26 Oct How to Build a Budget That Works
According to research by Gallup, 60% of Americans don’t even bother making a budget. That stat illustrates just how hard it is to build a budget that works – and stick to it.
Many people have trouble following a budget. There are some common mistakes that lead to this difficulty. From not knowing your monthly costs to setting unrealistic expectations, to not having the right tools in place to help: building a budget that works takes careful preparation and strategy.
The biggest mistake of all, however, is not having a budget at all. OFW families have the unique challenge of accounting for expenses in two different places. A budget can help keep track of regular expenses like rent, childcare, exchange and transfer fees, and taxes, as well as build a rainy day fund in case of emergencies. Overseas workers must have a smart system that works for everyone. Here’s how to build a budget that works for you and your family.
Decide what your budgeting goals are
Are you trying to send more money back home, save for the future, or build a rainy day fund? Your goals will help you determine how strict your budget needs to be. “Having a sense of the goals you want to achieve – and how much they’ll cost – can be powerfully motivating for budget-followers,” writes US News and World Report.
Often, when we fail to meet our resolutions or budgeting goals, it’s because the bar is set too high. If your budget goal is big – to pay off your student loans, for example – set smaller goals to help you reach your bigger outcome. Maybe your goal is to save enough for your child to go to college. This is a long-term goal with a big price tag: and it can be easy to deviate away from this goal as life gets in the way and day-to-day expenses pile up. If your budgeting goals are big, set yourself a smaller, more realistic goal, like stashing $10 out of every paycheck for a college fund.
Find a budget system that works for you
The next step in building a budget that works is to set up a system that works with your lifestyle and helps you achieve whatever goal you’ve set for yourself. There are basically two sides to every budget: decreasing spending and increasing savings. A budget system can help you tackle either or both sides of that equation.
There are a couple of systems you can use, depending on your goals. Here are some examples:
- The basic method: the 50/30/20 budget. Split your spending across three categories: 50% goes to necessities, 30% goes to wants, and 20% goes to savings and debt repayment.
- To reduce your spending: the envelope system. Set strict spending limits for each of your monthly expenses by filling envelopes with the cash you’ve budgeted for that month. For example, you might have an envelope for groceries, one for entertainment, and one for household expenses like utilities. You only use that cash for purchases.
- To build your savings: the reverse budgeting method. This strategy, also known as “pay yourself first” method, sets aside a portion of your monthly income for savings goals like retirement and an emergency fund first. Use the rest for bills and other costs.
- To make the most of your money: the zero-based budget. Another good general budgeting tool, this method takes your monthly income and uses each dollar deliberately until every dollar is accounted for. If you choose not to use the cash-envelope system, you will need a meticulous budgeting tool.
Clearly, some of these systems are more flexible than others. Decide how much time and effort you’re willing to dedicate to budgeting. Some people like the rigidity of the envelope and zero-based systems; others feel set up to fail by the when there’s no room for error.
Get an accurate estimate of your monthly cash flow
No matter what system you choose, the next step – and probably the most important step of all – is to get an accurate picture of your monthly expenses and income. For some people, even just knowing what their cash flow looks like can be enough to set them on the right budgeting path. “Creating a budget can be a simple back-of-the-envelope estimate in which you count up how much money comes in each month and how much goes out. Just getting an idea of where you are is a great start. It doesn’t have to be exact,” writes one expert.
When you want to get more detailed, take all your monthly expenses into account – not just the obvious ones like rent, bills, student loan payments, retirement contributions. Discretionary spending is also a big category that many people ignore. Include some amount for entertainment, family vacations, or medical expenses that might pop up unexpectedly.
Use a budget tool
An online tool can help you get a clear picture of your monthly expenses between your overseas expenses and your family in the Philippines. Many of these tools are free, and some will let you pay your bills directly through their platform to help you keep track of cash in and out. Here are some apps and sites that can help you stick to your budget:
Bottom line: set realistic expectations, get a clear picture of where your money goes, and use a budgeting tool to help you stay on track. Adjust and reevaluate as needed when your fixed expenses change or you realize your variable expense isn’t what you thought they were. Each month, look at what’s working and what isn’t. Building a budget that works is a process, but one that will pay dividends once you get it right.