There is no time like the present to build a budget and prepare for the journey ahead. Early in the year is the best time to map out your annual budget and set savings goals. A budget is simply a spending plan based on your income and expenses. When you budget your spending in advance, you can focus on what’s important – from debt reduction to saving for a goal. With a budget, you’re guiding your money where to go instead of wondering where it went — this ensures your spending is aligned with your personal financial goals. We’ve assembled a crash course on budgeting with a few tips to help you start and stay the course!

Benefits of Budgeting

There are so many reasons a personal budget fails, but the main reason is that it’s hard for people to commit to the process, as people often associate budgeting with self-denial. A budget isn’t only about restrictions — it can also help prioritize things you enjoy, like dining out or vacation. You’re more likely to change your day-to-day budgeting habits when a specific goal represents something you genuinely want. Maintaining a budget can help you:

  • Understand your spending habits

  • Find ways to reduce spending

  • Save for specific goals

  • Make sure you’re on target for reducing debt

  • Have increased account visibility

In the long run, a monthly budget helps to improve your financial health! Knowing how your money is spent helps maximize cash flow. It’s wise to coordinate your budget with an achievable timeline of personal financial goals:

  • Short-term goals can be accomplished in a few months or up to two years.

  • Medium-term goals can be achieved in two to five years.

  • Long-term goals can be completed in more than five years. 

Set S.M.A.R.T Goals

It’s essential to identify why you are budgeting and what you are saving for – clear visions are more attainable. Vague goals like adulting, saving for a house, and paying off credit card debt are all good but not great goals. Great goals require specificity! A great goal is a source of motivation and often sounds like saving $1,000 a month to move out of your parent’s house so you can afford to pay rent or aiming to pay off $4,000 in credit card debt in six months so you can put a downpayment on a new car. You’re more apt to change your daily budgeting habits when you have a specific goal that represents something you truly want for yourself, these are called S.M.A.R.T goals:

  • Specific – be as clear and detailed as possible. The more specific your goals are, the easier it is to obtain them.

  • Measurable – measure your goals so that you can monitor your progress. Check the balance in your savings account sporadically as it changes over time to see if you are close to your end goal.

  • Attainable – setting an achievable goal means choosing something feasible, even if it means pushing yourself outside your comfort zone.

  • Relevant – a S.M.A.R.T. goal must align with you. Is it worth your focus? Is it necessary? What are the long-term benefits? Your goals should reflect what’s going on in your life.

  • Time – how long will it take? What is the time frame and target date? Is my deadline realistic? When will I achieve my goal? What other specific actions can I possibly add to accomplish this goal sooner?

Choose a Budget Method

There are many different approaches to budgeting, such as cash budgeting, reverse budgeting and traditional budgeting, but one method that has proven to be most effective is the 50/30/20 rule, which splits your income across three major categories:

  • 50% goes to necessities (groceries, transportation, medical insurance, utility bills, etc.) 

  • 30% to wants (entertainment, eating out, travel, etc.) 

  • 20% to savings (savings, investments, or debt repayment)

This system allows you to pay off debt, cover current costs, and save for future expenses. You can use it alone or as a baseline for other flexible budgeting methods. With the 50/30/20 rule, your income equals expenses plus savings and investments. The purpose of this rule is that it should be flexible depending on your needs and encourage you to save something every month. It also helps you to visualize how your money is being spent and sets a limit for the amount of money that goes to the extra expenses that may or may not be necessary. This system can be documented on paper, spreadsheets, or budgeting apps! This system is an excellent place to start if you’re a first-time budgeter.

Pay Yourself First

It can be hard to find extra money to save by the time monthly bills and everyday expenses are paid – that’s where the “pay yourself first” method comes in handy. With this strategy, you’d set aside money for retirement, savings, and debt before paying for other variable expenses; this is also commonly referred to as a “reverse budget.” The pay-yourself-first method helps set aside money that can be used for an emergency fund, college tuition, debt repayment, a down payment on a home or retirement. Here are a few steps you should take to get started with the pay-yourself-first budget:

  • Establish how much money to save — as a set dollar amount or a percentage of every paycheck — and what to save for.

  • AUTOMATE! Have retirement contributions automatically deducted from your paycheck. Split your direct deposit across savings & checking accounts or schedule automatic transfers into a designated savings account(s). 

  • Create a budget based on the available funds after paying yourself first. You can manage monthly expenses and spending while still tucking money away.

  • Add to savings whenever you can! Set up your transfers by percent instead of dollar amount so that when your income increases, your savings automatically will, too!

It’s essential to keep in mind that prioritizing savings over other goals might not always be in your best financial interest. For example, if you have heavily burdensome debt — such as a high-interest credit card balances — try tackling that before saving up for a vacation or a new car. You may not immediately see the benefit of paying yourself first, but don’t get discouraged. If a financial emergency arises, this strategy can help weather the storm. Ultimately, paying yourself first is about putting yourself first, which helps ensure you’re prepared for whatever’s yet to come.

Follow Through

Budgeting requires discipline, and discipline takes time. As you build and modify your budget, remember why you started and focus on the target outcome. Building your budget can be summarized into four simple ideas:

  • Identify expenses

  • Create the budget

  • Commit to your budget

  • Review your budget regularly

With the right budget, you’ll be prepared to save for the exciting, winding road ahead. While on your financial journey, remember that your friends at Chartway are here to help you with your savings needs!