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Everyone has heard of budgeting, but what is exactly budgeting? More importantly, how do you actually start budgeting if you are doing it for the first time?
If you are a couple who are thinking about creating a budget, I will also share the exact steps you can take to put together a budget that you both can stick to without causing any arguments.
Now, why should you start budgeting?
And what are the benefits of budgeting?
Here are six reasons why you should start budgeting:
- It gives you control over how you spend and save your money because you can plan and decide in advance how much to spend and how much to save.
- It helps organise your spending
- It helps you save more money and pay off your debt faster by cutting down your spending through budgeting
- It allows you to set your priorities
- It helps you save for an emergency fund to deal with unexpected expenses such as car repair or doctor visits
- It makes it easier for couples or family to talk about money
With budgeting, you will definitely start to see improvements in your finances and stop living from paycheck to paycheck.
What Is Budgeting
So, what is budgeting?
Budgeting is simply the process of making a plan on how to spend your money.
With this spending plan, you will know exactly how much money is allocated in advance to each budget expense category.
Now, what are some common budget expenses categories?
Essential Expenses Categories:
Fixed Expenses Categories:
- Housing (e.g. rent or mortgage payments)
- Insurance (e.g. health insurance premiums, etc)
- Debt Repayment (e.g. student loan repayment, credit card debt repayment, car loan repayment, etc)
Variable Expenses Categories:
- Utility (e.g. gas, electricity, water, etc)
- Phone bill
- Car (e.g. petrol, parking, maintenance, etc)
- Transport (e.g. taxi, metro, bus, etc)
Non-Essential Expenses Categories:
Fixed Expenses Categories:
- Subscription services such as Netfix & Gym membership
Variable Expenses Categories:
- Entertainment & Recreation (e.g. movies, concerts, vacation, dining out, etc)
- Personal spending (e.g. hair styling, gym, video games, watches, handbags, etc)
For each expense category, you can further label them as either fixed expenses or variable expenses.
Fixed expense means that you are paying the same amount month in and month out.
Variable expense means that your expense varies from month to month, depending on your use of product or services.
For example, your rent is fixed every month, and your health insurance premiums are also fixed expenses.
On the other hand, your food expenses vary, depending on exactly how much you spend on groceries for the month. Your electricity bill is also not fixed because it depends on your exact usage of eletricity for the month.
Now, why do you need to differentiate essential expenses from non-essential expenses and fixed expenses from variable expenses?
It’s because it can help you make your budgeting easier.
With essential fixed expenses, you know EXACTLY how much to budget for it every month.
For non-essential fixed expenses, it’s a decision you need to make whether you want to keep it or cut it out of your budgets.
For example, your Netflix subscription is a non-essential fixed expense, do you include it in your budget or do you want to cancel your subcription and keep it out of your budget?
For fixed expenses, it’s very easy to budget.
It’s the variable expenses that make your budgeting a bit more challenging.
Now, let’s talk about how you can make a monthly budget that is good for your long-term financial health.
How Do You Make A Monthly Budget?
If you are a beginner and are budgeting for the first time, it’s normal to feel overwhelmed and don’t know where to start.
That’s why I always recommend beginners to do this.
First, you just keep spending the way you do normally for one full calendar month, BUT the only difference is that you record down every single expense in a spending log.
The purpose of keeping a 30-day spending diary is to get realistic data and numbers to plan our budget.
Then, at the end of the month, you go through all your expenses one by one and group them into four major categories:
- Essential fixed expenses (money spent on your NEEDS)
- Essential variable expenses (money spent on your NEEDS)
- Non-essential expenses (money spent on your WANT)
- Unexpected expenses (money used for emergency)
Now, how do you plan your budget based on your numbers?
When you plan your budget, you also need to include your income as well as your savings and financial goals.
Below is just a sample budget spreadsheet of what a household budget looks like.
For this sample budget, it only divides the monthly expenses into two big groups – Necessities & Discretionary Spending.
This is the other name for “Essential” & “Non-essential” and ” Needs” & ” Wants”.
For my husband and me, we further seperate our expenses into fixed and variable for each group.
It’s not necessary for you to do, but you can do it if you want to keep everything neater.
Now, what you should do is to open a spreadsheet and enter your own numbers into its respective budget expense category.
For fixed expenses, it’s more straightforward.
Your rent, internet, insurance and loan repayments are all essential fixed expenses.
When it comes to budgeting, it’s the variable expense that gives you more room for adjustments than fixed expenses.
For example, electricity bill is a vairable expense.
Let’s assume that your electricity bill is $100 based on your spending log.
If you feel that your electricity bill of $100 is a bit too high, then you can enter a budget, let’s say $80, and start taking steps to cut down your electricity usage by using your aircon or heater less often.
For essential variable expense, you can reduce it by using it less.
What about non-essential expenses?
This is the area where you can make the most changes.
For non-essential expenses, you can either choose to reduce it or cut it off completely.
Depending on your financial goals, you can set your budget accordingly.
For example, if you want to pay off your debt faster, then what you can do is to eliminate as much non-essential spending as possible.
Let’s say you are spending $200 every month on hobbies such as video games or dancing and spending $300 on dining out.
If you are willing to make some dificult lifestyle changes, you can save an extra $500 every month.
By allocating an extra $500 toward your debt repayment every month, you can easily clear your debt months, if not years, earlier.
Now, how do you exactly budget for your expenses?
What percentage of income should you allocate towards your expenses?
Most personal finance experts recommend this famous “50-30-20” budget rule.
What is this “50-30-20” budget rule?
According to this rule, you should allocate 50% of your income towards necessities (i.e. essential expenses such as housing and utility) and 30% of your income towards discretionary spending (i.e. non-essential expenses and the final 20% towards your financial goals such as savings or paying off debt.
First of all, this rule is just a guide.
And this is not a one-size-fits-all solution to your budgeting.
So, what you should do is to design your budget based on your own financial situation and your financial goals.
For example, if you want to put more money towards savings, then you could lower the allocation percentage from 30% to maybe 15% for discretionary spending and increase the percentage for savings and financial goals from 20% to 35%.
Also, this percentage is not fixed for life.
You can always review it and adjust it to better match your financial goals.
Budgeting For Savings & Financial Goals
Once you are done with expense budgeting, it’s time to move on to planning your budget for savings and other financial goals you have.
Earlier, we talked about the 50-30-20 rule which recommends you to put 20% of your income towards savings and other financial goals.
Again, you should see it as a guide and set your own budget based on your own financial goals.
For example, there are people in the FIRE (financial independence early retirement) community who are saving at least 50% of their income every month.
So, where there is a will, there is a way.
If you don’t have an emergency fund yet and still have outstanding loans, what I recommend you to do is to prioritize saving for an emergency fund and debt payoff over other financial goals such as buying a new car.
A Definitive Guide: How To Pay Off Your Debt Fast (2020)
How To Create A Budget As A Couple
Budgeting as a couple is a bit complicated because you and your partner could have different money beliefs and values.
For example, you might be a saver and your partner might be a spender.
When this happens, you and your parnter will likely have a lot of arguments about money.
So, budgeting might be a good way for you to minimize any fights over money and get everyone on the same page.
Why is this so?
First of all, you and your partner will need to sit down and have an open and honest discussion about money.
This is also a good time to understand each other’s money beliefs and spending habits.
For eample, your partner might feel it’s okay to spend a lot of money on wants such as designer bags or dining out.
On the other hand, you might be a person who prefers delayed gratification to instant gratification.
When there is a difference in views, it’s important to try to understand from your partner’s point of view and not to judge.
Since imposing your own money beliefs on your partner is not going to work, how do you set a budget that is agreeable by all?
That’s where dicussing about your joint financial goals as a couple comes in.
When you share the same goal, you are more willing to make compromises and work together.
For example, if you both want to buy a house together in a couple of years’ time, then it makes sense to start a housing fund and allocate more income towards this by cutting down discretionary spending.
Whether you join your finances together or you manage your finances separately, it’s a good idea to have a joint account for all the household expenses and a joint savings account for your financial goals.
Let’s say that you manage your finances separately.
If you set your household budget as $3000 a month, then you will contribute $1500 each towards the joint expense account.
Assume that you both want to save for the downpayment for your first house, then you might want to contribute, let’s say, $500 each towards the joint savings account every month.
Now, what if you join your finances together?
It works kind of the same.
The only difference is that you transfer your household budget $3,000 towards your joint expense account and $1,000 towards your joint savings account from your main joint account instead of from your separate accounts.
Useful Tips For Planning Your Budget
Budgeting does not work if you don’t stick to it.
So, how do you make sure that you will stick to it?
There are several ways to help you do that:
- You start tracking your expenses every day, so that you know how much budget you have left for each expense category
- You can plan your purchases (i.e. variable expenses such as grocery shopping) in advance
- You can set a hard limit on some of your discretionary spending (e.g. two movies a month)
- You can set up an automatic transfer to your savings account if you have set a monthly budget for savings