You’re here to learn about how to set a budget but here’s the thing…I hate budgeting. I’m sure that’s probably not what you were expecting from one of the founders of a budgeting startup but it’s true. The process can be tedious, the theories are endless and it’s downright impossible to stay consistent. Yet, I’m fully aware of how important it is to set a budget. So let’s talk the basics.
1. Begin With A Purpose
When considering how to set a budget you must first consider why (I get it, it’s a tad bit existential… but I’m serious). Perhaps you’re looking to buy your first home, save for that new (to you) vehicle or simply become smarter about your finances in general. Whatever the reason, having a purpose is incredibly important. It dictates how you allocate your income and where you focus your efforts. It also drives you to keep up with your budgeting.
2. Choose A Method
Look, to each their own but there are far too many budgeting methodologies, theories and strategies on the interwebs. The folks over at NerdWallet do a great job covering some of the more popular methodologies and the differentiating factors. There’s the 50/30/20, The envelope system, the pay yourself first and the zero-based budget.
I’m a simple guy and tend to enjoy simple things. So… lets’ keep things simple. The envelope system (popularized by Dave Ramsey) and the zero-based budget (where every dollar receives a task) can and should work hand-in hand. So let’s choose that as our methodology of choice.
3. Crunch The Numbers
So, here’s where things tend to get tough. I personally believe that your budget should be set and reviewed on a monthly basis. But that can be pretty tedious. With Change, we roll the settings from last month’s budget buckets over to this month’s buckets as a baseline — because, well, most of us are creatures of habit. So your very first budget might take some time but after that, it should be smooth sailing.
Have I mentioned that I’m a fan of simplicity? As a non-finance guy, I want my budget to simply make sense. No crazy math, no backflips, and please, no spreadsheets. Your budget should be as simple as:
Plan For Your Income
Estimate your income each month. As in, how much money (after taxes) do you plan on brining home? This gives you the total amount of money that we will be budgeting with. Rinse and repeat on a monthly basis.
Create Budget Buckets
Create buckets for each of your budget items. These buckets can be expenses such as mortgage, rent, electricity, etc or funds such as college savings, new car, retirement, etc.
You might end up with quite a few buckets. That’s okay. With Change, buckets can be arranged / filtered by category for convenience.
Set Spending Caps (Budgets) For Your Buckets
Now that you’ve created your buckets, set spending caps for each of them. Perhaps you only want to spend $95 eating out this month so that you can spend $205 on home projects. Whatever the limits, allocate every dollar from your income to a specific budget item — even if that simply means “saving.”
Reconcile (aka Track) Your Expenses
Reconcile is a just fancy word for tracking your expenses. This is key to a good budget and with Change, you can sync your bank account to pull your transactions directly into your budget. Now tell each transaction where it belongs and ensure that you are on track to meet your budget goals.
Budgeting takes time, it takes practice, and it takes course correction. This can’t happen without regularly reviewing your month, quarter or even annual progress to see what might need changing.
That’s all folks. Budget shouldn’t require a master’s degree in finance, it should’t be intimidating and it sure as coins shouldn’t be overly complicated. That’s why we created Change: friendly budgeting created for humans.