Financial freedom often starts with budgeting.
And budgeting strategies are tools to keep your financial health in check. They are proven ways to maximize the potential energy of your money for your benefit (and the benefit of your loved ones).
The salary you earn, the investments you make, the bank account you use, the credit you use (including loans); they are all tools to help create and grow your money. When you budget this money, you’re managing it to help you achieve big goals and dreams.
That’s why Kudzu exists: to help you achieve more with your money than you ever thought possible. In this article, we’ll take a detailed look at budgeting and how to adopt a strategy that fits your needs and lifestyle.
Why Is It Important To Create a Budget?
A budget is simply a plan to manage your income, expenses, debt and savings, with an implied goal that you have enough money to cover necessary bills and save for the future.
Virtually all budgeting strategies are designed to help you analyze your income and spending, so that you feel less stressed about money. Ultimately, they should help you make measurable progress toward long-term goals, such as college, travel, home-buying and retirement.
Most budgets also emphasize the importance of preparing for unexpected emergencies, spending less than you make and avoiding excess debt.
Debt can be a tool, but it’s also a common sign of overspending or an imbalance between income and expenses. In fact, Americans are holding $4.96 trillion in non-housing debt.
The easiest and most reliable way to avoid excessive debt (and the associated stress) is to budget. Budgeting can also unlock a host of other benefits and opportunities, when you understand the basics and apply them consistently.
Understanding the Basics: Fixed vs. Variable Expenses
Imagine that your budget is an empty pickle jar.
On the table beside the jar, you have some rocks and some sand. You’re going to fill the jar with as much stuff as you can without overfilling it.
You put the rocks in first and then the sand to fill in the empty spaces.
In this metaphor, the rocks are fixed expenses (or a long-term savings goal like retirement). They don’t really change in size and can’t easily be reshaped to fit more neatly.
The sand is variable expenses (or a short-term savings goal like a planned vacation). It tends to fill in the cracks and can easily be increased or reduced depending on the available space.
Fixed Expenses
A fixed expense or cost is the same every month. They include your rent or mortgage payment, auto loan or lease payments, insurance premiums, internet, most wireless phone bills and any subscriptions you have, such as Netflix, YouTube or Spotify.
These expenses are consistent from month to month, with the possibility for minor fluctuations. After a little analysis of your various bank and spending accounts, you can predict your monthly fixed costs.
But if you have too many of these rocks to fit in your pickle jar, you’re going to feel the pain of it.
Some fixed expenses are necessities; others are just nice to have. Knowing the difference can do wonders for your budget.
Variable Expenses
A variable expense changes from month to month. It can include groceries, utilities, clothing, gifts, dining and entertainment.
While groceries and utilities definitely classify as necessary expenses, many variable expenses can be greatly reduced or eliminated to help create space for more important things.
How To Save On Fixed and Variable Expenses
Before you select the budgeting strategy that fits your needs, it’s a good idea to create a list of your expenses and categorize each item as fixed or variable. For variable expenses, you can list a range from high to low since there isn’t a consistent number.
Once armed with this list of budget categories, you can highlight the expenses that you want to reduce or eliminate.
Here are some ideas for reducing both types of expenses.
For fixed expenses:
- Review and negotiate: Call service providers such as your insurance, internet and wireless phone companies. Ask them about loyalty discounts or other special offers. If they won’t budge, then price-shop the competition.
- Downsize: Sometimes you get accustomed to living with extra, such as extra rooms or a large car. Look for ways to shed the extra, as long as it comes with cost savings. Buying a new, fuel-efficient car might not be better than keeping an older, paid-off vehicle.
- Review your subscriptions and memberships: Highlight the ones that get used the least and cut them. Remember to check your smartphone for app subscriptions, as they can add up quickly.
For variable expenses:
- Meal planning: Drive-through meals and pizza may cut down on your time in the kitchen, but they are much more expensive than cooking at home. With a little extra planning, you can create leftovers for subsequent meals, saving you time and money.
- Trim energy costs: Turn off unused lights and electronics. You can also get a basic programmable thermostat to heat and cool your space only when you’re home.
- Shop smart: Watch for sales, buy generic brands and consider buying in bulk when possible. A Sam’s Club or Costco membership can be a big help when shopping for a family.
A quick note on debt payments: They can be either fixed or variable. Your mortgage is a fixed expense (unless you have a variable interest rate), but your credit card payment can be highly variable.
Popular Budgeting Strategies
Now that you’ve got a solid understanding of the fixed and variable expenses that go into your budget, it’s time to look at the most popular budgeting strategies.
Each budgeting approach has pros and cons, along with fierce advocates who claim it’s the “only” way to handle your money. In reality, the best budget for you is the one you’re the most likely to stick with.
Once you choose a strategy, give yourself the grace to learn and make mistakes. Budgeting is a skill you learn over months, not a pathway to overnight wealth.
50/30/20 Rule
If this is your first budget, the 50/30/20 rule is a great way to start. By dividing your money into these three percentage categories (50%, 30% and 20%), you can get a rough idea of how much is reasonable to spend on each area of your life.
The 50% category is for essentials including housing, utilities, groceries and fuel/transportation. It’s usually a mix of fixed and variable expenses. If you know how much money you bring home in a month, you can quickly divide it in half and compare it to your necessary expenses to get an idea of how your budget is shaping up.
The 30% category is for wants, including entertainment, dining out, travel and hobbies or activities. The 20% category is for saving, paying down debt and charitable giving.
The downside of this approach is that it doesn’t accommodate unique situations such as higher-than-average living costs, high debt loads or inconsistent monthly income. If you bring in $500 one month and $2,000 another month, it limits your ability to plan ahead or handle basic fixed expenses.
Zero-Based Budgeting
In zero-based budgeting, you fill the “pickle jar” to the very top and tap it gently to get out any bubbles. In other words, every single dollar is given a job and every expense is tracked down to the penny.
The point is that you track every change and adjust accordingly. If unexpected money comes in, you decide quickly where to send it. If expenses jump unexpectedly, you have to pull that money from a different category.
This budgeting strategy requires the most discipline and maintenance. It’s a great fit for personalities who thrive on details and working on the math until everything adds up.
While budgeting apps can help simplify the time investment that zero-based budgeting requires, this is a method that demands constant attention.
Envelope System
In the envelope system, you create physical envelopes for each category in your budget and put cash in them. After the envelope is empty, you’re done for the month or until the next paycheck comes in.
This method is very helpful if you’re the type of person who struggles with overspending or buying things on impulse.
While there are digital “envelope” budget tools, the philosophy of this method is to make it difficult to tweak categories on a whim or spend thoughtlessly.
You’ll decide which categories apply to you and how you want to set up your envelope system. Obviously, physical cash can be inconvenient when so many businesses expect to conduct transactions digitally, but it’s still doable. You might keep your “envelopes” in a spreadsheet and balance things out as you pay bills.
Pay Yourself First
This budgeting strategy was first promoted in The Richest Man in Babylon, a personal finance book that was published in 1926. It sets your savings and investment goals as the #1 priority in your budget.
That means you decide (within reason) what your long-term wealth goals are, break down your monthly contributions and then build your lifestyle using the remainder. When you receive your income, the first payments go to the savings and investment categories. It can be layered onto some of the other budgeting strategies we discuss in this article.
There’s no question that this approach is good for growing your wealth quickly and developing iron-clad financial discipline. However, it might feel unachievable to people who are living paycheck to paycheck and struggle to cover necessary expenses.
It can be difficult to evaluate your long-term wealth goals and how realistic they are compared to your current income. If your retirement goal is to have $10 million in the bank by age 65, but your yearly income is around $40,000, you must reassess.
That said, the pay yourself first strategy doesn’t stipulate how much money you put toward investments or saving, only that you make those contributions before you pay for anything else. This serves as a constant reminder of your goals and protects you against the tendency to say, “I’ll save whatever is left,” and realize at the end of the month that you saved $0.
Reverse Budgeting
Like the pay yourself first strategy, this method is favored by people who have aggressive long-term financial goals. This is because you devote a much higher portion of your income to saving or debt repayment.
In reverse budgeting, you figure out the maximum amount that you can afford to devote to savings or investment, and then pull your spending and expenses from the remainder.
The philosophy of reverse spending is that by focusing on your most important long-term goals, the rest will take care of itself.
Obviously, this isn’t a viable option for folks working on a fixed income or who have very little discretionary money available. But if you’re making a decent salary and have a big goal, reverse budgeting can get you there fast.
How To Create Your Budget
We’ve covered some of the common budgeting strategies and why they might work or not work for your needs. Whatever budgeting approach you decide on, there are six steps that will help you succeed.
As a starting point, you’ll need easy access to your bank accounts, spending accounts, pay stubs and other income reports (depending on your employment or compensation situation).
1. Assess Your Income
Gather all your sources of income, including salary, freelance income, side gigs and state assistance (if applicable). If your income fluctuates, then it’s probably best to take the past six months and calculate your minimum, maximum and average monthly income.
2. Track and Categorize Expenses
You might go old-school and print out your statement and highlight expenses in red. You can also enter the line items into a spreadsheet or a budgeting app. Categorize them by fixed and variable expenses, as well as necessary and wants (aka “discretionary”).
3. Set Financial Goals
Think for yourself and process with your partner or friend about what your financial goals are for the next one, three and five years. Create a list of short-term and long-term goals. A short-term goal might be paying off a credit card. A good long-term goal is saving for retirement.
4. Choose a Budgeting Strategy
Decide which budgeting strategy seems the most doable for where you are right now. If you want to start with the envelope system because you feel the need for a high degree of control and discipline, that’s great. You might shift to a more flexible budget like the 50/30/20 rule down the road, once you’ve got your debt and expenses where you want them.
5. Allocate Your Budget
Start with your monthly income and begin assigning amounts to the various categories in your budget. If you run out of money to assign before you’ve covered all your expenses, then you’ll need to find things to cut. If you have extra left over, then you get the happy job of deciding which of your goals gets that extra boost.
6. Review and Adjust Regularly
Track your numbers and look at the breakdown every month or two. Expenses change and income can go up or down. If you receive a raise or extra money from a tax refund, make a plan for where that extra will go, including debt repayment and goals.
Tips for Budgeting Success
The two biggest markers for a successful budgeting journey are reduced stress and financial stability. Sometimes, the process of budgeting can create new anxiety or even shame around spending. That’s not what we’re after!
Here are some tips to help you stay happy and motivated on your journey to financial freedom:
- Create an emergency fund: Accidents happen and stuff breaks down. To keep you from racking up high-interest credit card debt, you’ll need an emergency fund. Start with setting a small goal, working your way up to three months of living expenses.
- Celebrate wins: Discipline can create freedom, but if you never reward yourself for achieving major milestones, the work will lose meaning. Decide on your rewards ahead of time and make them part of your savings plan. Maybe it’s a massage when you pay off that first credit card or a trip to the beach once you pay off your car.
- Remain flexible: Numbers may not lie, but they definitely change from month to month, especially if you have a family. Don’t get frustrated if it seems like you’re always adjusting expenses—that’s a normal occurrence. You still have to work those changes into the budget, but that’s a challenge that everyone faces.
- Plan for gifts: Birthdays happen every year, but they can still take you by surprise. Create a category in your budget for gift-giving and holidays so that you can save ahead and shop the sales.
- Get support: Talking about your finances can feel embarrassing, especially if you believe that everybody is doing a better job than you are. They aren’t. Nearly everyone struggles to make smart financial decisions and the people who don’t struggle don’t get there overnight. Find friends you can trust and involve your partner in the journey. Talk about your goals, challenges and achievements.
- Use technology: Modern financial literacy doesn’t require you to balance a checkbook. It’s about balancing your budget and using all the tools at your disposal. Consider bank cards and spending apps like Kudzu to help you automate and simplify your budgeting strategy.
Most important of all, be willing to start small. If your first savings account is loose coins and cash and a shoebox under your bed, that’s great! As you build your skills and discipline, each step in your budgeting journey will feel easier.
Kudzu Makes It Easy To Become a Budget Master
One of the biggest mistakes that new budgeters make (young and old) is assuming that their past financial mistakes will hold them back forever.
Rebuilding your finances or creating new patterns is possible with the right tools and support.
Kudzu is here to help you take your first steps toward financial freedom and keep taking steps until you’re running at top speed. Our spending and savings accounts have no hidden fees, zero monthly fees, zero overdraft fees and zero in-network ATM fees.
And the Kudzu app makes it easy to manage your budget and move your money when and where you need it.
Remember, budgeting setbacks happen and when they do, you have to dust yourself off and get back on the budgeting bandwagon. Every time, Kudzu will be here rooting for your success. We can’t wait to see where you grow.
