A good budget balances expenditures with the need to save.
It is easy to get carried away with spending money, especially if you have a seemingly secure job. But spendthrift habits can put you in a bind if an emergency arises. Would you have the funds saved up to cover emergency expenses?
The best way to avoid possible financial trouble is to create — and stick to — a budget. A budget will keep expenditures in line with income, and can help ensure you save money. In addition, avoiding excess expenses helps you funnel money toward the future in the form of a retirement fund.
So with all these benefits, it might make you wonder why not everyone keeps a budget. Some people simply do not know how to create a budget. Others find it difficult to resist the temptation to buy unnecessary things. The key to living within your means is to create a budget that feels manageable. To better create a budget that suits your own needs and lifestyle, read through the following steps.
How to Create a Budget
You don’t need complicated math to create a budget. A simple budget spreadsheet program and general knowledge of your expenses can help you create a budget framework that will last for years.
1. Calculate Total Income
Put a number on what is coming into your pocket, and write it down on a budget worksheet. Include all sources of income — not just what is on your pay stub, but also anything that contributes to take-home pay, including gifts and sources of side income.
Subtract taxes from your total. The figure you have at this point should be 100 percent of what you pocket after taxes.
2. Calculate the Cost of Monthly Necessities
Calculate how much money you need to spend, and how you will allocate it. Just address necessities and basic expenses such as:
Leisure expenses such as entertainment and shopping will come into the process later. For now, you should have a fixed figure that shows the minimum amount you can survive on each month.
3. Calculate Once-a-Year Costs
Account for the expenses that occur once a year, whether they are leisure expenses or necessities. Add in the cost of memberships, subscriptions, gifts and other expenses that occur less than once a month.
Then, add these expenses to their respective monthly budgets. For example, if your gym membership runs out in November, the money to renew should come out of November’s budget; don’t divide up the total among all 12 months.
4. Choose a Spend-Save Ratio
Decide on a spend-save ratio you like and can keep. This ratio determines how much of your income you will spend compared to how much of it you will save. Remember, most people struggle to keep a budget because they overstep their spending boundary.
The 50-30-20 rule is one good approach to establishing spending patterns. Senator Elizabeth Warren offers a version of the 50-30-20 budgeting rule:
Fifty percent of your money goes toward fixed expenses, including a mortgage or rent, car payment and utility costs.
Thirty percent of your money goes toward flexible expenses, including daily costs such as groceries, shopping, entertainment or gas.
Twenty percent of your money goes toward financial goals, such as paying down credit card debt, saving for retirement and creating an emergency fund.
If your spend-save ratio doesn’t give you adequate spending money, change it to suit your wants. Whichever ratio you choose, try to spend as little as possible. But above all, take that initial step to establish a ratio you can keep.
5. Track Your Progress
At this point, you are ready to apply the budget to your life. Try it for a month or two and see how you do. Resist the urge to buy unnecessary things. Just because you can afford something doesn’t mean you should buy it.
If you are still sticking with your budget after a month or two, take pleasure in your progress as you watch your savings add up. However, if you find yourself dipping into savings every month for more cash, modify your budget.
6. Revisit and Adjust If Needed
Your first pass at a budget might not work out. Groceries might cost more each month than you anticipated. Or no matter how hard you try, you might find you can’t stick to spending just 30 percent of your income on flexible costs.
Many people struggle to follow a new budget. The easy solution is to simply change the budget to fit your needs. If necessary, go back and change it more than once. Eventually, you will craft a budget that helps you live within your means.
Sticking to a Budget
To stick to a budget — and to receive the benefits of budgeting — the motivation must come from within. Seeing the progress you’ve made should encourage you to stay the course.
Don’t get discouraged by a slow start. If you are just starting to save a little extra, it can be challenging at first. Regard every dollar saved as a victory. Look at your savings as the amount saved above $0 — not as the amount saved below your long-term budget goal.
Every success — no matter how small — is an improvement. Remembering that fact will keep your motivation strong and your budget thriving.