If you’ve been operating without a monthly budget, you might wonder why it’s worth building one and when it makes sense to start. As for when, there’s no better time than the present, and April is Financial Literacy Month, making it even more perfect to get started. Take the time this month to put together a monthly budget, and you’ll reap the benefits for years to come.
Why should I make and follow a budget?
According to Standard & Poor’s 2016 study, Americans fall astonishingly short on financial literacy. Unfortunately, on top of that, non-white Americans face increased financial challenges due to systemic social and political policies. In 2019, only 42% of adults reported following a budget, a rate that has remained steady since 2007.
Many people prefer not to know how much they spend day in and day out. As long as everything clears at the end of the month and they maintain monthly payments everything is okay. What happens in the case of a large financial emergency? Or a global pandemic? According to recent Center on Budget and Policy Priorities statistics, more than one in three adults struggled to pay regular household expenses in the last seven days.
Unfortunately, once you start amassing consumer debt, like not paying off your credit card in full or taking payday loans, it can snowball quickly. This is due to interest. Interest is a great thing in your savings account — you get small dividends for your holdings, which can then also earn interest.
When it comes to debt, interest is accrued on the amount you owe. In the end, you have to pay back far more money than you borrowed. Some debt may be good as long as their interest rates are low and necessary for large projects, such as mortgages, car payments, etc. The high-interest rates on credit cards and lack of material value make this debt bad.
Following a budget is the most effective way to eradicate bad debt and move toward the path of financial security and, one day, independence. By following a monthly budget and paying your bills on time, you’ll also be able to increase your credit score. A higher credit score earns you lower interest rates and better loan options which can save you a lot of money over your lifetime.
A youth financial planning seminar hosted by My Money Workshop, a partner of bunny.money. Photo provided by Gineyda Diaz.
How can I get started budgeting?
Start by laying out your hard expenses. List how much you pay each month for rent, student loan payments, car payments, insurance, phone, WiFi, etc. If you have any annual hard expenses, divide the amount by twelve and be sure to still include it.
Next, you’ll need to determine your variable expenses, such as gas, food, electricity, and water. Since these aren’t hard costs, you’ll want to take a look at your past spending habits to figure out how much you need to budget. Unless you’ve had any recent life changes (for example, starting to commute to work and now having to pay more for gas), it’s a good idea to take an average of the last six months of spending. You’ll want to go through your bank statements, and look at where you spent money on each of the variable categories. Add everything up in each category, and divide by six to get your average monthly spend.
From there, list your monthly income. Does everything you’ve budgeted for come in under your total income? If yes, move on to the next section. If no, you’ll need to revise your spending. Start by looking at your variable expenses. Typically, eating out tends to be the biggest expense on people’s budgets. Explore if you can make more room by cooking at home more frequently. From there, it might make sense to shop around for cheaper insurance, phone, and WiFi plans.
If your expenses still outweigh your income, you may need to reevaluate bigger spending decisions like where you live, your car, and more.
What should I budget for after my expenses are covered?
Once your expenses comfortably fit within your income, you should start thinking about an emergency fund. It’s a good idea to put away 3-6 months of expenses in a savings account that you only touch in the event of an emergency. It’s important not to invest this money, as you don’t want your emergency fund to be subject to the ups and downs of the market.
With a solid emergency fund developed, it’s a good idea to begin planning for retirement (10-15% if not on your payroll) and college savings for your children if you choose. After figuring out how much you can save toward each goal every month, put it on autopilot. By setting up automatic deposits, your brain will treat your savings like any other expense and you’re less likely to forget to save or spend it elsewhere.
If you’re able to cover your expenses, your savings goals, and still have income leftover, it’s a great idea to start thinking about charitable giving. How much you give to charity will depend on how much room remains in your budget along with your personal preferences. Any amount of charitable giving is admirable, but most people who donate typically budget about 1-5% of their income.
Your budget may not have room for all the charitable giving you’d like to do today, and that’s okay! Giving your time can often be just as valuable — if not more so — than financial donations. Explore ways you can give back by volunteering your time or sharing your skills.
How can I enforce my budget?
The budgeting strategy that works best for you will completely depend on your personality. If you’re a pen and paper person, try writing down each purchase you make. If you’re more digitally-oriented, a spreadsheet works well too. Documenting your spending habits will make you more accountable and you’ll be able to keep track of where you’re at throughout the month.
Another strategy is the envelope budgeting method. While this might not be as applicable in a cash-free, post-pandemic world, if you’re someone who still uses cash, it might work well for you. The strategy is as simple as it sounds — create envelopes for each of your categories, and fill them with a set amount of money at the beginning of the month. Once the money runs out, you’re done in that category.
Celebrate your small wins when you have them. If you pay off a credit card or car loan, be sure to celebrate it. You don’t have to go crazy, but doing something small to treat yourself helps encourage you to keep going.
Finally, visualizing your goals can also help you prioritize your budget. When you remind yourself about how close you are to paying off those student loans, and how good it will feel to have those off your back, it can make it easier to skip ordering Uber Eats and cook dinner instead.
What happens when I get a raise?
Like any other win, you should definitely celebrate it! Treat yourself to dinner out or a new pair of shoes if that’s your thing. After that, keep your lifestyle the same and explore how you can increase your savings goals or donate more to charity.
Just because you make more money, doesn’t mean you need to start spending more. Keeping up with the Joneses by buying the newest car or getting a larger apartment doesn’t help you build wealth and work toward financial independence. Instead, it can often lead back to a spiral of consumer debt you’ll have to dig your way out of.
A My Money Workshop seminar teaching young adults about the importance of budgeting and financial literacy. Photo provided by Gineyda Diaz.
Where can I learn more about financial literacy?
One of our partners, My Money Workshop, offers a wide-variety of financial literacy seminars. We interviewed the organization's founder, Gineyda Diaz, to learn more about her insights regarding the importance of being financially savvy.
Why should individuals prioritize improving their financial literacy?
At My Money Workshop, we believe there is power in knowledge. Financial literacy affords individuals confidence in achieving their financial goals. Understanding why you make the choices you do, and among other things, managing your budget and creating SMART goals ensures a positive economic vision. Financial literacy allows individuals to make informed life choices like what kind of job they should have, whether it makes sense to buy or rent, or if giving that $50 they had set aside to their friend makes sense.
One of our instructors, Laura Rotter, recently stated: “Understanding how to budget, what is appropriate to spend, what kind of debt is good debt, what kind of debt is bad debt – I think all these pieces of someone’s financial life are not taught in school. They are not taught when we get married. Frankly, they are skills that we are expected to somehow know when we are born.”
Financial education ensures that individuals know the answers to these questions. Plus, it empowers individuals to articulate a positive vision for themselves and their families.
How does My Money Workshop help with financial literacy?
My Money Workshop understands that individuals have different relationships with money. We provide actionable steps and knowledge that help reduce the stress that comes from managing your finances and making life-changing financial decisions.
My Money Workshop creates customized programs that help meet the needs of the specific populations we serve. We teach individuals to understand the reasons why they make their financial decisions. We all learn our money behaviors from parents, other family members, or colleagues. Once we walk our participants through understanding this, we apply an extensive curriculum that helps teens and adult build a foundation for financial success.
Where can people go to learn more about My Money Workshop?
People can find more information about our work on our website, and via Facebook, Twitter, and Instagram. Individuals who are not affiliated with a partner organization, can attend our monthly programs available to the public via Zoom and schedule a call with one of our instructors.
bunny.money makes it easy to see your finances so you can save and give back to the organizations you care about the most. Get early access to our smart savings app that lets you effortlessly set money aside so you can stick to your budget.