10 Key Components of Successful Budgeting
Creating a budget is the top thing to focus on in personal finance.
Think about it, you can establish your financial goals and know exactly what you need to do to get there. BUT, you’ll never achieve them unless there is money left over at the end the month.
People often focus on making more money to solve this puzzle, but more income is not the main key to financial success.
Many people spend more as they earn more. Then they look back and wonder why they feel behind financially. Even with more income, it’s a challenge to find extra money to save and invest and live below their means.
By all means, continue to build your income. It’s important too.
But what matters most is the difference between your income and expenses (aka your savings rate).
A budget acts as a way to get clarity on your savings rate and your spending habits so you can reach your financial goals.
An effective budget has many life benefits as well.
In this article, I’m going to go over what are some key components of successful budgeting.
Table of Contents
What are the benefits of a successful budget?
Budgeting helps people get clarity on their spending, feel in control, and gain peace of mind.
Creating a budget helps you make informed decisions too. You understand what your spending levels should be in order to maintain financial stability and reach your financial goals.
Whether you have credit card debt, want to build an emergency fund, or catch up on your retirement plan contributions, the budget can make sure you can measure your progress to end the month on target.
Another benefit is getting in alignment with your values and priorities. Make sure that you are spending money on the things that help you live your best life today.
Finally, a budget will help you be aware of spending habits. I can’t tell you how many times I hear, “I’m not sure where our money is going.”
Tracking spending will show you different choices you can make.
Myths of successful budgeting
If I haven’t been clear enough so far, creating a budget is super important to having successful finances. But many myths stop people from creating one.
Let’s debunk these myths. It’s not so intimidating.
Your budget should be rigid and restrictive
We have wrongly learned that a budget is there to decide in advance exactly how much money you will spend across 50 different budget categories.
What happens is that people go over in some categories but are under in others. Then they “borrow” money from a the under category to spend money in that area.
The reality is that you don’t need to keep super specific categories. Budgeting can be simplified.
For example, does it matter if you spent money going out to eat or on Amazon? Not really. A dollar spent is a dollar spent.
Set up your budget to have ranges rather than limits. Think green light if you’re under, yellow light if you’re between the ranges and red light if you’re at or above the top number.
A budget makes drastic changes to your spending habits
We think budgeting means giving up the things you enjoy entirely. There’s no middle ground. You can either do it or not.
Honestly, who wants to give up everything they love? This stops so many from keeping a budget.
The reality is that you should think of budget as a way to KEEP the things you care about while reducing the things you don’t care about.
Cut back on the things you still want to do but know you can do better. For example, many families look at online shopping or dining out on things they can do better on.
Remember, you can still do these activities. Just cut back on how often you do it or see if you can spend less while doing it.
There are certain things you shouldn’t spend money on.
Financial gurus often tell you to avoid spending in certain areas. They say you are “wasting” your money and should avoid certain things.
Listen closely. It is YOUR hard-earned money, and NO ONE should tell you what bad spending habits are.
Do the things you care about guilt-free. Just don’t waste money on things you don’t really care about.
Every month will be the same
Have you ever said, “We do fine most months, but then something always seems to come up that breaks our budget.”
I certainly have.
For some reason we think monthly expenses should be the same every month.
But as you know, there are certain things that come up throughout the year that are predictable but don’t happen monthly. Think holidays, birthdays, anniversaries, summer camp, vacations, etc.
Every month will be different. It’s ok to have months where you spend more than your income as long as you have a baseline that is under what you earn.
Six figure earners don’t need to budget
When I started my business, I thought most middle- and lower-income families would be reaching out.
But I quickly learned that people in those income ranges are actually quite good at budgeting out of necessity. I certainly was!
Many of the families getting in touch were high-income households and self-employed business owners with variable income.
Things got a little comfortable and their income and expenses have risen in lock step (aka lifestyle creep).
The reality is that six figure earners take their eye off the ball, look back and wonder how they got there, and aren’t really sure how to reduce expenses.
Budgeting helps especially high-income earners.
What to Do Before You Start Budgeting
I know, I know. You just want to dive in and start budgeting. But that’s a big mistake.
First, lay the foundation of what you want your finances to do for you now and in your financial future.
Here’s how to do it.
Set clear and vivid financial goals
Let’s face it, most long-term financial goals are boring like saving for retirement.
Yes, you must set long term goals and set realistic goals, but you must also make them come to life.
Having enough money to retire is a worthy goal for sure. But get more specific.
For example, “travel more” needs fleshing out. Where will you go? What will you do once you get there?
Instead of building retirement funds being a goal, how about something like this:
In retirement, we want to travel to Italy starting in Venice. We’ll take a cooking class to make authentic pasta & tiramisu and take a gondola ride. Then we’ll go to Florence grab a cafe macchiato at a local cafe and enjoy delicious pasta over our favorite wine.
Now THAT sounds exciting! Set your goals that way.
Focus on fewer goals
There are so many goals to pursue!
You can fund retirement, save for a down payment on a bigger house, set up an emergency fund, pay off credit card debt, get a new car or start investing in a 529 plan for kids’ college fund.
Yes, you could do this all at the same time, but it’s better to narrow down.
The first priorities could be paying off high interest debt, getting the max employer match in your 401k, and growing your emergency fund.
Think about how much relief you’ll feel if those three goals are accomplished. Consider checking those boxes first. Then you can build your investment accounts, work on college savings, and other things.
Understand your values & priorities
Before you set up a budget, examine what is really important to you. What do you want your money to do for you and your future?
A budget forces you to really examine your values & priorities as individuals, as a couple and as a family unit. You want your expenses to be in alignment with what you want to get out of life.
Take the time to understand that before you create a budget.
Commit to working together
I get it. Things get busy and there needs to be a division of labor in the household to make sure everything gets done.
That can be true with budgeting as well. One of you can do most of the work.
However, you must work together to make a budget that sticks.
Treat it like an experiment
Budgeting is an evolution not a revolution.
Many think a budget can help them reach their future goals right away. But the reality is that it could take a few months until you get it really dialed in.
This is all about mindset. Know that it won’t be perfect so you don’t feel like a failure and give up when it doesn’t.
Don’t go for perfection. Just get started, then iterate and improve.
Key components of a successful budget
Ready to go? Let’s dive in!
Organize all of your financial accounts in one place
You can’t start a budget unless you get all of your financial information in one place.
Fortunately, there are great options that will do it for you. Pick a budgeting tool or app, and link all of your accounts to it.
That way, you only have to go to one place to see all of your finances.
Automate this process and get away from manually inputting every single expense. You’re more likely to stick with it.
Understand the flows of your income
Do you get a bonus or work on commission? Are you self-employed with unpredictable income?
Not everyone has a fixed monthly income or a regular paycheck, so get a feel for your irregular income.
Understand your full year of take-home pay and the timing. That way you can create a spending plan that encapsulates all of your income, your savings goals, debt reduction plan, and investing milestones.
Oh, and don’t think of your income as your gross salary. Think of it as take-home pay after health insurance and taxes.
Start tracking your expenses before you create a budget
Don’t make the critical mistake of pulling your budgeting numbers out of the air.
Track your expenses before you budget. This is your starting point.
If you set a food budget of $1,000 per month, it makes a difference if you’re spending $1,200 or $2,000 right now. The former could be easy to do without disrupting your routine. The latter means making significant changes.
You’d be surprised how much people underestimate their spending. Get the accurate number by tracking your expenses first.
Remember, you don’t need to sift through all of your bank statements, use your favorite budgeting app to get all the expenses in one place.
Differentiate between fixed expenses and flexible expenses
Take a look at your current & past spending.
Then determine your fixed expenses. These are things that are the same, predictable amount each month and would be hard to eliminate without a lot of effort.
This would be rent or mortgage payment, utility bills, your car payment, daycare, other debt payments, and other necessities like groceries, internet, and baseline pet care.
Flexible expenses fluctuate from month to month. Some you can easily reduce or get rid of. Think dining out, shopping, streaming services, discretionary items for kids, etc.
These are everyday expenses and are sometimes referred to as variable expenses.
Separate how much of your expenses are fixed vs flexible.
Budgeting for the fixed expenses is easy but they also can’t really be modified as easily as the flexible ones.
That’s why it’s important to parse these out.
Figure out how much you want to save each month
The reason you want to budget is so that you can start saving more money, right?
Maybe you want to boost your high yield savings account with that awesome interest rate. Maybe you want to pay off a credit card or two with high interest rates. Maybe you want to get rid of your car payments or save for a down payment.
Whatever the reason, the goal is to have a bigger difference between income and expenses.
Pick the number you want to have left over to achieve these financial and life goals.
But PLEASE! Be realistic. Start with an attainable number. Then work into a higher savings rate from there.
Leave a buffer for unplanned expenses
It is inevitable. You’re going to have an unexpected expense or two or three pop up.
If you haven’t yet built up an emergency fund sitting ready in a savings account, it is imperative that you build in a cushion for the unexpected expenses.
Remember the budget busters
Your living expenses are going to be different from month to month.
Holidays, birthdays, anniversaries, summer vacation, back to school, camp registration, and others will happen throughout the year but not every month.
I refer to these as budget busters, because you feel like you do ok then something always seems to come up.
The good news is that these are predictable and can be planned for. Check out this article on how to plan for non-monthly expenses to get the details.
Set weekly spending ranges
Now you know how much you’ll be spending and when your fixed expenses will occur, so start setting weekly spending targets.
A simplistic example: Say you want to spend $10,000 for the month. Your housing payment is $3,000 and your auto payments are $1,000. Both of those come out in week one each month.
That’s $4,000 of fixed expenses leaving $6,000 on everything else. Take the $6,000 and divide it by 4 weeks ($1,500 per week).
Here’s what your targets would look like:
Week 1: $4,000 in fixed expenses + $1,500 on everything else = $5,500
Week 2: $1,500 more = $7,000 total month to date
Week 3: $1,500 more = $8,500 total month to date
Week 4: $1,500 more = $10,000 total month to date
How does this help? Well, if you’re at $5,000 on week 1, you’re doing great! If you’re at $6,000, then you need to pull back in the other weeks to end the month on target.
Forget about all the budget categories
Notice how we didn’t set 20 categories? The $1,500 per week is on “everything else”. It doesn’t matter if you spend on Amazon, dining out, clothing, or personal care. All that matters is that it is spent money.
Super simple and easy to maintain!
Commit to the 5 Minute Weekly Spending Review
Here is the quintessential budgeting habit to keep stick with budgeting.
Take five minutes each week and review these two things:
- Total spending month-to-date based upon your weekly targets
- Review your expenses for the last week.
Why this works? Taking a little bit of time each week is easy to maintain. You’re only looking at the key metrics that will affect your budget, total spending.
Reviewing your transactions affects your spending decisions in the future by keeping your decisions front of mind.
If you only commit to one thing, this is it!
Need help setting up a successful budget?
A budget can help you achieve your long-term goals whether they are saving, investing or paying back debt.
It can also help you go from feeling behind to getting ahead.
If you’re still reading at this point, you like what you’re reading and are ready to take action.
I’d love to help you create your best life today while securing your finances for tomorrow.
The first step is easy. Simply click on the link below to book a free call with me.
We can discuss your biggest budgeting challenge and talk through some quick solutions.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this information.