Budgeting—like dieting—sounds really difficult. It often brings up thoughts of all the things you can’t buy (or can’t eat, in the case of dieting) and all the things you’ll have to sacrifice in order to achieve your goals. The truth is that budgeting is a necessary part of every adult’s life, and the more you know about it, the less restrictive and scary it can seem. There are numerous budgeting guidelines out there and many different options when it comes to choosing the proper budget for you. These can range from a zero-based budget plan to a more traditional 50/30/20 budget. In fact, there are more than four main, popular ways to budget, and they all approach the problem of budgeting from a different angle!

Essentially the different budgets just provide basic rules for different ways to manage your money and ensure that you don’t overspend and thus get yourself into a financially tricky spot. However, the most important thing to know about creating and sticking to a budget is that your budget doesn’t have to be an emblem of deprivation and restriction. In fact, budgets can be empowering and help you make faster gains toward your goals! Budgets are more like maps than anything. They allow you to figure out where you are and where you might like to go. Plus, you don’t necessarily have to be a spreadsheet fan when creating or working with a budget. You can actually take a bit of a step back and look at the bigger picture yet still work within the bounds of financial responsibility. Here are a few budgeting guidelines that will help you figure out where you should be putting your money and why.

Getting Started—Find Your Why

Sometimes the most challenging part of a process is the very beginning. It can be a real challenge to take that first step toward your budgeting goals, but I’m here to tell you, you aren’t alone in feeling that way. Looking at a mountain of bills or having no idea where your money is, where it is going, or where it has gone can cause a lot of anxiety. That’s okay. Take a deep breath and begin at the beginning.

Start by asking yourself why you want to start budgeting. Your reason for creating a budget should be something that resounds deeply with you. It doesn’t do you any good to only partially commit to something because you feel obligated to do it or because someone told you to do it once. Those kinds of goals never pan out because, as humans, we just don’t have the deep drive to stick with things that we don’t believe in or aren’t motivated to do. We inevitably end up being distracted by something else that is more immediately appealing to us.

Think about it this way: If you were trying to lose weight and someone offered you a free salad, you’d probably take it. If you were on a diet and someone offered you a free piece of pizza or a free salad, the choice you make would be primarily determined by how committed you are to your goal. Can you turn down gooey pizza because you know it’s the right thing to do for the long term? Or do you cave and just go for the pizza? If your drive to be healthy is strong enough and central to what you want and what you believe in, you’re more likely to turn down the pizza and stick with the healthy choice. That’s why setting goals that you genuinely feel and believe in is so important. The same concept applies to setting budgeting goals. You have to feel an attachment to the goal to really commit to it, which will increase your chances of success.

Common Budget Focuses

Most people start a budget because they want to achieve a long-term financial goal—here are a few really common long-term financial goals you can consider.

Retirement

Retirement is one thing all of us should consider, but very few of us start to think about it until we get closer to the end of our working days. According to a Forbes story back in October 2020, more than half of Americans struggle with funding their retirement. In fact, the Employment Benefit Research Institute says that retirement is a significant source of financial stress for most Americans because many of us worry that we won’t have enough money to retire—and the scary truth is that a lot of us won’t. A recent survey from Fidelity shows that the COVID-19 pandemic and its resulting economic upheaval have hit many of us very hard—especially when it comes to saving for our future. The National Institute on Retirement Security says that more than 77 percent of Americans fall short of conservative retirement savings based on their age.

If you don’t want to be just another statistic, it makes sense to start thinking about retirement right away—especially if you haven’t thought about it before. The sooner you can start a 401(k) or an IRA, the smaller the amount of money you’ll need to put away each month or year in order to reach your goals. This is because of the power of compounding. As this story over at Investopedia points out, figuring out the right amount to put away depends largely on your age. If you put 10 percent of your salary away each year when you first start working in your early 20s, you should be set for a comfortable retirement by the time you reach 65.

Saving for retirement can make your sunset years far more comfortable, especially if you want to escape to a deserted island or have dreams of traveling the world with your loved ones. Both those things can cost a considerable amount of money. If you aren’t working, you need to have that stash of savings to draw on, and retirement accounts provide that. The trick, however, is that you have to start saving now to live that sweet life later.

When saving for retirement, you have various options available. I don’t suggest leaving your retirement fund in a regular checking or savings account because they don’t earn enough interest to really take advantage of the power of compounding. Instead, put that cash in a 401(k), IRA, or a well-diversified stocks and bonds portfolio. Remember, you’re planning for the long term and should choose the right mix of stocks and bonds based on your age and how long you have until retirement. There are many financial advisors who can help you pick the right mix for you, and it may pay to enlist their help in order to ensure that your retirement future is secure.

Emergency Savings

We all know the importance of having an emergency savings cushion to fall back on, and yet the idea of putting aside money for a rainy day is one that nearly everyone in the country struggles with. In fact, according to CNBC, just 39 percent of Americans could pay for an emergency expenditure of only $1,000.

In general, you should plan to save at least three to six months’ worth of your salary to be prepared for any kind of emergency that might require access to quick cash. Of course, the amount also depends on your lifestyle, how many family members you care for, and where you live. Still, the general idea is to have enough cash on hand (or at least in an easily accessible account) to cover any issues that might come up. Examples of emergencies include fires, hurricanes, ER visits, and car accidents—as well as sudden job loss. The aim of an emergency fund is to cover your costs while you recover, work to find a new job, or rebuild your home or life.

Ideally, you should put your cash into a relatively liquid account. A liquid account is one that you can easily put money into or take out when you need it. Most experts agree that keeping an emergency fund in an account that earns interest is a good idea. Something like a savings account will typically earn you the least amount of interest, so it’s best to look into options like money market accounts and high-yield savings accounts that allow you to earn a higher interest rate while still having access to your cash when you need it.

One thing to note is that, unlike your retirement account, an emergency fund isn’t really a “set it and forget it” type of account. When you need to tap into your emergency account, you will need to replenish that money once you get back on your feet again.

Life Event Savings

The final principal place to put your money might be into a bucket I like to call your “life event savings.” Consider this a catch-all for the big things you want to achieve and pay for in your life. If you have children, this could be a college fund. If you are looking to go back to school yourself, it could be an education fund. If you want to buy a home, rental property, or even vacation place, these can all fall into the life event savings bucket. These are big purchases that require a good, solid foundation of cash, which would need to be built up over time. Once you’ve determined what you want to save for, it’s best to investigate just how much money you might need to put away for that event or purchase. Below are some general guidelines that lay out the typical cost for significant life events.

• College savings: $60,400–118,900 annually, depending on whether you plan to send your kids to private or public, in-state or out-of-state college.
• Home purchase: The average home price in the U.S is $400,800. Plan to save at least 20 percent of this amount to have a down payment. Put away at least $80,000 to save toward a home purchase.
• New baby: The costs can vary wildly, but on average, just the delivery can run you anywhere from $4,500–50,000 depending on your health insurance, where you live, and how old you are. That doesn’t even begin to take into consideration the cost of diapers, food, and other necessities for a baby.
• Wedding: The average cost of a wedding is anywhere between $29,000 and $31,000 for the ceremony alone. Add another $5,000–10,000 on top for a honeymoon.

If your life event doesn’t happen to be on this list, never fear. You can always do a quick Google search for the average cost of your event to get a good idea of the potential financial impact and just how much you might need to save toward it.

Depending on your life event goal, there are a variety of financial instruments that you can use to save efficiently for the item. If you are saving for a child’s college tuition, for example, you might be able to open a 529 savings plan. If you’re saving for a home, a house, or even a new baby, you should consider putting your cash into a money market or other high-yield savings account so that you can continue to contribute to it and withdraw the cash when you need it.

The Bottom Line: Where You Put Your Money Matters

The primary takeaway of all this is that whatever you decide to budget for has to be significant to you. Determining what to save for is one of the most challenging parts of budgeting, but if you prioritize the things that matter to you and your family, you’ll be sure to make the right choice to ensure the financial security of your family both now and in the future.