Step 2 of 12 to Financial Wellness: Creating a Budget

Now that you’ve tracked your spending and kept a careful record of where your money goes over the course of a month, you’re ready to move onto the next step of financial wellness: creating a budget. Budgets play a crucial role in promoting financial awareness, which then helps to facilitate more responsible money choices. This discipline will benefit you individually, as well as all who are part of your household. 

Let’s get started by taking a look at how to create a budget and review some popular budgeting systems and how they work. . 

Create a budget in 5 easy steps

  • Track your spending and income. This includes all your financial documents, such as your account statements, bills and pay stubs. [If you’ve followed Step 1, you’ve already completed this step–nice work getting ahead of the game!]
  • Tally up your totals. Calculate the totals of your monthly expenses and all your streams of income. If your income exceeds your expenses, you’re in a good place. However, if your expenses exceed your income, or the numbers are too close for comfort, you’ll need to trim some discretionary expenses to make it through the month without falling into debt if an unforeseen big expense happens. 
  • List your needs. Your needs include anything that is essential for living and basic functions, such as rent or mortgage payments, savings, food and clothing. Needs always take priority in a budget. As you list each need, write down its corresponding cost. Sum up the total of your needs when you’ve finished. 
  • List your wants. This includes anything that is not essential for living, like entertainment costs, brand-name clothing and eating out. Here, too, note the monthly cost of each item on your list and add up the total when you’re done. 
  • Assign dollar amounts to your expenses. Open a new spreadsheet and copy your list of expenses, starting with fixed-cost needs, then non fixed-cost needs, and finally, your wants. Assign an appropriate dollar amount for each of these costs, making sure the total does not exceed your estimated total for monthly expenses. 
  • Review and tweak as necessary. You will likely need to adjust the amounts in each expense category at least once a year to keep your budget relevant. Likewise, you will hopefully be able to increase the amounts in the income column as you move upward in your career path or find additional income streams. 

Budgeting systems

While every kind of budget involves tracking expenses and committing to a maximum spending amount each month, there is a wide range of budgeting systems to fit every kind of personality and money management style. 

The traditional budget doesn’t involve much more work than the steps described above. After working out a number for every expense category, you’ll simply need to track your spending throughout the month to ensure you’re sticking to the plan. You can use a spreadsheet for this purpose, or utilize one of the popular budgeting apps, like Mint or YNAB, and do it digitally. 

The money-envelope system works similarly. However, instead of simply committing to sticking to your spending amounts for each expense category, you’ll withdraw the amount you plan to spend on all non-fixed expenses in cash at the start of the month. Divide the cash into separate envelopes, using one for each of these expenses. Then, withdraw cash from the appropriate envelope when making a purchase in that category. There’s no way to blow your budget with this system; when the money in the “Dining out” envelope runs dry, that’s all for this month!

The 50/30/20 budget is simpler, but requires more discipline. Set aside 50 percent of your budget for your needs, 30 percent for wants and the remaining 20 percent for savings. Of course, you’ll need to make sure your income and expenses will work with this kind of budget. Does 50 percent of your income cover your needs? If yes, this budget allows for more individual choices each month and less accounting and tracking of expenses. 

A well-designed budget can provide its creator with a sense of financial security and freedom. When you stick to a budget, you’ll always know you have enough to get through the month and save for the future. Start budgeting today!

Your Turn: Do you stick to a strict monthly budget? Share your best budgeting tips with us in the comments. 

Give Your Finances Some Therapy With Amanda Clayman

Protrait of Amanda ClaymanMeet Amanda Clayman, a financial therapist and influencer who uses a therapeutic approach to help people get their finances on track.

Clayman is no stranger to financial struggles. She shares her journey on her blog, telling the story of the “$19,000 haircut” which served as her personal rock bottom and forced her to take her career in a new direction. Clayman makes it clear that it was not a lack of financial literacy or an upbringing steeped in bad money habits that led to her money troubles. Instead, it was the snowball effect of one bad choice leading to another, until she was struggling under a mountain of debt with no visible way out.

Today, Clayman is a popular financial influencer and a practicing clinician who specializes in money issues. In 2006, she partnered with The Actors Fund and founded a cognitive behavioral therapy-based financial wellness program. She says that money can be a tool for transformation, and this belief helps shape her approach for financial healing.

Clayman tells her followers that financial challenges are inevitable; they can only control their reactions. They need to be proactive at developing a healthy way to handle these setbacks so they can set firm, loving boundaries, make value-based decisions and align behavior with intentions when faced with a financial hardship. Ultimately, this will enable followers to view these challenges as a source of personal growth and empowerment.

You can read Amanda’s story on her blog and follow her on Twitter at @mandaclay to learn more about this transformative approach toward money management and financial wellness.

Your Turn:
Do you have a plan in place for financial setbacks? Tell us about it in the comments.

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8 Reasons To Create A Monthly Budget

Young athletic black man in red shirt sits at his kitchen table planning his monthly budgetNot sure what you’ll gain by budgeting? Here’s a list of the benefits.

  1. You’ll spend less.
  2. You’ll have more freedom by knowing exactly how much you have to spend.
  3. You won’t neglect any fixed expenses because you’ll have money set aside for them.
  4. You’ll skip more impulse purchases.
  5. You’ll have more money to put into savings when this expense is built into your budget.
  6. You’ll have fewer arguments and misunderstandings about spending when it’s all been pre-decided and discussed beforehand.
  7. You’ll never be afraid of running out of money before your next payday.
  8. You’ll feel more confident about your financial situation when you know exactly how much money you have to spend each month.

Your Turn:
What’s your favorite reason for sticking to a monthly budget? Share it with us in the comments!