Do you immediately feel a little anxious when hearing the word budget? If so, you aren’t alone. Only 32% of families prepare a budget each month. Historically, the word budget has been synonymous with sacrifice, pain or at least minor discomfort. But I feel that budgeting actually provides us with more freedom by ensuring each and every dollar works for YOU.
Building a Foundation
A strong offensive line is foundational to a football team’s offense. A putting game is foundational to the game of golf, a strong core is foundational to personal fitness. A strong foundation is the most crucial part of a well-built house.
Offensive lines and the underlying concrete on a new house aren’t often featured on ESPN highlights or HGTV shows. But without each of them, the whole structure whether it be a team or a home, falls apart. In the same way, your personal budget is foundational to your own financial freedom.
Just Get Started
The importance of a budget is why we recommend creating one as soon as possible. Before you protest, let me give you freedom and say your first attempt at a budget will not work. If you have never tracked where your money is going, then you can’t expect for the first month to sit down and decide where every dollar from your paycheck will go without any need for adjustment.
Remove the pressure to be perfect. Instead, focus on getting it done and feel the relief of giving every dollar a job.
Reasons You Need a Budget
1. Know where you are spending
One of the biggest reasons people overspend is that they don’t realize where all there money is going. Until you start tracking them, you never realize how much your daily expenses add up over a month.
By building a budget and monitoring each expense you are better able to understand just how much you spend each month on clothing, eating out, and transportation costs.
If you’ve never done a budget and don’t know where to start, here are some general guidelines:
- No more than 25% of your take-home pay should go towards your housing. That includes rent or your mortgage including PITI (payment, interest, taxes, insurance).
- You should be putting 10-25% of your take-home pay towards long term savings goals, such as a down payment on a house, retirement, building an emergency fund, or other significant financial goals.
- You want to get $1000 into your savings account as fast as possible.
- If you have consumer debt (car, student, credit, or medical loan) you should then work towards paying down that debt.
If you follow the guidelines above, you still have around 60% of your take-home pay left. We believe that everyone should be using at least 10% of their money towards charitable giving.
As Christians, we give 10% of our take-home pay towards our local church. But regardless of your religious practice, the positive benefits of donating to a nonprofit or charity whose mission aligns with your values is incalculable.
That means you have 50% of your take-home pay for everything else. We like to break this down into big categories:
- Groceries (not just food but anything used around the house in a typical month).
- Clothing
- Utilities
- Entertainment (eating out, date night, concerts, etc.). We’ll have a post in a few weeks that does a deep dive into setting up a budget, but for now, these broad categories will help you get started.
2. Give every dollar a job
Every family’s situation is unique so how you assign their money will have its own unique arrangement. Troy’s family doesn’t eat out much, but our grocery bill is high because we have multiple food allergies and also tend to eat healthier meals with lots of greens.
We allocate our money in alignment with our values. Each month be sure to look at how much money you have coming in and assign every single dollar a “job” in your budget. The technical term for this approach is a zero-based budget, and ensures that every dollar that comes in your possession gets used in the best way possible.
For example, if you bring home $2800 a month, $700 (25%) goes towards housing, $280 (10%) for charitable giving, between $420-$700 (15-25%) for savings or debt reduction, and then you would assign the remaining $700 – $1400 (25-50%) into other categories such as food, clothing, entertainment, utilities, etc.
Make sure that every dollar is given a job. Money without a job isn’t working for you, and you want your money working for you.
We allocate our money in alignment with our values.
Troy – The Compounding Interests.
3. Reduce stress
The times in my life when my finances have felt the most out of control, have been when I haven’t had a budget. I need clear expectations for my spending habits. Early on in our marriage, frequent fights broke out around how much I spent eating out at work or how much money she spent at Target.
It’s not just overspending that can be a problem. If you haven’t assigned a specific number of funds for each budget category, you can become trapped in a cycle of fear over spending any money at all. In both situations, you become a servant to your money instead of using your money to work for you and your goals.
4. Achieve Your Goals
When you are in debt, it can seem like it’s an impossible task to dig yourself out of the crushing debt hole. But when you get on a budget, you begin living, spending and saving with freedom.
A budget is a tool that helps you achieve your goals. You aren’t pinching pennies, instead you are choosing where your money will be going. You move from your debt collectors or your circumstances telling you where your money goes, to you deciding where you will spend your money.
Freedom
A budget has made a huge difference in my life and in my marriage. I encourage you to start with a simple budget that outlines your income and the largest spending categories such as housing and giving. While it will be painful to get started, the payoff will absolutely be worth it. Let us know what has worked for you in the comments below and let’s work towards freedom together!
Budgeting Tools
Here are four different online tools that you can use to get started budgeting. They all have a free version so feel free to play around with different ones to see which you like best. We’ve included a mini-review of each budgeting software.
Mint
Mint is a favorite amongst people in the personal finance space, and for good reason. Not only does Mint allow you to track your budget, but it also allows you to enter your investments, your bank accounts, credit cards, and loan balances (mortgage, student, medical) so you can track your net worth at a glance. The budgeting software uses a zero-based budget which is great. You can also see your credit score, your spending patterns, and your cash vs. credit card debt trend each month. With all this functionality it’s easy to see why Mint is preferred by many in the personal finance space. Troy used Mint a few years ago, and it was fine, but it had some syncing issues with his bank, and that’s what moved him to YNAB. Also, Mint is entirely free but they make their money through their affiliate program, and they put offers for credit cards and investment accounts right on the front of your dashboard. The ads aren’t pushy but are always there, which turns some people off.
YNAB
YNAB stands for You Need A Budget. It allows you to link your bank and credit card accounts so you can easily import transactions. Once imported, you classify each transaction to say with what budget line item that transaction belongs. You also set your budget each month using a zero-based budget. It’s the software Troy uses for his budget.
Every Dollar
Every Dollar is the software created and recommended by Dave Ramsey. It does follow the zero-based budget which I LOVE. You can try the full (paid) version for 30 days which allows you to import credit/debit card transactions into the Every Dollar app. Alex suggests you try the full version and see if the importing feature is important enough for you to to pay the $10 a month or if the free version will suffice.
Personal Capital
Personal Capital is primarily a wealth management tool. We find it most useful for linking all our banking and investment accounts together and serve as a one-stop shop for our finances. They also offer budgeting software for tracking your expenses as well as wealth management. One cool feature is that every week you get an update on how many purchases you made as well as if you spent more or less than the previous week.