What is budgeting? It is a financial plan to divide out your income most effectively and efficiently for your needs and wants. Budgeting can help you manage and avoid debt, achieve short- and long-term goals, and prepare for the curve balls life throws at you. Budgeting will help you get out of the living paycheck-to-paycheck routine and give you peace of mind. Building a budget does not have to be as complicated as building an Excel spreadsheet. You can build your budget on an app, a worksheet, or just on a piece of paper.
The following are some great steps to take in building your budget.
- First, you are going to need to know details about your monthly income and expenses. This can be done by just collecting all your financial information. By collecting three months’ worth, you can make a good assessment of where all your money goes. This information allows you to split your spending into categories to create your budget. Examples of categories would be insurance, groceries, bills, entertainment, and dining.
- Secondly, you will need to calculate your monthly income. This should only include your take-home income. Make sure to include any other regular sources of income, such as child support, disability, social security, etc., when creating your budget. You can use formulas to calculate your monthly income based on your pay periods or a budget calculator.
- Next, you will need to figure out your monthly expenses. This is where the categories you created will help you. For each category, find out how much it is costing you each month. Additionally, remember to consider those bills that are only paid semi-annually or annually. This spending tracker worksheet from the Consumer Financial Protection Bureau can simplify this process.
- Labeling your expenses as fixed or variable is the next step. A fixed expense is usually the same every month and is usually a need, not a want. Examples include insurance, cell phone services, mortgage/rent, and utility bills. A variable expense, on the other hand, varies from month to month and is based on wants, such as lifestyle and spending habits. Examples include dining, entertainment, clothes, and travel.
- The last step is to evaluate your results and make necessary adjustments to your lifestyle. If your expenses are less than your income, that is a great sign! You can use the extra money to pay off debts or add more to your savings for a rainy day. This money should be used wisely to ensure your financial future. If your expenses are more than your income, that means you are spending more than what you have. This is putting you into more debt and living a paycheck-to-paycheck lifestyle. In this case, you should look at your expenses and make changes to secure your finances. Examples of changes could be eating out less or finding a cheaper insurance company. Another helpful tip would be to enroll in automatic payments, which would help you pay your bills on time and avoid late charges.
If you want a simple budgeting technique the 50/30/20 Rule can be used. In simple terms, you divide your income into three parts: 50% should go towards your needs, such as food, bills, and other debts; 30% should go towards your wants, such as entertainment or trips; and the remaining 20% should go towards your savings. Some households may not be able to devote 50% of their income to their needs and may need to pull from the other 30% and 20%. This is fine as long as you are working towards the 50/30/20 Rule.