Most people need a way to see where their money goes each month. A budget can help you feel more in control of your finances and make it easier to save money for your goals. The key is finding the right way to track your finances. The following steps can help you create a budget.
Step 1: Calculate Your Net Income
The basis of a budget effective is your net income. This is the amount of money you take home: total salary or wages minus deductions for taxes and employer-provided programs, such as retirement and health insurance plans. Focusing on your total salary instead of net income could lead you to overspend because you'll think you have more money than you actually do. If you are self-employed, a contract worker, contractor, or freelancer, be sure to keep detailed records of your contracts and payments to help manage variable income.
Step 2: Track Your Spending
Once you know how much money you have coming in, the next step is to know where it's going. Tracking and categorizing your expenses can help you determine where you are spending the most money and where it might be easier to save.
Start by preparing a list of your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next, prepare a list of your variable expenses, which are those that can vary from month to month, such as groceries, gas and entertainment. This is an area where you may find opportunities to reduce expenses. Bank and credit card statements are a good place to start, as they often break down your monthly expenses by category.
Keep track of your daily expenses with whatever you have on hand, such as paper and pencil, an app, or your smartphoneYou can also use budget spreadsheets or templates that you can find online.
Step 3: Set Realistic Goals
Before you begin reviewing the information you have been monitoring, prepare a list of your short- and long-term financial goals. Short-term goals should take one to three years to achieve and may include things like establishing an emergency fund or paying off credit card debt. As for long-term goals, such as saving for retirement or your child's education, it could take decades to reach them. Remember, your goals don't have to be set in stone, but identifying them can motivate you to stay within your budget. For example, it may be easier to reduce expenses if you know you are saving for a vacation.
Step 4: Develop A Plan
This is the meeting point of what you are actually spending and what you want to spend. Use the fixed and variable expenses you recorded to get an idea of what you will spend over the next few months. Then compare them to your net income and your priorities. Consider setting specific and realistic spending limits for each spending category.
You may want to break down your expenses further to identify what you need to have and what you would like to have. For example, if you drive to work every day, gas counts as a necessity. However, a monthly music subscription may count as something you would like to have. This difference is relevant when you are looking for ways to reallocate money to meet your financial goals.
Step 5: adjust your spending to stay within budget
Now that you have documented your income and expenses, you can make the necessary adjustments to avoid overspending and have money available for your goals. Look at the "what you want" section as the first area to cut back. Can you give up going to the movies one night and watch a movie at home? If you've already adjusted your spending in the what you want section, take a closer look at what you spend on your monthly payments. When you think about it, a "need" may simply be something that is "hard to put aside".
If the numbers still don't add up, consider adjusting your fixed expenses. Could you, for example, save more by shopping around for a better price on auto or homeowners insurance? These decisions come with big trade-offs, so be sure to carefully evaluate your options.
Remember, even small savings can add up to big money. You'll be surprised at how much more money you can save with just a few small adjustments.
Step 6: Review Your Budget Regularly.
Once you finalize your budget, it is important to review it and constantly monitor your spending to make sure you are on track. Only some elements of your budget are set in stone, as you may receive an increase, your expenses may change, or you may reach a goal and want to set a new one. Whatever the reason, get into the habit of constantly reviewing your budget by following the steps above.