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how to make a budget

Make a Budget With These 5 Steps

When she was in her early 20s, Lindsey Burgess’s budgeting consisted of making sure she had enough in her checking account to cover dinner and drinks with friends or those cute shoes she just had to have for work.

She was making good money working in public relations and consulting and – unlike her friends – she didn’t carry credit card debt, “but at the end of every month I was counting down to my next paycheck.”

“I just saw every dollar divided into jeans and shoes and sushi and happy hour,” she said.

Now in her 30s, married with two kids, Burgess is devoted to a budget and found that it had given her more freedom to get what she wants than spending on a whim ever did.

“Especially when people are young, I think a budget seems like it’s going to hold them back. Like it’s going to keep them from doing the things they want to do,” she said. “but it’s the exact opposite. The budget is going to give you so much freedom.”

“You can do all the things you want to do and you’ll do them more because you’re not mindlessly spending money.”

“No amount of money prevents you from needing a budget.”

Burgess began budgeting several years ago, shortly after her second child was born. She signed up with or YNAB, a budgeting tool that was founded in 2004 by Jesse Mecham while he was still in school and trying to figure out how to make expenses meet. Since then, YNAB has repeatedly made headlines for being among the most popular budgeting software available.

Burgess became such a fan of YNAB that she joined the team, now working as their chief marketing officer.

She looks at creating and maintaining a budget as three separate phases: breaking the cycle of living paycheck to paycheck, getting out of debt, and finally investing and saving for retirement.

However, it doesn’t matter how much or how little your make. A recent survey by YNAB showed that most of their customers had an annual household income in the six figures.

“The lesson there is it doesn’t matter how much money you make you can still totally blow it,” Burgess said. “No amount of money prevents you from needing a budget.”

Steps to getting started  

1. Take inventory of your fundamental costs.

That can sound more daunting to some people than it is. Burgess said it’s a matter of simply going through your past expenses and totalling up the basics, such as rent or mortgage, utilities, car payments, student loans, and cell phone bills.  Then look at items like groceries, gas or child care or pet food.

2. Add up your other big annual spends.

One thing that many new budgeters leave it out is what YNAB calls “true expenses.” 

Like the holidays or Christmas. “It comes the same time every year. You know when it is,” Burgess said. “And you know every year you spend way more than you expect.”

3. Turn these annual expenses into monthly ones.

If you expect to spend $1,200 each year over the year-end holidays, factor $100 into your monthly budget that is not to be touched until then. Then you can sit back and enjoy shopping (and those non-existent January credit card bills) while everyone else stresses about how to pay for their holiday spending.

Other true expenses? Car repairs, insurance premiums, and vacations. Do you want to take a $3,000 vacation to Thailand? Put $300 per month into your budget and you will be there in a year.

4. Track your money habits.

Andrew Schrage, co-owner of Money Crashers Personal Finance, said, like Burgess, he watched money fly out of his wallet before he began budgeting. “I was spending too much money on everything—entertainment, personal electronic upgrades, restaurants. You name it,” he said.

So Schrage started his budget the old fashioned way, with a manual ledger and a pen. Once he got the hang of it, he switched to the online money management company, Mint.

“Use the method that you’re most comfortable with—an online website, a spreadsheet, or pen and paper. Use it every month—fill it out so you know where you stand,” he said. “Once you’ve created a surplus, make sure it goes to your longer term needs or paying off credit card debt. When you begin to see actual results, you’ll be that much more motivated to keep it as part of your financial life.”

5. Set goals.

Getting out of high-interest debt from credit cards is typically the goal to tackle first, especially credit card debt, followed by building an emergency fund.

“If you have $10,000 in credit card debt, that won’t be solved overnight. Go with reducing it by $1,000 in the beginning and work from there. And when you do reach a goal, reward yourself with a modest purchase,” Schrage suggested. “That might seem counterintuitive to your goal of saving more money, but it will help you stay on track.”

Then look at other lower-interest debt, such as student loans, and see how you can make it more affordable. Refinancing can make these loans more manageable by reducing the amount of interest you pay. At Earnest, you can refinance your student loans and customize your new monthly payment to fit into the budget you’re creating.

Once you’ve got your finances (including a plan to pay off your debt) under control, that extra cash can be put toward your future goals, whether that’s building cash reserves or saving for retirement.

“I think young professionals, in particular, have the most to gain,” she said of those who don’t yet have children or home mortgages to pay. “They can do the things they want to do if they are just aware of what they are spending their money on.”

Putting a Budgeting Plan into Practice

Ashlee Kirkwood, a biologist for an environmental testing company in Massachusetts, recently refinanced her student loans with Earnest. Her budgeting tactic is to use multiple bank accounts to keep her on track, and she factors in annual expenses into her monthly bookkeeping. She explained her budgeting practice:

“I have two checking accounts and one savings account.  My paycheck gets deposited into my first checking account, and I use that account to pay bills like my mortgage, insurance, and utilities,” Kirkwood said. “The ‘extra’ money I have after paying those bills gets transferred to my second checking account.  That checking account is used to pay for all discretionary purchases like groceries, shopping, and entertainment.”

Instead of pen and paper, she uses a spreadsheet to calculate and track her monthly income and expenses. She averages the monthly cost for occasional expenses—like insurance—into her monthly expenses. Knowing her monthly expenses ahead of time means she knows how much she can put in her savings account.

“Using this method was the best way I have found to not only be prepared for large yearly bills like insurance, but also to see if my discretionary spending needs to be reigned in, or if I can afford a big purchase like a vacation.”

Some successful budgeting tips may seem counterintuitive, both Schrage and Burgess said. But it works.

“I never look at my bank account balance. Ever. Because It messes with your mind,” Burgess said. “You have $15,000 in there, and you think, ‘Oh my gosh I can go buy a new couch!’ But you can’t because that money is all reserved for different things.”

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