How to budget: the basics of budgeting
How do I make a monthly budget? In this blog post, we’ll explain all the basics of how to budget, and we’ll tell you about two useful rules – the 30-day rule, and the 50/30/20 rule.
How do you budget money?
Learning how to budget effectively means putting yourself in the driving seat of your finances.
This means the money you have will go further for you – but while this may sound simple, it’s not always so easily achieved.
Whether you’re caught in a cycle of making budgets and not sticking to them, or you’ve never managed to budget at all, understanding how to constructively manage your money can be one of the hardest (and most important) lessons you learn in life.
Let’s start from the beginning and have a look at the definition of a budget.
A budget is a strategic plan that includes:
- How best to use the money you have coming in, and;
- How to effectively report on your money’s activity within a specific period
Essentially, it’s the control centre of your income and expenditure.
When learning how to budget successfully, you need to be able to both look into the past as well as into the future. Looking back requires honest, accurate self-auditing of your past income and expenses. Looking forward means creating financial projections that are most likely to be true for you in the months or years to come.
Budgeting for individuals: how do I make a monthly budget?
There is no single proven way to learn how to budget. Some people will create colour-coded spreadsheets, while others will simply write down their income and expenses on a post-it note.
While budgeting will look different for everyone, one thing to keep in mind is that there needs to be a high degree of accountability weaved into your method. Your budget will only work if you take it seriously!
Your first three steps to creating a budget:
- Start by looking at two simple things: the money you have coming in and the money going out. List them down:
- Freelance income
- Rental property
- Any other allowances
- Housing and household costs (rent or mortgage, food, water, gas, electricity, phone, etc.)
- Travel costs (public transit, car or bike maintenance, petrol)
- Recreation costs (memberships, dining out, entertainment)
- Education (either for children or yourself)
- Debt repayment
- Now it’s time to see if the current picture works for you. Ask yourself if you’re happy with how your budget looks. Are there areas where you’re spending much more money than you’d like? How can you factor in things that you dream of doing, like long-term travel, buying a house, or continuing your education? Next…
- Start adopting some money management best practices. And, thankfully, there are a few simple tricks to help you budget effectively from day one. These include:
- The 30-day rule; and
- The 50/30/20 rule
There are plenty of other budgeting techniques out there, but let’s look into these in a bit more detail:
What is the 30-day rule?
This is going to sound really simple – and, in theory, it is...
If you want to purchase any sort of luxury item (e.g. an expensive pair of shoes, a new TV, or a trip to a high-end spa), stop. Wait. Don’t do it right away. Instead, write it down somewhere – and in 30 days, if you still want that item (and you can afford it), go back and get it.
The point of the 30-day rule is to prevent you from buying on impulse. You’ll know once that time period lapses whether or not you really wanted something.
What is the 50/30/20 budget rule?
The 50/30/20 budget rule helps you better allocate your money to ensure that, firstly, you’re financially secure and, secondly, that you don’t forgo life’s joys. This is how it works:
- 50% of your budget to needs. These are the things you NEED to survive. Housing expenses, car payments, insurance, utilities, and groceries are just some of the items in this list.
- 30% of your budget to wants. These will be different for every person and relate to the things that you desire. This will include material goods, restaurant outings, gigs, and entertainment.
- 20% of your budget to savings. This category pays for your future and can include contributing to retirement annuities, investments, and simple savings accounts. Also, include any debt repayments in this category – as this will save you from future interest payments.
We fully covered the 50/30/20 rule here.
Summary: how to make a budget
The key to creating a budget is to be realistic, set goals, and stick to a conscious strategy. First and foremost, you need to account for the money going in and out of your accounts. This means looking back and looking forward – and being honest about where you’re spending more than you should.
Next, figure out where you’re spending more than you want to – and adopt the money management framework that best suits you. This might be the 30-day rule, 50/30/20 rule, or something totally different. Either way, you’ll see the best results from setting yourself clear guidelines.
Note: You can easily manage your budget with Revolut’s Budget Planner. Set a monthly budget for whatever you need, and you can track your progress in real-time with alerts and updates. With our handy Analytics tab, you get full visibility on where your money is going – and thanks to the automatic categorisation of payments, you can easily understand where you’re spending.
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To set up On-Demand Pay, you’ll need your employer to know, so they can set it up via Revolut Business. It’s super simple, and free to integrate. Share the details here for us to enable this feature for you.
If you’d like to learn more about saving and budgeting, check out our related blog posts below:
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