Budgeting is a term that elicits different feelings and reactions in many people. Some find it tedious, while others find it boring or even uncomfortable. Regardless of how you feel about budgeting, the reality is that it is essential to a healthy financial life. Determining how to budget will depend on your income, expenses, wants, needs, and more.
So read on to get a personal guide that will help you create and stick to a budget that works for you.
How to Budget: Getting Started
Simply start by taking a look at your finances. By taking stock of your income and expenses, you’re well on your way to creating a budget to get you to your financial goals.
Use this simple process to get started.
- Determine your monthly net income
- Track and record your average monthly spending
- Determine your preferred budgeting method
- Determine your long and short-term financial goals
- Create your budget and track it using a budgeting app or a simple notebook
- Automate your bills and savings
- Revisit your budget each month
Your net income is the number that hits your bank account each month. Using this number and not your gross income is important because you don’t want to consider income you can’t access monthly.
Read: Why Budget?
Choose a Budgeting Method
There are a few different budgeting methods, and that’s good! Not all methods will work for you. The trick is to find the best budgeting method for your current financial situation and future financial goals. To get started, consider each method and how it could fit into your lifestyle.
The 50/30/20 Budget Method
This method splits your take-home pay into three categories:
- 50% Needs
- 30% Wants
- 20% Savings and Debt Repayment
Let’s say your take-home pay is $3,000. This gives you $1500 for needs, $900 for wants, and $600 for savings and debt repayment. Use a budgeting calculator to determine your specific limits. Examples of needs are mortgage payments, health and auto insurance, and other bills that come with your day-to-day life. Wants include entertainment, luxuries, and the like. This method may not work best for you if you have larger debt repayment or savings goals.
The Pay Yourself First Budget Method
This budget method uses the logic that you should prioritize saving and debt repayment first. You’d start by putting a larger portion of your income into savings, retirement, loan repayment, or an emergency fund before creating a budget for any other expense. The idea here is that by pushing some of your income into savings first, you’ll become used to living off your remaining income and thus become more adept at saving and living on less money each month.
Determine Your Financial Goals
Listing and prioritizing your financial goals is essential. Short- and long-term goals should be considered along with your motivation or intention. If you want to buy a home, be specific about your preferred timeline and always be realistic. Taking stock of your income and expenses will help you to make those SMART financial goals.
In the age of technology that we’re in, there is no shortage of tools that make budgeting more manageable and accessible. But again, use what works for you. You may find that more traditional tracking works best, but don’t be afraid to experiment with apps like Money Manager, Mint, or PocketGuard. Know that just as you adjust your budget, you can also change your tracking method.
Automate & Monitor Your Budget
The phrase set it and forget it rings true when it comes to automating your expenses. After creating your budget, take advantage of automatic payments for your bills. This will help make your monthly efforts much easier. But always remember to revisit your budget at the end of the month to continue to sharpen and adjust your budget as needed.
As every budget method isn’t a one-size-fits-all, neither is financial literacy. Discover your path to financial health with our exclusive financial health programs.