Your budget is like your wardrobe--it needs to fit your style and personality. But every budget can benefit from a few best practices, such as taking savings seriously, tracking your expenditures and basing your income on your take-home pay.
Plus, it's easy to remember such things as rent or car payments, but you need to watch out for sneaky expenses, such as subscriptions, gifts and non-prescription medications that are part of everyday life, but get left off many people's budget spreadsheets.
A reason many people avoid budgeting is because they think it means giving up everything they love and converting to a super-frugal lifestyle. Or, they might be scared they’ll discover that they’ve been spending too much money on the “wrong” things.
Budgeting is not meant to shame you into being financially responsible. At the end of the day, budgeting is simply about awareness. If you fully understand where your money is going each month, you can design a budget that allows you to truly enjoy your money. How fun is a shopping spree if it puts you in credit card debt for another month? How much can you enjoy your new apartment if the rent payment is stressing you out? Budgets are helpful when it comes to managing your bills and saving up for future expenses, but they’re also the key to spending your money confidently.
An effective budget is tailored to your specific combination of wants and needs, so forcing yourself to live within a sample budget you found online or in a personal finance book is not a long-term solution. Budgeting categories can vary wildly depending on where you live, where you work, how you get from point A to point B, what you do for fun and what your personal goals are. Finding a budget that works for you will take trial and error, and the end result will look different from every other budget out there. Get comfortable with the idea that everyone has different priorities, and that no two budgets look alike.
A rookie mistake when it comes to budgeting is using your gross salary or hourly wage as your monthly income. Instead, take a couple of minutes to calculate your monthly take-home pay—this is your income after estimated taxes and other deductions (like health care, social security and retirement savings contributions) have been taken into account. Your deductions should be listed on your paycheck, and there are plenty of free online income tax estimate services.
If budgeting categories were a high school gym class, savings would be picked last. In many budgets, the savings category ends up getting whatever is left over after the “more urgent” expenses have been paid. The only way to take your savings seriously is to give it the same priority as your living expenses. If you contribute a set amount to your savings at the beginning of the month, your savings will grow so much faster and you won’t accidentally spend that money on something else.
For many people, budgeting simply means checking your account balance before making a purchase—and although it’s good to stay on top of your account totals, looking at your balance is an unreliable way of determining what you can and can’t afford. Your account balance can’t communicate, for instance, how much money needs to be left untouched in order for you to pay your taxes this year or to renew your gym membership next month or to repair your car next week. Get into the habit of referencing your budget instead of your account balance before spending your money.
Emergency expenses have a knack for breaking even the best budgets because they can very easily turn into a huge source of debt. If you don’t have the cash on hand to take care of them immediately, you’ll have to put them on a card or take out a loan, which will have you paying interest on top of the cost of the expenses.
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, an unexpected medical emergency, or a critical home or vehicle repair. Instead of looking at your emergency fund like yet another savings category, look at 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.