Creating and following a budget can provide you with several important benefits. A good budget can help you prevent overspending, see where your money is going, accomplish your financial goals and more. Budgeting may seem like a chore at first, but once you make a plan and get in the habit of sticking to it, your budget can provide you with peace of mind and financial security. Here’s a basic guide to building your budget.
Track Your Spending
The first step to creating a budget is recording how much you spend each period. You’ll probably want to track your spending by month since many bills are charged monthly. You can tally up your monthly spending by saving receipts, taking notes with a pen and pad or smartphone, checking your credit and debit card statements and/or using a budgeting app.
Categorize Your Expenses
Next, you’ll want to sort your spending into categories. Useful categories include housing, food, transportation, bills and utilities, health and personal care, entertainment, shopping, taxes and fees and savings, investments and debt repayment. You’ll then want to divide these categories between needs and wants. Needs are essentials such as food and housing, and wants are comforts and luxuries like entertainment. You may need to create subcategories to account for these differences, such as for groceries (typically a need) and dining out (typically a want), which are both food spending.
Determine Your Income
In order to budget your spending, you also need to know how much take-home pay you receive. For many people, their monthly take-home income is equal to the sum of the paychecks they receive each month. If you have any steady side jobs or other sources of income, don’t forget to include those too. If your income fluctuates, such as from a sales job, use an estimate of your average monthly take-home pay.
Calculate the Difference
Now that you know your spending and income, it’s time to see how they match up. Begin by subtracting your current monthly spending from your monthly income. If the result is negative, you’ll need to look for areas to reduce your spending so you can keep up with your obligations. This could include spending less on inessential categories, finding more affordable ways to fulfill your needs and refinancing any high-interest debt you may have.
Set Your Goals
Once your income and spending match up, it’s time to set your goals. Common financial goals include creating an emergency fund, reducing debt, saving up for a big purchase or vacation, paying for college or a home purchase down payment and building a nest egg for retirement. Goals can be short-term (purchasing a new TV next month) or long-term (retiring with a certain amount of funds).
Creating a Budget
With your goals in mind, you can design a budget to help you reach them. One of the simplest budgets is the 50/20/30 rule, where 50% of your income goes toward your needs, 20% is put toward debt repayment and savings and 30% is designated for things you want. You can adjust these numbers up or down according to your own situation and goals. For example, you may want to bump up the savings target if you’re behind on growing your retirement fund.
Execute and Adjust
Once your budget is ready, it’s time to put it into action. Continue to track your spending each month and see how the actual numbers fit with your budget. Don’t expect everything to line up perfectly right away. Based on the results, you’ll likely need to rein in your spending in some categories or adjust your budget in certain spots.
Don’t think of your budget as a limitation. By following your spending plan, you can take care of your needs, spend on your wants without guilt and achieve the goals that are important to you. Stick to it, and you’ll be glad you did.