Struggling with Budgeting? Four Tips to Create Your Optimal Budget

It can be extremely difficult to create and follow a budget, especially when you have never followed one before. People often struggle because right off the bat they try to create a budget that is not based on reality or on their reality. Maybe they have read that a single person should spend $150 per month on groceries, which might work for the person who is on an average diet but what if you have a goal of being a vegan and only eating organic food? A budget of $150 may or may not work for you and will not necessarily support your personal goals.

So how can you create your optimal budget that fits your personal goals? I have four tips that you need to follow. I followed these tips when I was on the Dave Ramsey Total Money Makeover plan, in Baby Step Number Two, the Debt Snowball, when I needed to free up as much cash as possible every single month. Even if you are struggling with following an extreme plan such as Dave’s, you can follow these tips. In fact, these tips are probably an ideal formula to follow!

Tip 1 – Start with your long term goals

The biggest mistake people make when creating a budget is to not fully understand why they are on a budget or having a generic reason for being on a budget. They may say, I spend too much money and I need to go on a budget. What exactly will they do with this extra money if they do succeed in spending less? More importantly, what will keep them motivated to continue to follow their budget?

The first thing you need to do is understand what are your long term financial goals and from there break them down into short term goals that you can check off month to month. My suggestion is to start with only one goal, so that you can really focus on that goal.

For example, you really want to take an international trip for your 30th birthday, which is in two years. You have down extensive research and the trip package that you have found is $3000. YIKES! Not in your wildest dreams can you afford this and you have committed to not putting it on your credit card. Saving $3000 in two years has now turned into your long term financial goal. It is also a very good SMART goal.

A SMART goal is one that is:

  • Specific – You have a specific goal of saving $3000.
  • Measurable – You can measure whether or not there is $3000 in your savings account.
  • Attainable – Saving $3000 in two years is a reasonable savings goal while $300,000 in the same timeframe for the average person is not.
  • Realistic – This is realistic depending on your current salary. If you are unemployed with no source of income, this may not be a realistic goal.
  • Time bound – You have given yourself two years to complete this goal. You can even set a specific date to achieving this goal.

Now, using your long term goal of $3000, convert that into a short term monthly goal. There are 24 months in two years, meaning you need to save $125 per month. This goal no longer sounds unreasonable.

Tip 2 – Review and Analyze Your Historic Spending

Sometimes people need a reality check because they are blissfully unaware of their spendings habits. I think I can safely say that most people do not have the best short-term memory. I know I do not. If you ask them to say how much they have spent on any one budget category in the past month, they will likely underestimate how much was spent… especially if they are ashamed.

To give yourself the ultimate reality check, download your past three months of expenses from your bank account, categorize every single item and total everything up. Are you surprised? Take it a step further and calculate the average you have spent in each category. Now you can really see what your average spending is per month. All of a sudden you see your daily Dunkin Donuts mid-day snack run for a quick cup of coffee and a treat, is costing you $120 a month. This is almost the same amount you need for your trip!

By completing this exercise, you can easily see that your current spending habits may not be supporting your long term goals and if you do not make a change now, it will be extremely hard to live the life you have dreamed of.

Tip 3 – Start Small

People who are the most successful in weight loss do not follow crash or fad diets, they  make lifestyle changes by creating healthy eating and exercise habits. The focus here is habits. Research shows that it takes 21 days to create or break a habit. In Leo Babauta’s book, The Power of Less, he suggests that you “choose a habit that’s incredibly easy to start. Make it so easy you can’t say no.” If the first thing you do when you create your budget is to make it super restrictive, when you have never had healthy spending habits in the past, you are destined to fail.

In creating your new budget, instead of telling yourself you are going to do all of these things at once to save money like bring lunch from home everyday, cooking dinner every night and not ordering takeout or not buying new clothes, just commit to reducing spending in one of those areas and focus on it every single day. Bring lunch from home at least one day the first week, twice the second week and build up from there. Once you done that for a month, try reducing spending in another category.

Tip 4 – Make Funding Your Goal a Priority

When building your budget, after you enter your fixed expenses and before you enter your variable expenses, enter in the amount you will spend to support your goal. Whatever you have left over is what you can allocate for variable expenses. In order to make sure that you are making your goal a priority in practice as well as on paper, you need to set yourself up for success.

Instead of telling yourself you will transfer money into your savings account on pay day or do a double payment on a credit card when you have extra money, create automatic systems that will do it for you. You can set up your direct deposit so that a portion of your money goes into a separate savings account, or you can set your autopay for the amount you want on a specific date. Every year, my goal is to double my net worth and I do it through investing. So my investments are funded automatically twice per month.

I have a super simple budget tool in the shop section of this site. It allows you to enter your historic spending in one column and then create your new budget in a separate column so you can have side by side comparison of what you have been doing to your proposed changes.

4 Tips to Optimal Budget

FUNDRISE | Real Estate Investing

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About Kamilah

My name is Kamilah and I am a native New Yorker of Caribbean descent who is passionate about helping you learn how to invest and build your net worth by sharing easy-to-follow YouTube tutorials that will help you take control of your money and set you up for financial success. But this wasn’t always my story.

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