ms McCreary says.
That could include talking with your significant other about your finances, telling your friends that you will start budgeting, or explaining to your children how the family is now spending money.
Ms Rogers’ 11-year-old son now knows that if there is not a coupon for the item, they don’t get it.
In Ms Stewart’s case, using cash when going out with friends helped. If you only take $100 out with you and don’t bring your credit card, you simply can’t spend any more, she says.
“You need everybody who’s involved in those decisions, to commit with you to be supportive of it,” Ms McCreary says.