Everyone has financial goals of their own – buying a house, being debt-free, or starting a business. Whatever your goals, it all starts with creating a budget. This allows you to stay within your spending limits and achieve financial freedom.
Because budgets are highly subjective, what works for your best friend or sibling may not work for you. But whether you are a student or an expecting mom, this guide to budgeting will help you manage your money with confidence and achieve your financial goals.
Calculate Your Monthly Income
The foundation of an effective budget is knowing your take-home pay. If you get regular paychecks with the taxes, 401k, and other deductions already made, it’s okay to use the net amount. Otherwise, ensure you include any additional income you get from a side business, child support, etc.
Using the least monthly income from the past year will suffice for individuals who get irregular or variable income, like contractors and freelancers.
Calculate Your Monthly Expenses
Once you know how much money is coming in, evaluate where it’s going. Tracking and categorizing your spending can help identify the best opportunities to save money.
Expenses usually fall into three main categories:
- Fixed expenses are the same every month. Bills like rent, mortgage, renters insurance, mortgage insurance, auto insurance, life insurance, and debt payments fall under this category.
- Variable expenses include groceries, utility bills, and any other obligations that change every month.
- Discretionary expenses are optional and may include entertainment and clothing.
Pick a Budget Method
A good budget must account for your needs, wants, and savings. Depending on your specific needs, there are several budget plans to choose from.
The 50/30/20 framework is quite simple and allows you to save for unexpected expenses, indulge occasionally, and pay off debt. It advocates that you spend 20% on paying off debt and saving, 30% on wants, and 50% of your income on necessities.
The pay-yourself-first method prioritizes savings and debt payments. Simply put, you allocate a specified amount of money each time you get paid to savings and debt payments, then make do with whatever is left over. It’s a great method for someone with significant debt like bad credit home equity loans they’d like to pay off as soon as possible.
The envelope system utilizes envelopes and cash. You allocate each spending category to an envelope and then fill it with cash as specified in your budget. This method is excellent for individuals who are averse to credit cards and debit cards.
The zero-dollar budget aims to account for every dollar you earn and have no money at the end of the month. It ensures that all of your money is accounted for and budgeted towards specific expenses, savings, or debt repayment goals.
Adjust Your Spending
It’s important to keep tracking your spending once you have a budget in place. Recording your spending will help you avoid overspending and identify unnecessary expenses. Don’t put this task off until the end of the month – take a few minutes to record how you spent your money at the end of the day.
You can go over the record once a month and see if you need to make any adjustments in service of your financial goals.
Can you skip movie night and watch one at home instead? Do you have too many service subscriptions? If the numbers don’t add up, go over everything and find creative ways to adjust your spending.
Review Your Budget Regularly
Budgets aren’t set in stone and will need to change as your circumstances do. People get promotions, and expenses change. Maybe you achieved one of your goals and are set on another one. Whatever the case, reviewing your budget regularly to account for such changes is essential. The goal is to ensure that the budget works for you and not the other way around.
The “B” word can be scary if you’re in denial about your spending or don’t think you have time to track your spending. However, it’s also the most powerful tool at your disposal if you want to pay off debt and afford what’s really important versus keeping your favorite restaurant in business. The tips in this guide to budgeting are just the first step towards financial freedom and endless possibilities.
