Making a Budget
Like it or not, you really need one. If nothing else, it’s helpful when it comes to saving money for rainy days. Because let’s face it, when things are going well in the financial department it can be easy to forget about that little thing called your savings account.
The first step to making any budget, no matter what style or method you want to use, is to create a monthly average of your income as well as your expenses.
For this step you need to make sure to scrape together all the financial statements you can, I’m talking bank statements, investment accounts, W-2s and paystubs, credit card bills, recent utility bills, mortgage or auto loan statements, receipts from the last three months, and 1099s. Anything you can get your hands on really.
When you have all of your paperwork you can calculate how much take-home pay you have. Include all money that you bring in whether that be from your job, side hustles, child support or social security. If your job is one in which your pay fluctuates then you should use your lowest-earning month for your baseline just to play it safe. After you’ve calculated your average income, do the same thing with your expenses. Take into account everything, from your student loans to your transportation costs. It’s best to look at the last three months of spending so that you can get a big picture type of feel. That will help your estimate to be more stable despite some expenses not being fixed month to month.
At the end of these steps you should be able to assess what you need from your budget. If your income is larger than your expenses then you can celebrate! You can now allocate some of your extra money to an emergency fund, college fund or a much needed retirement account. If things didn’t turn out so well, and your expenses cost more than you can afford with your income then it gets a little bit more complicated.
Your first course of action should probably be to cut out variable expenses. Maybe you’ll need to eat out less or skip that weekly movie night at the theater. If by cutting out variable expenses you haven’t changed the scales in the incomes direction then you may need to lower your fixed expenses as well or consider finding new ways to supplement your income.
You can set up your budget in a way that works for your household’s needs whatever that may be, or you could use a premade budget.
One very popular method is the 50-30-20 budget. Essentially this budget divides your spending into three categories: needs, wants, and savings/debt repayment. Fifty percent of your income would go toward essential expenses, thirty percent would go towards things that you want, and the final twenty percent goes for savings and/or paying back debts.
Another method that many people use it the zero-based budgeting system. The name is very fitting, by the end of the month you want to have zero money left. Or rather, zero money left that hasn’t served some purpose. You don’t want to have any leftover, meaning that you save or invest any of the extra you have. It can be a pretty strict system and it doesn’t work for everyone but it is still something to look into. With either this system or any other budgeting plan you can generally find an online app to make your job easier. Although there’s nothing wrong with using the classic pen and paper if that’s what you prefer.
You should also keep in mind that no matter what budget you pick you’ll need to adjust it over time as your life and financial situations change.
If you have a hard time staying on your budget there are some hacks that you can use to help yourself out.
If you’re a visual type of person then it could help to have an envelope for every section of your budget and when you run out of cash in one envelope you can’t spend anymore money for that section. It could also help you to envision why it is that you’re budgeting. Maybe you’re saving up for a house, a big trip, or even just a financially stable future but whatever it is, imagining it might help you stay motivated and one track.
Briefly touching on financial stability which is one of the biggest motivators for having a budget. You do need to keep in mind what that means for you. Some people have a specific number in mind, $1,000 or $2,500 etc. As a rule though, it’s best to have a minimum of three months worth of living expenses set aside at any given time. You never know what may happen and it’s better to be safe than sorry.
Keeping these tips in mind, I hope you can achieve your perfect budget.
