Budgeting is simply spending less than your income. To create your budget, you must determine your take-home income. It is easy to overestimate what you can afford if you think of your total salary as what you have to spend. Keep in mind that you must subtract deductions, such as social security, taxes, 401 (k) and flexible spending account allocations. Your final take-home pay is called net income, and that is the number you should use when creating a budget.
Determine your necessary fixed expenses; such as, rent or mortgage, utilities, or car payments, since it is unlikely that you will be able to cut back on these, but knowing how much of your monthly net income they take up can be helpful. Then determine unnecessary fixed expenses; such as, cable TV and other subscriptions. Although you may think that they are necessary, these can be cut back on if necessary. Therefore it is good to see how much of income these take up. Next list variable expenses- those that may change from month to month such as groceries, gas, and entertainment. These are areas that can also be scaled down. Look at your credit card and bank statements to see these, since they often itemize or categorize your monthly expenditures.
One option to create a budget especially if you are new to it is to use the 50/20/30 guideline. Tally your necessary expenses, and aim to keep them under 50% of your net income. If you can get the sum to be less than 50%, then it leaves more room for paying off debt, accumulating savings, or having more play money. Aim to allocate 20% or more of your take-home pay to your financial priorities. Financial priorities include paying off debt, saving for retirement, saving for any big financial goals such as buying a house, taking a dream vacation, or starting a business. If you don’t yet have emergency savings, start small by building a “curveball fund” of about $1000 or $2000. The remaining 30% or less of your budget is devoted to your discretionary lifestyle, such as dining out, shopping, entertainment, charitable donations, gym memberships, electronics, etc. These expenses should be less than 30% of your budget. . Although this guideline doesn’t work for everyone for instance if you are fresh out of college and saving money by living at your parents, then the ratio might be different. Similarly, if you are a new parent, then you might have high childcare costs. You may need to adjust the ratio, as needed, but it helps to give you an idea of where the majority of your money should be going toward.
Making a list of both short-term goals and long-term goals can be helpful to motivate you to save. Short-term goals are things that you can accomplish in less than a year. Long-term goals are goals that take longer to achieve, such as saving for retirement or your child’s education. For example, it might be easier to cut your spending if your short-term goal is to reduce your credit card debt. A great goal is to establish an “in case of emergency” savings fund large enough to cover 3-6 months of your living expenses, as to have enough money to cover unexpected events that may occur, such as losing your job.
A budget can be hard to maintain, but there are many ways to track your spending and there are many ways that a budget can benefit you in the long run. You can track your spending using apps, a spreadsheet, or on a post-it-note in your wallet, as to visually see where the majority of your money is going. Budgeting allows you to create a spending plan for your money, in order to ensure that you will always have enough money for the things you need and the things that are important to you. Following a budget will also keep you out of debt and help secure your future finances.
Sources:
https://bettermoneyhabits.bankofamerica.com/en/saving-budgeting/creating-a-budget