Budgeting is the core part of everyone’s financial well-being. Whether you want to pay off bills, get out of debt, or subscribe to a new entertainment platform, budgeting is where to start. A budget is a spending plan that gives a clear picture of what your money goes towards each month. By creating a realistic budget, you ensure that you have enough money for the essential things and for the things that you enjoy without feeling guilty. Maintaining and following a budget will also help keep you out of debt or help pay off any debt that you may have incurred. You may even find that you have more spending money than you thought!
So, how do you budget? Here’s a simple four step process for you!
First, determine your monthly income after tax. If your income varies month to month, you can either take the average income over several months, or to be safe, use the minimum income that you know you will receive. Please add any other sources of extra funds such as interest, dividends, etc. to get a more accurate picture.
Next, determine your average monthly expenses and divide them up into three categories: fixed, flexible, and discretionary. Fixed expenses cost the same month to month, like your rent, phone bill, and loan payments. Flexible expenses are things you have to pay for, but the amount you pay can change, like groceries and gas. Discretionary expenses are your “wants,” things like new clothing and going out to dinner.
Third, determine a monthly savings goal and debt payoff goal. Saving is another vital aspect to one’s financial well-being. But, depending on the first two steps, savings will look different for everyone. Not everyone will be able to save for retirement right away, but a general rule of thumb is to allocate about 20% of your disposable income towards savings. Through saving, you can pay off whatever debts you have incurred and/or invest it and watch it grow for years to come.
Lastly, go through your fixed, flexible, and discretionary expenses, as well as your savings goal to see if your plan is achievable given your after-tax monthly income. If your spending and savings goal are not achievable, then changes need to be made. Try cutting back on discretionary spending first, then move on to flexible expenses. With 20% of your income going to savings, and knowing your fixed expenses, the remainder can be split between flexible and discretionary. This means that if one month you spend more on your flexible expenses, you cut back on discretionary spending. If you spend less on flexible expenses, you could increase your discretionary spending or savings. If you ever have extra money you’re not sure what to do with, consider putting it in savings rather than spending it.
Once you have created your budget, it is important to stick to it. Here are a few tips on how you can do so.
- Record spending to track your progress – the best way to stay on top of your budget is to record all transactions being made. That way, you can keep up with how close or far off you are from your budget, and it makes you think twice before splurging.
- Look at your flexible spending, especially groceries. A few changes at the grocery store, like making a set grocery list and sticking to it, and not shopping while hungry can make a big difference.
- Keep the money that you are saving separate from the money that you spend so that you are not tempted to use any of it. Try a savings account that limits your withdrawals.
- Find an accountability partner that will help you stick to your goals!
- Adjust your budget – Every month is different and your flexible and discretionary spending will change. Therefore, be sure to adjust the budget based on what is happening during what month.
- Don’t be afraid to make budget cuts.
- Emergency fund – keep some of your money in an emergency fund in case unexpected expenses occur.
- Stick to debit card- By using a debit card or even cash, you avoid certain fees that can come up with accumulating credit card debt. Also, a debit card makes it easier to follow how much money is left.
- Don’t compare – Do not compare your situation with others. Everyone is different and that is OK. Comparisons will only make you feel bad when you should be content with where you are.