You’ve finally decided to put yourself on a budget so that you can save your money. But what does a budget actually mean? In this article, we’ll break down what a budget is, what it’s not, and how you can use a budget planner create the perfect savings plan to strengthen your financial base.
Money is a major part of most American’s lives. Whether you have a large savings cushion or not, it’s easy to see that money measures everything, at least in the US.
So then, why is it that more than half of American’s don’t have any plan in place with their money other than paying their bills and buying avocado toast?
And the other half spend more than what they have on fancy things that make them look rich like cars, clothes, and the latest Apple product, when in reality, these things keep them broke?
Simple: Lack of financial education!
The majority of American’s don’t know what to do when they get their paychecks. So, in this article, we’re going to show you:
- What you shouldn’t do with your money each time you get paid
- What a budget is and why you need one
- How to budget your money for things you want
Money can improve the quality of your life, and if you learn to use it the right way, you’ll end up having more of the things you want because you’ll have more money. It’s a win, win!
But first, let’s talk about exactly what a budget is not.
Common Budget Mistakes
If you cringe when someone says the word, ‘budget,’ you’re not alone. 33% of American’s don’t have a budget and have no plans on making one.
If you’re part of this crowd, we don’t blame you. Cornerstone budgeting tips have always been:
- Save every extra penny you have
- Don’t spend any money on things you don’t need
- Save until you retire
Now, these three things are wrong for a lot of different reasons, and we’ll break them all down in a sec. But the biggest issue with all three? These are saving tips, not budgeting tips. And they’re not very good savings tips either.
By the way, we wrote a whole guide on how to save, which is different from budgeting. If you haven’t checked it out yet, you definitely should.
Saving every extra penny you have just doesn’t make much financial sense. How can you know exactly how many extra pennies you have without a plan in place beforehand?
If you never spend money on things you want, then what is the point of making money in the first place? Horde it in a savings account until you die? Save it so someone else can spend it years from now?
We want you to actually use your hard earned money while you’re in the best years of your life, not just for the 10 or 15 years after you retire.
But we also don’t want you to just wing it when it comes to your money, either. These old “budgeting” strategies don’t offer any structure for you to actually use your money efficiently.
They only set you up for failure in the long run because you’re not developing good financial habits, you’re just throwing your money into a savings account in hopes that it will benefit you in the future.
This is why you need to learn how to budget your money before you can save it the right way.
Think of your finances like baking a sweet potato pie. It doesn’t just start out a pie, right?
Of course not! You’ve got to add water, and sugar, and sweet potatoes, and even then, you’ve got to let it bake for a while, and then let it cool before it’s time to finally eat it! Don’t forget the whipped cream…
Budgeting your money is the first step in building your financial sweet potato pie.
So, what exactly is a budget?
What’s A Budget?
Now that you know what a budget isn’t, let’s talk about what a budget actually is.
A budget is a tool that you can use to organize your finances this way you can give every dollar you earn a job. You need to know exactly where each dollar you earn is going. If you don’t know where a dollar is going, your budget is broken.
In order to make a budget that actually works, you need to know what you’re spending your money on. You can do this by:
- Checking your bank statements from the last month
- Hanging on to receipts for the things that you buy
- Keeping a checkbook for bigger purchases
- Looking at your credit card statements
Once you know exactly where your money is going, you can then start to break it apart into different categories like expenses, food, housing, and leisure.
You may notice that the amount you spend at Starbucks is just as high as your living expenses. We hope it’s not.
That is the reason for a budget in the first place. Once you have your finances organized, you can figure out where you need to cut back, how to do it, and how to allocate your hard earned money.
For example, once you know that you spend $50 a week on coffee, you can reduce it to something you feel more comfortable with.
Take the money you were spending on coffee each week and put it towards paying down a debt or setting it aside for a lavish event or vacation down the road.
A budget takes away all of the unknowns from your finances, and it lets you use your money more efficiently. You’ll have a plan in place for every dollar that you earn, that way no penny can slip through the cracks.
Now that you know what a budget is and why you need one, let’s go over how you can use it to create the perfect financial plan.
How To Budget Your Money – The Right Way
You’ve picked apart your finances and you know exactly how much you’re spending every single month.
So how much should you set aside, and what exactly should you break your money into?
Well, we’ve created two budget plans to help you organize your money in the most efficient way possible. Let’s talk about the two plans.
The 50/30/20 plan:
You may have heard of this type of budget planner before for your after tax income, and it may have looked something like this:
- 50% of your income goes towards your needs or expenses
- 30% goes towards anything you may want, like that shiny Gucci belt
- 20% of it is exclusively for saving
Sounds great until you remember one thing: We’re the Minority Mindset, and we don’t think like the majority of people!
This plan neglects some key things like investing, which is part of using your money the right way.
When breaking your money down into our 50/30/20 plan, it should actually look something like this:
See the difference?
In our plan, 50% of your after tax income goes towards spending which will include needs AND wants.
30% of your money should be budgeted for investing, that way you have multiple streams of income which are important for your financial health and stability.
And 20% is for saving, but we don’t want you to save forever, so once you have about six months worth of expenses saved, move that money you would have saved into your investing budget.
This is the budget to follow if you’re young and do not have a lot of financial responsibilities.
If you’re older, and have a lot of financial responsibilities, then you’ll want to follow our second budget plan which is the 75/15/10 plan, which looks something like this:
This budget planner works in a similar way to our 50/30/20 plan. It gives you the breathing room for your expenses and wants, while still allowing you some money to save and invest.
By sticking to one of these plans, you will begin using your money more efficiently and create long term stability for your finances.
A Budget Is Your Lifeline
Budgeting your money won’t make you rich overnight and it certainly won’t double your income in 30-days.
But budgeting your money does give you the opportunity to organize your finances, and then strategize your spending patterns so you can start developing good money habits and begin saving.
And, if you invest your money the right way, you’ll have more money to budget, which means more money to spend and save.
But what exactly is investing anyway, and how can you use it to make you more money?
You can learn all about it in our free eBook on money management and investing – plus you’ll get our financial education emails as well.