Why and How-To Create A Saving & Spending Plan (Budget)

Why and How-To Create A Saving & Spending Plan (Budget)

April 26, 2024


The Most Important Decision You Can Make About Your Personal Finances

I'm often asked questions about personal finance that start something like this, "What's the best way to (fill in the blank)" and I wish there were an easy answer, but it always requires more questions and clarification in order to get it right. One thing that is always the right thing to do is to create and maintain a personal saving & spending plan. Most people would call this a budget but I prefer calling it a saving and spending plan because it gives you credit for the planning and execution you put into it. It takes discipline but it is well worth the time and the rewards can be enough to create a gateway to a whole new level of financial security. 

Let's look at the why's and how's to help you get started with your saving & spending plan for greater control of your finances.

Key Benefits Of Using A Saving & Spending Plan

  1. Controlling Your Spending Habits:

    • A budget helps you manage your spending by tracking income and expenses.
    • It ensures you allocate funds wisely, preventing overspending and impulsive purchases.
  2. Working Toward Long-Term Goals:

    • A budget forces you to map out your financial goals.
    • Whether it’s saving for a car, a house, or graduate school, a budget helps you stay on track.
  3. Avoiding Financial Overwhelm:

  4. Making Retirement Saving Easier:

  5. Preparing for Emergencies:

  6. Maximizing Income and Minimizing Waste:

  7. Financial Contentment:

Remember, a saving and spending plan is a powerful tool that empowers you to make informed financial decisions and achieve your goals. 

How To Get Started

Creating a budget is a crucial step toward financial stability. Let’s break it down into five simple steps:

  1. List Your Income:

    • Start by identifying all sources of income for the month. Include your regular paychecks, side hustles, freelance work, or any additional money you expect to receive.
    • Remember to work with net income (after taxes and deductions).
    • Create separate income lines for each paycheck or income stream and make note of when you receive the income during the month.

    Example:

    • His Paycheck 1: $1,500
    • Her Paycheck 1: $1,500
    • His Paycheck 2: $1,500
    • Her Paycheck 2: $1,500
    • Side Hustle: $500
    • Total Income: $6,500
  2. List Your Expenses:

    • Now, identify your monthly expenses. Refer to your bank statements or online account for accuracy.
    • Categorize expenses such as rent/mortgage, utilities, groceries, transportation, insurance, and debt payments.
  3. Subtract Expenses From Income:

    • Subtract your total expenses from your total income.
    • If your expenses exceed your income, consider adjusting spending or finding additional income sources.
  4. Track Your Transactions:

    • Keep a record of your daily spending. Use a budgeting app, spreadsheet, or pen and paper.
    • Monitor your transactions to ensure you stay within your budget.
  5. Make Adjustments Before the Month Begins:

    • At the end of each month, review your budget and make necessary adjustments.
    • Allocate funds for savings, debt repayment, and financial goals.

Remember, a savings & spending plan isn’t about restricting spending—it’s a plan that empowers you to achieve your financial objectives. Whether you use paper, spreadsheets, or an app, taking control of your money starts with creating a budget! 

Learn More ramsey solutionsmoneyfitnerdwallet

Some Budgeting Approaches To Consider

The Pay-Yourself-First Spending Plan

The pay-yourself-first budget is a smart financial strategy that prioritizes saving, debt repayment, and investing before allocating funds for other expenses. Here’s how it works:

  1. Assess Your Spending:

    • Begin by reviewing your typical spending. Pull up your bank and credit card statements to understand your monthly expenses.
    • Start conservatively and avoid risking overdrafts or bounced checks.
  2. Determine How Much to Pay Yourself:

    • Use the 50/30/20 approach:
      • Allocate 20% of your income to savings and debt repayment.
      • Reserve 50% for necessities (like rent, groceries, and utilities).
      • Set aside 30% for wants (discretionary spending).
    • For example, with a $3,400 monthly income:
      • Savings and debt repayment: Up to $680.
      • Necessities: $1,700.
      • Wants: $1,020.
  3. Identify Your Savings Goals:

    • Make a list of short-term and long-term goals.
    • Prioritize saving for retirement and building an emergency fund.
    • Allocate funds toward other goals like travel, appliances, or a house.
    • Decide how much you need to save for each goal and how much you can afford to set aside monthly.

Remember, the pay-yourself-first spending plan treats savings like a bill—you prioritize saving before covering other expenses. It ensures financial stability without neglecting necessary costs like housing and utilities

Learn more: Nerdwallet, budgetmethodthebalancemoney

The 70/20/10 Approach

The 70/20/10 approach is a straightforward money management strategy that helps you allocate your income effectively. Here’s how it works:

  1. Seventy Percent (70%) for Monthly Bills and Daily Spending:

    • Allocate 70% of your take-home pay to cover essential expenses like:
      • Mortgage or rent
      • Utilities
      • Transportation
      • Insurance premiums
      • Food
      • Clothing
      • Entertainment
    • Include minimum payments for credit cards, personal loans, and student loans in this category.
    • Estimate monthly costs for periodic expenses like travel, haircuts, and gifts.
  2. Twenty Percent (20%) for Saving and Investing:

    • Set aside 20% of your income for:
      • Emergency savings
      • College tuition
      • Investments
      • Future big purchases
  3. Ten Percent (10%) for Additional Debt Payments or Donations:

    • If you have debt (credit cards, loans), use this portion to accelerate debt payoff.
    • Alternatively, consider using it for charitable donations if you’re debt-free.

Example: Let’s say your monthly take-home pay is $3,000. Using the 70/20/10 system:

Remember, this rule provides a framework to prioritize your spending and achieve financial goals. Adjust the percentages based on your unique situation and priorities. 

Sources and references
Are There Budgeting Apps I Can Use To Help Me Stay On Track?

Certainly! Here are some of the most popular personal budgeting apps that can help you manage your finances effectively:

  1. Nerdwallet.com
    • free budgeting app that allows you to manage your finances effectively.
    • Features: You can view all your financial accounts on one screen for easy, holistic monitoring, provides insights into your cash flow, including how your spending fits into the 50/30/20 budget guidelines. Keep an eye on your credit score directly within the app.
    • Why People Like it: NerdWallet’s user-friendly interface helps you make smart money decisions, you can understand how your financial decisions impact your creditworthiness, NerdWallet’s user-friendly interface helps you make smart money decisions.
    • Cost: Free.
  2. YNAB (You Need A Budget):

    • YNAB follows the zero-based budgeting system, where you actively plan for every dollar you earn. It prompts you to allocate your income toward various categories (spending, savings, debt) as soon as you get paid. YNAB encourages intentional money decisions.
    • Features: Link your checking, savings accounts, credit cards, and loans. Available on phone, desktop, iPad, Apple Watch, and Alexa.
    • Considerations: Requires commitment and active planning. Higher price compared to other apps.
    • Cost: $14.99 per month or $99 per year (34-day free trial). College students can use YNAB for free for a year11.
  3. PocketGuard:

    • Snapshot Budgeting: Provides a simplified view of your budget.
    • Features: Tracks spending, categorizes expenses, and helps you stay on top of your finances.
    • Why People Like It: Quick and easy to use.
    • Cost: Free with optional premium features.
  4. Zeta:

    • Budgeting for Couples: Designed for couples to manage finances together.
    • Features: Shared budgeting, expense tracking, and financial discussions.
    • Why People Like It: Facilitates communication between partners.
    • Cost: Free.
  5. Goodbudget:

    • Envelope Budgeting: Allows hands-on management of spending categories.
    • Features: Create digital envelopes for different expenses.
    • Why People Like It: Helps visualize and control spending.
    • Cost: Free with optional premium features.
  6. Buddy:

    • Group Budgeting: Ideal for roommates or friends sharing expenses.
    • Features: Split bills, track shared costs, and set group goals.
    • Why People Like It: Simplifies group finances.
    • Cost: Free.
  7. Monarch Money:

    • Personal Financial Assistant: Uses AI to analyze your spending patterns.
    • Features: Provides insights, suggests optimizations, and helps you save.
    • Why People Like It: Tailored recommendations.
    • Cost: Free with optional premium features.
  8. Stash:

    • Investment and Budgeting Combo: Combines budgeting tools with investment options.
    • Features: Helps you save, invest, and manage your money.
    • Why People Like It: Integrates budgeting and investing.
    • Cost: Free with optional premium features.

Remember to choose an app that aligns with your financial goals and preferences. Stick with your program and before you know it, the progress you make toward your goals will help motivate you to continue.

Learn more: https://www.nerdwallet.com/article/finance/best-budget-appshttps://www.usatoday.com/money/blueprint/banking/best-budgeting-apps/https://money.com/best-budgeting-apps/https://www.forbes.com/advisor/banking/best-budgeting-apps/