Budgeting is an important aspect of personal finance. Regardless of how much money you make, you need to know what you’re spending it on and how to plan for the future.
There are many benefits to creating and using a budget, such as a better credit score, less debt, and increased long-term financial security, but how do you create an effective budget? What can you do today to start budgeting and planning for your future?
Read on as we share our top budgeting tips with you!
Create Your Monthly Budget
The first thing you need to do for budgeting success is to create a monthly budget. With a monthly budget, you know how much money you have coming in and how much you expect to spend for the month.
To start, add up how much money you have coming in each month so that you know exactly what you have to work within your monthly budget. For income from a job, be sure to use your after-tax take-home pay, because this is the amount you can actually spend.
Next, you need to add up all your monthly expenses. If you’ve never created a budget before, this part can seem intimidating. The best place to start is to gather all your monthly bills, look at your bank and credit card statements, and make a list of everything that you’re spending money on and the monthly amount. Here is a list of expenses from Credit.org that you should be tracking:
- Housing – rent, mortgage
- Utilities – gas, electricity, water, sewage
- Car – car payment, gas, insurance
- Loans – student, credit card bill
- Amenities – internet, phone, monthly subscriptions
- Medical – healthcare insurance, bills
- Necessities – clothes, household products
- Groceries – food, pet food
- Entertainment – activities, gifts, dining out
- Miscellaneous – random expenses
In addition to the expenses above, you also need to account for any quarterly, bi-annual, and annual expenses you may have. These need to be added in monthly, so that you can be sure you’re properly saving for the expense. For example, if you only pay your property taxes once per year, then divide the amount by 12 and include it in your monthly budget.
After you have your total income and total expenses, you need to create a chart to track them. You can do this in whatever way works best for you, whether that’s in a spreadsheet or in a notebook.
Once your chart is created and everything listed out, subtract your expenses from your income. If you have money left over after doing this, that amount would be great to put into savings. If you’re in the negative after doing this, you need to cut some of your expenses or increase your income.
Needs vs Wants
As you create your budget, really think about each item and whether it’s a need or a want. To keep it simple, needs are things that you need to live such as housing, utilities, food, and clothing. Wants are things that you don’t need but are nice to have, like entertainment, eating out, and going on vacation.
The reason you need to look at these expenses separately is that if you need to lower your expenses, you’ll have to take away from your wants.
Track Your Actual Spending
Once you have your monthly budget set up and ready to go, you need to track your actual monthly spending to ensure that you’re staying on budget and determine if changes are needed in your budget.
There are a few ways to do this including looking at your bank and credit card statements and manually adding everything up, or using software like Mint, a free budget tracker and planner that basically does all the tracking for you.
Once you’ve decided on your preferred method, compare your actual spending to your monthly budget to see if you need to adjust your budget. For example, if you are spending more on food than you expected, you need to adjust this in your monthly budget moving forward so that it’s accurate.
Save for Your Future
Saving is important for future needs and wants like buying a house, investing in your education, or going on a dream vacation.
In order to save consistently and effectively, you need to add the amount you want to save each month to your monthly budget. Look at the monthly amount you save like it’s a bill you are paying to your future self.
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