When you want to improve at something or pick up a new skill, you turn to the experts. They're not too hard to find if you're trying to learn a sport or an art. But what about budgeting? There isn't a clear set of guidelines to follow. Partly that's because many different types of budgets can work well, and your best budget will depend largely on your goals and preferences.
That said, there are a few boxes that nearly all the budgeting superstars check, regardless of their methods. Let's take a look at four of them in more detail.
1. They have emergency funds
The best budgeters know that no monthly budget survives contact with a financial emergency. That's why they start by building up a safety net to cover unplanned expenses, like a job loss, an insurance deductible, or a doctor visit. When an emergency arises, this fund pays for the surprise bills so that you can stick to your regular budget for the mundane expenses. Without an emergency fund, you might have no choice but to take on debt or raid some of the savings you'd set aside for your long-term goals to cover your expenses.
Your emergency fund should contain at least three months of living expenses, or six months if you'd like to be extra safe. If you have a high-deductible health insurance plan, you should make sure you have at least enough to cover your deductible unless you're saving for that in a health savings account (HSA). If you don't have an emergency fund yet, make that your first savings goal before anything else. Set aside what extra money you can spare every month until you've saved up enough.
2. They put their needs before their wants
The most useful budgets put your living expenses and your long-term goals ahead of discretionary spending. If you focus on allowing yourself a large discretionary spending budget first, you might not have much room left over to put toward your savings goals, and then you won't progress very quickly.
When crafting your budget, the first thing you should do is make note of all your basic living expenses. These include things like your rent or mortgage payment, food, utilities, and insurance. They do not include things like streaming service fees or dining out. Those are discretionary purchases.
Once you've gotten an idea of how much your basic living expenses add up to, decide how much you can afford to put toward your long-term goals, like retirement savings, a down payment on a home, or purchasing a new appliance. Add these expenses to your budget and then subtract your total expenses from your monthly income. The remainder is what you can spend on things you enjoy.
3. They don't spend more than they have to
Savvy budgeters are always looking for ways to cut their costs to free up more cash for their financial goals or for spending on things they enjoy. Sometimes this is as simple as looking back through your bank and credit card statements and canceling subscriptions you aren't using anymore. It could also involve turning down your water heater or thermostat to save a few dollars on your electric bill.
You need to be smart about new purchases, too. Always shop around to make sure you're getting the best price and give yourself time to think about a purchase before you buy it to make sure that it's actually worth it. Check for coupons online, in your local newspaper, or in emails from stores to see if you can save a little money on the items you plan to buy.
4. They find a system that works for them
Some people love budgeting apps because they can make tracking your spending a lot easier and you don't have to do a lot of math to use them, while others might prefer a pen and paper. Some people like to stick to cash because it gives them a better sense of how much they're actually spending compared to using a card. Others are fine paying any way but budget only a certain amount of money for each category.
There really aren't any wrong answers here. You just need to find a method that works for you. The most carefully planned budget won't do you any good if you're not willing to do the work necessary to follow it, so don't overcomplicate things. Come up with a simple system that keeps you accountable without requiring a lot of time or upkeep on your part. It might take a little time to find the right system for you. Try a few different methods until you find the one that you like best.
Budgeting might not be the most exciting skill to develop, but when done correctly, it can give you the financial freedom to do more things you love. Try some of the above tips to build yourself a shiny new budget right now.