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How to create a budget: Lessons from being broke

What are some lessons from being broke? See how you can start budgeting with these tips.

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I hear too many stories about people struggling to make ends meet. Worse, many feel those ends are drifting apart as their debt seems to grow faster than their income.

What often starts with one car payment and rent can quickly turn into two car payments and a house payment. Often, credit card debt is added on top of all that, creating a vicious cycle.

Budgeting is a crucial skill that can help you get and stay on the path to righting your financial ship. Even if your financial house is not in disarray and you are not feeling the stress of too much debt, budgeting can help you avoid those situations. Read on to learn more about why budgeting is important and how to make a budget that helps you achieve your goals.

What's a budget?

A budget is a spending plan based on your income and expenses. It gives you an at-a-glance picture of how much money you make and spend over a certain period, usually a month.

The process of creating a budget helps you determine your spending goals for the immediate future, as well as your long-term savings priorities. You might budget $75 a month for dinners out, for example, and budget $500 a month to save for your retirement.

Once you've created a budget, it serves as a guidepost that keeps you on track for meeting those goals. You can use online tools to track your actual spending to see how it measures up, such as the USAA My Budget tool.

How to budget

Not sure how to create a budget? First, list all your expenses using paper or a digital device. Consider the following three categories:

  • Savings and debt repayment
  • Needs: Essential expenses like utilities, food, rent and insurance
  • Wants: Expenses that are discretionary like eating out and entertainment

Savings and debt repayment are key parts of your budget. Begin by paying down debt. Focus first on high interest rate debt like credit cards as these expenses normally don't add to your financial security. One thing to note is that an auto loan or a mortgage would fall in the needs section since transportation and housing are necessary.

One of your main savings goals under this category is retirement. Remember that you can get a loan for a car or a home, but no one will give you a loan for retirement. Another savings goals to consider is saving for a fully funded emergency fund.

An emergency fund falls within savings and is important to protect you against unforeseen expenses that might cause difficulties in the future. It'll also keep you from reaching for credit card debt to cover must-pay expenses. If you're just starting out, try to save $1,000, but if you can save more, three to six months' worth of essential expenses is usually recommended.

How to save: Emergency fund infographic

The next step is to allocate needs and wants in that order. Separate out spending by fixed and expected expenses, such as your rent or mortgage payment. Then note the assigned monthly spending total next to each category. For expenses that vary — groceries or entertainment, for example — take a guess, set a goal and adjust after a month or two based on how your spending habits shake out.

Next, record your expenses. As you move through the day, record what you spend per category so you can keep a running total to compare against your budget. Don't just pay attention when you hand over cash or plastic. Record it all, so you can see whether your daily actions are helping you build financial security or keeping you close to the edge.

The goal here is to actually see where you spend your hard-earned dollars. And have patience — it'll take some time for this to become a new habit. Experiment with a few different methods to find a routine.

Now that you've tracked your spending, is it where it should be? Well, only you can decide that, but a good starting place is with a 20/50/30 budget.

  • 20% spending and debt repayments
  • 50% needs
  • 30% wants

It's important to note that a budget is not a one-size-fits-all solution but should be personalized to your specific needs, wants, geographic location, life circumstances and financial goals.

Personalization is critical to a budget because a gallon of milk costs the same for a family earning $50K per year as the family earning $100K per year. Therefore, the percentage one family allocates for essentials like groceries will differ from the percentage another family allocates even though they purchase the same items.

Geographic changes can impact how you spend your money. Moving from Manhattan, Kan., to Manhattan, N.Y., will drastically change several aspects of your budget like housing, taxes and even the cost of food or utilities. But moving from a more expensive area to a cheaper cost of living area might free up funds from the needs category to allocate to the savings category.

With all this said, a 20/50/30 budget is a great place to start and then adjust from there.

How to budget when you get paid

Ever heard the advice "pay yourself first"? That means paying yourself automatically before you spend. So, for example, if you budget $500 a month for retirement, you could ask your employer to automatically deposit $500 from each paycheck into your retirement account.

That way, you never see that money and aren't tempted to spend it on anything else. You only have to decide once to save for retirement instead of having to make a hard decision every time you get paid.

If you're wondering how to budget when you get paid twice a month instead of once a month, we have an easy solution. Set up bimonthly transfers into a bills account, and then the money is there when your bills come due.

Just like paying yourself first, having your money automatically deposited from your paycheck into a bills account twice a month is a helpful trick. It keeps you from spending your paycheck before your bills are due.

Once you've established your budget and implemented easy strategies for paying yourself first, it's fun to coast along on cruise control as your savings stack up. But sometimes you're faced with an unexpected opportunity. If you take advantage of it, you can take a huge leap toward your goals.

Here's an example: Tax time rolls around, and you get a $1,500 refund.

This can provide a wonderful opportunity to make a big gain in paying off debt or saving towards an important goal. This quick progress can be a big psychological boost and help you staying motivated on you financial journey.

Let's look at it in mathematical terms. Budgets/spending plans = freedom to live and enjoy your life. Overwhelming debt and spending more than you earn = a life of anxiety and restrictions.

Sometimes, a change in mindset can go a long way toward achieving financial wellness.

USAA budget resources

USAA has resources to help manage and track your spending.