To be honest creating a budget and keeping track of your spending isn’t a lot of fun. In fact, it’s probably one of the more boring things you will ever do. But despite this fact, it’s still important that you do it if you want to be able to be financially secure. The good news is that if you develop the right mindset you can turn the creation of a budget from something dull and boring into something that is empowering. You can feel empowered by taking control of your finances, and by saving money you can prepare yourself for being able to buy splurge items on occasion.
The basic idea behind a budget is that you need to spend less than you make.
Now it’s a little bit more complicated than that, but ultimately budgeting is all about having more money than you are spending on a monthly basis. So how do you get started on creating your budget? First, figure out where your money is going each month. Make a list of your fixed and variable expenses so that you know what you are spending your money on. While this can be the most time-consuming part of the process it can also be the most rewarding because once you have finished you will have a sense of accomplishment.
- Start Out By Gathering All Of Your Financial Information
- One You Have All Of Your Spending And Income Gathered It’s Time To Analyze It
- Setting Priorities And Getting Your Budget Right
- Prioritize Looking At Your Spending
- Next Work On Getting To That 20% Savings Goal
- Don’t Be Afraid To Make Adjustments
- Make Things Easier On Yourself By Automating The Process
Start Out By Gathering All Of Your Financial Information
If you use some type of budgeting software then start by downloading your spending for the last three months. If you don’t use software like this, then you will simply have to spend more time gathering together data. Remember that while this may be a time-consuming process it is a necessary step toward building a budget. Make sure that you gather bank statements as well as credit card statements when you are getting your financial information together. Once you have all of your financial information together then you need to categorize everything.
1. Net income, this is income after taxes.
2. Necessities, these are things you need to have to live your life. Examples include rent, utilities, groceries, insurance, car payments etc.
3. Wants, these are things you want but don’t need. Examples including eating out at restaurants, going on vacation, or shopping for nonnecessary items.
4. Savings, including your retirement account, emergency fund, and any money you are saving for a future purchase such as a down payment on a home.
One You Have All Of Your Spending And Income Gathered It’s Time To Analyze It
1. You shouldn’t be spending any more than 50% of your income on needs. If you are then you need to take a look at your needs and see where you can cut costs. This may mean moving into a more affordable home, getting a less expensive car, or making other changes.
2. You shouldn’t be spending any more than 30% of your income on wants. Once again if you are then you need to evaluate your spending habits and make whatever changes you feel necessary to get your spending in line with what your budget is going to require.
3. At a minimum 20% of your income should be going into your savings.
Setting Priorities And Getting Your Budget Right
After gathering all of your financial information and looking at the picture how do things look? Are you meeting these requirements? Don’t worry, the entire idea behind setting up a budget is to get your finances in order so that you are meeting these budgeting requirements.
Prioritize Looking At Your Spending
This is one of the most eye-opening things I have ever done in regards to money and personal finances. A lot of people are truly shocked when they look at their spending. All of those little things you buy and spend money on throughout the month add up over time and can become a large amount of cash. On a personal level, I realized that I was spending a lot more money on Uber than I thought I was. Make sure that you look at your spending and are constructive instead of beating yourself up over it. Look at ways you can cut your spending paying special attention to your wants, and then if necessary your needs.
In terms of prioritizing you should also take a look at what you are spending money on and place everything in order from most important to least important. Then when you need to start trimming the fat you can do so in areas that won’t have as much of an impact on your life. Anything that isn’t high on your priority list should be cut first, then you slowly work your way up front the bottom of the list toward the top. The idea here is that you find a balance so that you can go to that Pilates class you want to by cutting out the late night Pizza you don’t really need.
Next Work On Getting To That 20% Savings Goal
When working on your savings goal keep in mind that you should be saving money in different areas, with different goals, and with different priorities for each goal. For example, you may be putting away 20% of your income toward savings each month, but that shouldn’t all be going to one account. Instead, you should have part of it set up for retirement, part for an emergency fund, and part for a purchase of a necessity such as a house. Any type of savings you are doing for a want, such as a vacation, should be included in your budget for wants, not for savings.
Don’t Be Afraid To Make Adjustments
Once you have set up your budget realize that it is not set in stone. You may realize that your savings goals were too ambitious and that you can’t live comfortably with the budget you currently have. Setting up a budget requires sacrifice, but if you are forced to live a miserable existence then you are obviously going to have to make some changes. When changing up your savings goals make sure that you target savings for wants first. Cutting out on retirement savings and an emergency fund can come back to bite you in a big way.
Make Things Easier On Yourself By Automating The Process
Once you have your budget set and your savings goals make things easier by automating as much of the process as possible. Set up different savings accounts for different goals, and have part of your check deposited into them each time you get paid. This way you don’t ever see the money in your checking account, so the chances of you spending it are going to be much less. Remember this basic rule, out of sight out of mind.
If you really want to prioritize saving then set up your savings accounts in a different bank than your checking. This will put an added layer of protection between your reckless spending and your savings. This way if you have to dip into your savings you will have to actually go through the process of transferring funds between banks.