Ways to Budget Money & Build Your Financial Future
For many families, the path to long-term financial wellness begins with budgeting today. Creating a game plan for how your family spends, saves, and invests money is a way to reduce debt and build net worth. In fact, 85% of people who budget say that sticking to a financial plan helped them reduce their debt and avoid additional debt.
Even better—nearly 40% of people who budget said they do so to increase their wealth and savings. Creating a budget from scratch can be an intimidating prospect, and evaluating multiple budget options may seem overwhelming. But the good news is that finding the right budget for your family may be easier than you think.
Furthermore, implementing a budgeting habit not only improves your daily financial situation but will also help create a foundation for long-term financial wellness.
Understanding how to budget can help you build a sustainable base for your family's financial future. The process begins with a deeper understanding of some key components of your financial life. For instance, you'll want to review your family’s monthly expenses and spending and compare your results with your monthly income.
Regardless of the results of your initial assessment, the information is empowering. You’ll discover what’s consuming the bulk of your financial resources. In doing so, you can start to identify ways to reduce your costs and accelerate your savings. Both are key financial moves that help you live within your means in the present and ensure you're prepared for the future.
To make the budgeting process easier, consider using a budgeting worksheet. You fill in the amounts you spend on core and discretionary expenses, along with your sources of income, and the worksheet will calculate how much you can save. Pair the worksheet with tools such as the PNC emergency fund calculator and college savings calculator, which can help you better define your savings goals.
What budget works best?
There’s no single, right way to create a budget. Instead, consider the budget that works with your financial habits and life. The best one is the one that you can stick with long term. Consider these common budget approaches:
- Line item budget: This method groups your expenses by categories (aka line items). This provides an easy way to review your spending and identify areas to cut back. All it requires is your financial information and a spreadsheet.
- 50/30/20 budget: With this approach, you spend 50% of your income on needs, 30% on wants, and 20% on saving or paying down debt. It doesn’t involve detailed line items and provides a simple way to boost savings.
- Reverse budget: Also known as the pay-yourself-first budget. With this method, you prioritize saving at the beginning of the month and then use the rest of your funds for expenses and discretionary spending.
- 80/20 budget: This budget recommends that you direct 80% of your take-home pay to expenses and save 20%. The latter can help make savings a habit and accelerate your efforts.
- Envelope-based budget system: With this strategy, you determine how much you want to spend on each expense category monthly. Then you place that amount of cash in designated envelopes and use the envelopes to fuel your daily spending.
- Hybrid budgeting: This approach empowers you to combine elements of different budget methods and create one that works best for you. For instance, you may like the savings recommendations of the 80/20 approach, but you want to use the envelope system for managing your cash spend.
A financial plan that flexes
An effective budget isn’t set in stone. Instead, it changes and evolves over time in tangent with your financial situation. For example, you may connect your budget efforts to reaching specific mid- to long-term milestones, such as saving up for a down payment for a home or paying off debt.
Once you reach that milestone, you can reevaluate your budget and create new goals. Your budget may also change with your family’s plans. You may need to ramp up your savings or re-prioritize your expenses after you have a child or change jobs. A flexible budget enables you to keep your spending in line with your current needs while still prioritizing your future goals.
Building a budget isn't just a tool for managing expenses today. It's a strategy that helps build financial wellness for the long-term while providing levers you can adjust along the way to ensure you stay on track.