Having financial goals is a great way to keep your spending under wraps but, having a budget is key to make sure that your finances don’t get out of control.
What is a Budget?
A budget is a planning instrument that takes into account the amount of money that you earn each month versus how much you can safely spend. It allows you to look at all of the expenses that you carry in relation to your lifestyle and finances.
Things like your rental payment, car note, or credit card balances are items that should be accounted for but can take you for a tailspin if they’re consuming too much of your income, incorrectly calculated, or you have a negative relationship with money.
Although some people may get into a twist when it comes to looking at their money, it’s one of the most convenient ways to ensure that your finances aren’t all over the place. What makes a budget work, is the fact that the numbers don’t have to be perfectly aligned to make sense. A bit of savings here, a mortgage payment there, and a daily latte in between are all completely normal, as long as the numbers add up in the end.
Once you have an idea of what your personal budget looks like, you’ll have a better idea of where your money is going and what your net worth could be.
How to Create a Budget?
Creating a budget is fairly easy and can be done in a few simple steps. However, for someone who hasn’t considered it before, the process may seem like a lot.
The best way to get a grip on your weekly or daily outlook is to start with a premade template or spreadsheet. These will come pre-filled with the most common spending areas, and plenty of spaces for you to plug in your own numbers.
Or if you plan on creating one manually, the following steps will ease you through the process:
Calculate Your Net Income
Your net income is the amount of money that you have left after taxes and other deductions such as healthcare, and 401k contributions are accounted for. This is also known as take home pay or the gross amount you earn from your employer minus deductions . For those in a non-traditional role such as business owners or the self-employed, the net amount would be your total income minus any deductions.
Create a List of Monthly Expenses
A great place to start when you are creating your budget is to write down all of your monthly expenses. These can include anything that you pay for including housing, subscriptions, travel expenses, or miscellaneous items.
There are two different types of expenses to consider when calculating your income versus outgo. These are called fixed expenses and variable expenses. You can get a better picture of your finances by examining transactions over a quarter or period of three solid months.
Fixed Expenses – These are those obligations that aren’t going to change each month and likely the most stable when it comes to your financial habits.
- Mortgage or rental payment
- Car note
- 401k or other retirement contributions
- Health insurance premiums
- Property taxes
- Car insurance
- Daycare or tuition payments
Variable Expenses – Variable means moving, or expenditures that vary from time to time. The following are examples of variable expenses.
- Groceries
- Utility Bills
- Gas or subway passes
- Shopping
- Emergency expenses
- Shopping
Set Your Goals
Goal setting is not only a way to help you achieve things like saving up for a new home, or family vacation. It also gives you an incentive to reward yourself from time to time for being accountable when it comes to your finances.
Accurately incorporating goals into your budget requires you make some adjustments to your savings. An easy way to do this is to take a pre-planned amount such as $10,000 for a new vehicle and divide it by the time frame in which you’d like to have it accomplished.
This allows you to set multiple goals at once without going outside of a normal savings pattern or neglecting other expenses to come up with extra funds.
Make Adjustments
It’s important to remember that life doesn’t stay the same. Sometimes you may need to adjust your budget accordingly for job changes, the birth of a new child, salary increases, or other unexpected circumstances. A good rule of thumb is to revisit your budget quarterly to ensure that everything is on track with your lifestyle and obligations.
An electronic version of your budget such as a spreadsheet or app may make it easier to move numbers around if need be or even add some updated categories to reflect changes.
Review and Track
Once you have your budget fully figured out and calculated, you may want to review it for errors or those miscellaneous items that you forgot, like that last minute change to your Netflix premium or upgraded gym membership.
Your budget should always reflect how things are currently going, so anytime there is a major change you want to keep the following points in mind.
- Salary increases or pay raises are opportunities for increased savings
- Unpaid time off or other job loss may temporarily disallow contributions in other areas
- Businesses with cash flow issues may want to spread their income over larger time frames
- Household budgets can always be downsized when necessary
- Emergency repairs or unexpected medical bills can be borrowed against savings
- Using credit cards may help alleviate spending allocated funds
- A cash envelope system is useful in curbing overspending
Budgeting Methods
When it comes to budgeting there are many different types and methods that you can choose to follow. Each one should be considered based on your specific situation and what seems easier for you to follow.
The 50/30/20 Rule – This rule is great for those who may not have much to save and want to keep their housing expenses manageable. With this method, your paycheck is automatically divided up so that your needs are fully covered while leaving some room for savings.
- 50% – Needs (house payments, utility bills, food, transportation)
- 30% – Wants (shopping, electronics, unnecessary expenses)
- 20% – Savings ( leftover cash for emergency funds or a money cushion)
The 70/20/10 Rule – This rule is based on the premise that you can have more money for savings while devoting a large portion of your budget to household expenses. While this method gives you more room for higher living costs, it also provides a way to use a third of your income to take care of debt while saving.
- 70% – Needs (house payments, utility bills, food, transportation)
- 20% – Savings (leftover cash for rainy day funds, emergency funds or college tuition)
- 10% – Debt (unpaid credit cards, collections accounts, or medical bills)
Bottom Line
Saving or creating a lifestyle that allows you to live within your means can be difficult when you feel like you are barely getting by or don’t know where your money is going. By making a budget, you give yourself the breathing room to control your spending, afford basic necessities, and save money for a rainy day.
