Crafting a Practical Budget: A Comprehensive Guide to Financial Planning17 min read

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Crafting a Practical Budget: A Comprehensive Guide to Financial Planning

I used to dread budgets.

Most budget templates and apps seemed too restrictive and inflexible. If an expense didn’t fit neatly into a predefined category, I’d become overwhelmed and abandon the effort altogether.

So be sure to set up a realistic budget that reflects your actual income and expenses. If you’re spending money be sure that the budget reflects that.

So, what changes led me to successfully pay off over $50k of debt? Allow me to show you how to create a budget that you’ll actually stick to.

You should start thinking of the bigger financial picture and consider your ultimate lifetime money plan as early as possible. Personal finance is a lifelong responsibility and has nothing to do with your take-home pay or existing debt. So start planning toward your own ultimate lifetime money plan or goal and get rid of your financial stress.


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The Crucial Principle for Effective Budgeting:

The most important aspect of creating a useful practical budget guide can be summarized in one phrase: Be aware of where your money is going. Various budgeting apps and spreadsheet templates are designed to help you achieve this goal. So be sure to track spending in all its forms.

Watch this video by The Rachel Cruze Show on How to Make a Budget That Actually Works for You

Failing to track your spending can lead to:

Unconscious spending.

Underestimating your expenditures.

The Key to a Successful Budget Plan:

Many people avoid the term “budget” because it evokes images of spreadsheets, numbers, tables, and percentages – elements that may appeal to accountants, but not to the average person. In reality, only 2 out of 5 Americans maintain a budget, even though most of us have debt.

The unpredictability of life can make financial planning seem daunting, but it doesn’t have to be. The secret to a good budget is simplicity. A straightforward budget is more effective than a complex one. If you can’t stick to your perfect and detailed budget, what’s the point?

One of the best things to do if you want to succeed after you start to set up your budget is to find an accountability partner. This will not only make making a budget easier, but it will also keep you accountable and ensure you stick to your budget and create realistic goals for yourself.

Budgets: Everything You Need To Know

Budgets: Everything You Need To Know

A yearly financial plan is the way to manage expenditures for a specific period. Businesses and governments rely on budgets to evaluate revenues and spending. There are different kinds of budgets. How do I set up my budget?

How to budget money

Make a monthly income estimate, choose a budget strategy, and monitor it. Make 50% of your income available for your needs. Leave 30% of your earnings for spending on wants. Set aside the remaining 20% of income for savings. These are the three categories you will divide your take home income into.

If you get some extra money elsewhere, don’t just spend all of it, allocate it to the different budgeting categories. You can use some of it as fun money to spend on what you like, but save some of it to make it easier to get to your realistic budget goals you set for yourself.

Add Up Monthly Expenses

Make sure you have all the monthly expenses you need for the period. Including fixed expenses such as rent, home loan, or any other expenses such as monthly repayments and insurance. List your variables which can differ month-over-month. Examples include food purchases, gasoline, and entertainment. Make note of what your spending is. You can use specialized budgeting apps, or simply pen and paper. Checking your bank accounts and credit card statements each week or month is a useful way to remember any lost expenses that you may have.

Spend 50% of your money on needs

Simply put, needs are expenses that one must pay for everything essential to survive. 50 % of your net income after taxes should cover the cost. For example, if you earn a gross income of $2500 per month before tax you will receive just over $2000 per month.

Of that income 50% (around $1000) will be allocated to your needs. Your needs include things like housing, transport, child support, food, utilities and medical care and maybe a few other things as well.

These budgets are different for everyone. Often your needs can exceed 50% of your earnings and it may be necessary to reduce the cost. It’s as simple as changing the allocation of your income.

Understand the budgeting process

Figure out how much income is available after your taxes have been deducted. If your income includes business expenses and tax deductions – maybe from side jobs or renting out a property you own – remember to submit those with your tax returns.

Select a budget. Any budget must be designed to provide for your needs— what’s most important –, wants, and savings for things that may go wrong in the future. Budget examples include envelope systems and zero-base budgets.

For some more budgeting tips go to Nerd Wallet and read Budgeting 101: How to Budget Money. They also have awesome tools you can use.

Spend 30% of your money on wants

30% of your net income after taxes could be utilized as payment for your wants. Want is a term used for non-essential expenses and describes items that you don’t need to survive, but that you want to buy. Wants are things like going out with friends and buying extra clothes or items you like but don’t really need.

Depending upon your monthly after-tax income, you can spend up to 30% of your regular paycheck on what you want. If you find you spend too much on things you don’t need and want you should think about reducing your spending. The 50/30/20 rule does not guarantee that you will manage your money perfectly it’s more of a practical budget guide to help you.

Leave 30% of your income for wants

It’s difficult to separate desires from needs. But generally speaking, a need is essential for your life and work. Wants are typically desires which include dinner parties, gifts, traveling, and entertainment. Sometimes decisions are difficult and often nearly impossible. Do you really need massages and takeout? Do you really need to spend so much more on organic food? It varies from one individual to the next. If you want to pay off your debt as quickly as possible you can decide that your desires will be put off until you have enough money. But you need to make sure your spending budget isn’t too tight that you cannot spend money for the enjoyment of the day.

The bank account that gives you more control

Spend and save in a safe way and find a better way to cut spending and manage your money. This can be done by getting separate bank accounts for all your different needs. Make sure you choose a bank that has an intuitive banking app that helps you monitor spending. It should also have a comprehensive monthly statement.

Subtract Expenses From Income

Let’s subtract monthly expenditure from the total amount of your earnings. You are in a better position if you expect the money remaining after this calculation is performed. If you’ve been told you’d be in shortfall, you should check out how much you should reduce the expenses. The key here is to differentiate between needs and desires.

Stash 20% of your money for savings

The rest of the monthly after-tax income should be around 20% and can also be saved. Save your money if you don’t have any outstanding debts. Although minimal payment is considered needed, additional repayment may reduce current bills or anticipated credit debt so they can be categorized as savings. Consistently saving 20% per month may be helpful. The same can happen whether you plan to start an emergency fund or create long-term financial plans. It is impressive how quickly savings can count up and increase your available funds.

Evaluate and adjust your spending to match the 50/30/20 rule

Once your money is accounted for you can begin making adjustments to your budget to match the 50/30/20 rule. The best method of assessing your monthly spending is to find out what your needs are. A want is not extravagant – it’s a basic nice thing that lets you enjoy your life. When cutting back on your expenses, it may become difficult. The more money you reduce in order to meet your budget goals, the higher you will likely achieve your 20% saving target.

Zero-Based Budgeting

Zero-based budgeting requires putting a zero-based budget on your earnings to the lowest possible value. We’re looking to spend every dollar well in order not to waste money. Businesses, governments, and other organizations are also allowed to use the zero based budgeting approach.

Categorize your spending for the past month

If you are looking into how much of your income has been spent in a given month, you must see how much you earned that last month and what it was spent on. Grab the latest bank statement from your bank account or simply download the N26 Analytics app. It automatically sorts every transaction into categories for example salaries, groceries, leisure, entertainment, etc. Split your expenses into 3 sections. Remember, necessity is a crucial expense that cannot be lived without, like rent for example. The second category is “wants”, which are additional luxuries that you don’t need to survive, including eating at restaurants. The third category is savings.

How To Start a Budget

Start with creating a budget. Your goal should be to make a budget, measure the average amount of money coming in and plan out where that amount will go.

What are the 7 steps to a practical budget?

  1. Assess your financial goals: Before creating a budget, identify your short-term and long-term financial goals. This could include saving for a vacation, paying off debt, or building an emergency fund. Knowing your goals will help you allocate your resources effectively. This can also help you choose a budgeting method that suits your needs.
  2. Gather financial information: Collect all relevant financial data, such as income, expenses, debts, and savings. Make sure you have a clear understanding of your monthly income and recurring expenses.
  3. Categorize your expenses: Divide your expenses into categories such as fixed expenses (rent, mortgage, insurance), variable expenses (utilities, groceries, transportation), and discretionary expenses (entertainment, dining out, hobbies).
  4. Calculate your monthly income and expenses: Determine your total monthly income and total monthly expenses by adding up the amounts in each category. This will give you a clear picture of your financial situation and help you identify areas where adjustments may be needed. Regularly track and monitor your spending.
  5. Allocate funds to each category: Based on your financial goals and current situation, allocate a specific amount of money to each expense category. Ensure that your total expenses do not exceed your total income.
  6. Implement and track your budget: Use a budgeting tool, spreadsheet, or app to track your spending and monitor your progress. Regularly update the budget with actual expenses to ensure you’re staying on track.
  7. Review and adjust: Periodically review your budget and make necessary adjustments to stay aligned with your financial goals. If you find that you consistently overspend in a certain category or struggle to meet your savings goals, make adjustments to your allocations and spending habits. Remember, a budget is a dynamic tool that should be adapted to your changing needs and circumstances.

In this step by step guide, we’ll create a simple budget with only three major categories for your expenses:

Fixed Expenses – Include monthly charges that remain consistent, such as rent/mortgage, subscriptions, or car payments.

Variable Expenses – List monthly charges that fluctuate, such as utilities.

Monthly Expenses – Track frequent expenditures that vary throughout the same month often, like groceries, dining out, or shopping.

Monitoring Your Monthly Expenditures:

Choose a method to for keeping track of your monthly expenses:

Use a smartphone app

Utilize a budget spreadsheet in Excel

Write expenses down manually

Staying on Track with Your Budget: Common Pitfalls to Dodge:

To maintain your budget, avoid these common mistakes:

Not having a clear reason or goal for budgeting

Using a budget that’s too complicated

Failing to combine budgeting with saving money

Budgeting Advice for Long-Term Success:

To ensure long-term success with your next budgeting app, follow these tips:

Set up email alerts and autopay

Review credit card statements weekly

Develop a frugal lifestyle

Remember, your budget doesn’t have to be perfect

Be honest about your spending habits

Keep track of important dates

Consider the 50-30-20 budget rule

Commonly Asked Questions

  1. How do you create a budget spreadsheet?

How do you create a budget spreadsheet?

Crafting a Budget Using Microsoft Excel or Google Sheets:

To create a budget spreadsheet, follow these steps:

  1. Choose a platform: Decide whether you want to use a spreadsheet program like Microsoft Excel, Google Sheets, or another alternative.
  2. Create categories: Start by creating categories for your budget. Common categories include income, fixed expenses (such as rent, mortgage, or utilities), variable expenses (like groceries, transportation, or dining out), and savings or debt repayment.
  3. Add subcategories: Within each category, list specific items or expenses. For example, under fixed expenses, you might list rent, electricity, and water bills.
  4. Input values: Enter estimated or actual amounts for each expense or income item. You can choose to input these values on a monthly or weekly basis, depending on your preference.
  5. Calculate totals: Use formulas to calculate the total for each category and subcategory. For example, in Excel or Google Sheets, you can use the SUM function to add up all the amounts in a specific range of cells.
  6. Calculate the difference: Subtract your total expenses from your total income to determine your net income or deficit. This will help you identify areas where you need to cut back or save more.
  7. Adjust and update: Regularly update your spreadsheet with actual expenses and income figures to track your progress and make any necessary adjustments to your budget.

To make it easier, you can find many budget spreadsheet templates available online that can be customized to suit your needs. These templates often come with pre-built categories, subcategories, and formulas, saving you time and effort.

Watch this video by Work Smarter Not Harder on Excel Budget Template | Automate your budget in 15 minutes

  1. How do you maintain a budget?

To successfully maintain a budget, regularly track your spending to gain a clear understanding of where your money is going and how to better allocate it.

Start by:

a. Reviewing your account statements and categorizing your expenses.

b. Keeping your tracking consistent.

c. Identifying areas for improvement. Utilizing free online spreadsheets and templates can simplify the budgeting process.

  1. How do you determine a budget? What is the 50 20 30 rule?

Start with a financial self-assessment. Once you have a clear understanding of your financial situation and goals, choose a budgeting system that suits your needs. We suggest the 50/30/20 system, which divides your income into three primary categories: 50% for necessities, 30% for wants, and 20% for savings and debt repayment.

Consider using the widely recommended 50/30/20 budgeting methods to optimize your finances. This budgeting method entails spending approximately 50% of your post-tax income on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.

This simple plan promotes long-term financial stability by ensuring manageable debt levels, providing occasional indulgences, and fostering savings for unexpected expenses and a comfortable retirement.

Review the 50/30/20 budget:

  • Monthly post-tax income
  • Your 50/30/20 numbers:
    • Necessities: $?
    • Wants: $?
    • Savings and debt repayment: $?

Track your monthly spending trends to differentiate between needs and wants. Allocate up to 50% of your income for necessities such as groceries, housing, basic utilities, transportation, your health insurance amount, and minimum loan payments. Any additional payments should be directed toward the savings and debt repayment category. Also, consider work-related expenses such as childcare.

If your essential expenses exceed 50% of your income, you may need to temporarily adjust your spending by reducing your “wants” budget. Periodically reviewing your fixed expenses can help identify opportunities for savings, such as switching to a more affordable cell phone plan or refinancing your mortgage.

Reserve 30% of your income for wants, which typically include dining out, gifts, travel, and entertainment. Distinguishing between wants and needs can be challenging, as this varies between individuals. If you’re eager to pay off debt quickly or build savings, you may decide to postpone some wants until your financial situation improves. However, your budget should still allow for occasional fun and flexibility.

Dedicate 20% of your income to savings and debt repayment. Prioritize establishing an emergency fund, contributing to a 401(k) if your employer offers a match, and paying off high-interest debt. After addressing these priorities, focus on saving for retirement and building a more substantial emergency fund. Once you’ve achieved these goals, concentrate on repaying any remaining debt.

Remember to prioritize yourself and continue saving for non-emergency expenses, such as home repairs or a new car. Maintaining a habit of saving provides greater financial flexibility and security.

This simple plan promotes long-term financial stability by ensuring manageable debt levels, providing occasional indulgences, and fostering savings for unexpected expenses and a comfortable retirement.

Components of a practical budget:

A practical budget typically consists of the following components:

a. Income: This includes all sources of money, such as salary, freelance work, or investments.

b. Expenses: This covers both fixed expenses (e.g., rent, mortgage, utilities) and variable expenses (e.g., groceries, entertainment).

c. Savings: This portion of your budget is allocated to building an emergency fund, saving for specific goals, and retirement contributions.

d. Debt repayment: This includes paying off credit cards, loans, or any other outstanding debts.

Creating a practical budget:

To create a practical budget:

a. Determine your monthly income from all sources.

b. List and categorize all your expenses (fixed and variable).

c. Set realistic and achievable savings goals.

d. Prioritize debt repayment and create a plan to reduce outstanding balances.

e. Choose a budgeting method (such as the 50/30/20 rule) that aligns with your financial goals.

f. Track your spending regularly and adjust your budget as needed.

Four types of budgeting:

a. Line-item budgeting: This traditional method involves listing each expense and allocating a specific amount for each category, focusing on tracking and controlling spending.

b. Zero-based budgeting: In this method, you allocate every dollar of your income to specific expense categories, savings, or debt repayment, ensuring that your income minus expenses equals zero.

c. Envelope system: This cash-based budgeting system involves allocating a specific amount of cash for each expense category in separate envelopes. Once the cash in an envelope is spent, no more spending is allowed in that category until the next budgeting period.

d. Percentage-based budgeting: This method, such as the 50/30/20 rule, divides your income into percentages allocated to different categories, providing a flexible framework for managing your finances.

A budget helps you estimate your monthly spending, but it’s useless if you don’t know your actual expenses and aren’t striving to save money. Money management is a skill that takes time and practice to master. By learning how to create a budget tailored to your needs, you’ll hone this valuable skill. Imagine how different your life could be in a year if you start practicing now.

Personal Budgets vs. Corporate Budgets

Personal vs. corporate budgets differ significantly. Your personal budget affects how your money goes. Usually budget categories are housing, utilities, groceries, or transportation. Typically people who are trying to reduce their debt try to save money for retirement or emergency funds. The budget for corporations deals with typical costs of a particular company. A corporation’s budget could therefore include cash flows, debt services, and salaries. Although businesses can have cash reserves, they can’t usually invest their own budgets into it.

In Conclusion

Embracing the budgeting lifestyle requires a shift in mindset. There’s no need to worry about having a perfect budget that’s always spot-on, since life is full of surprises. Focus on making decisions today that will positively impact your future self. Go for it!

Also read:

Budgets for beginners: A guide to creating and sticking to one

Mastering Your Budget: The 37 Untold Secrets of How to stick to a budget

18 Actionable Steps for Millennials to Build a Strong Financial Future

Why Is It Hard To Save Money? (2 reasons)

Best Wedding Reception Order of Events for Your Big Day (4 steps to planning)

9 Frugal living tips for 2022 (and beyond)

10 Top Tips for Planning a Wedding on a Budget You’ll Love


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