Every great financial plan or goal starts off with a solid foundation of a budget. Whether you’re trying to pay off your bills or save for a dream vacation, car, or home, you need to have some sort of plan in place – a budget. A budget will turn your dreams into a reality, however not many people know where to start or how to make one properly. Below we’ve broken down and made the process easy for you and have outlined the creation of a budget in 5 simple steps.
First, Figure Out Your Income
The first step is to figure out how much money you are taking in every single month after taxes. For those working a steady day job this should be simple, but in cases where your compensation varies from month to month, having an average will be okay. The key here is to make it as accurate and as realistic as possible.
The other thing to remember is to count all of your income. This means if you’re getting money from government programs, side hustles, alimony, child support, interest, dividends or rental income – you should include all that.
Second, Determine Expenses
Next step is to break down your expenses. The ideal method is to group everything into broad categories such as housing, transportation, utilities and food. You can then break those down into further categories. For example, your utilities you can divide into heating, internet, plumbing, etc. For food it can be dining out, groceries, etc.
Again, you want to be as accurate as possible, so be sure to look at your expenses throughout the month, rather than specific dates where you know money comes out for certain things. You want to get your budget as detailed as you can.
Third, Find The Difference
After that – it’s a matter of doing the math: your income minus all your expenses. If you’re in the red (below $0), then you have 2 options: either increase your income or cut some of your expenses. Generally speaking, it’s easier to cut your expenses over making more money, so we’ll be taking that approach with this route and example.
With this approach, you want to be going back to your budget and look at your more flexible expenses and see what you can do. In most cases people can start cutting back on buying lattes from Starbucks, dining out, or having the urge to buy every launches of new technology, clothes, or games. The key is looking at what sort of cuts you can make in order to save more.
If you’re in the black – that is above $0 – then that’s a good sign. The question now is are you happy with the amount that you’re saving? If you’re not, go back to those expenses and see what you can cut.
Fourth, Decide What You’ll Do With Those Savings
The next step is to figure out what is the best thing to do with your savings. This is the easy part, as this incorporates your overall goal. If your current financial goal is to get out of debt, you’ll be looking at your savings going towards paying that down. If you’re saving up for a car, you’ll want to save towards that.
But why not go a step further with it?
If you’re looking to get out of debt, look if you can consolidate that debt at a lower interest rate. This will allow you to save more and pay it down faster.
If you’re looking to save overall, a good target to go for is always having $1,000 in your savings account. From there, build it up into a 3 month emergency fund.
Or maybe you want to target a percentage of your income towards saving? In those cases, saving 5% or 10% of your income would be a good starting point and then you can keep that rate growing over time.
Finally, Make All Of It A Habit
The last step to the budget is to make all of this into a habit. Naturally, you want to stick to your budget and one way to do that is to verify it every week or 2 before checking on it once per month. The idea with the frequent checkups is to help you quickly understand how you spend your money. It also helps with determining what needs changing and ultimately if the budget is realistic in helping you stick to your financial goals.
A budget is more than just a bunch of numbers on a piece of paper. It’s a way to change and manage your lifestyle and form it in a way where you can reach your financial goals. With a secure and stable budget by your side and these five steps, you are so much closer to growing and prospering in your financial journey.