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Benjamin Franklin once said, ”If you fail to plan, you are planning to fail.”
A budget is essentially a plan for your money and shows you how it is being allocated. Coming up with a budget and sticking to it can help you accomplish your short-term financial goals and should put you in position to accomplish your mid to long term ones.
Here are some tips to get you started:
1. Calculate your net income
The first step to creating your budget is to identify the amount of money you have coming in.
From your salary, it is the take-home amount – the amount after all the deductions (taxes and insurance costs) have been subtracted. From the other types of income you may receive, remember to subtract taxes, business expenses, and anything else that reduces it.
2. List out your expenses
Once you figured out the money that is coming in, we need to figure out the money that is going out.
Start by listing out all your fixed expenses. Your fixed expenses would include your regular monthly bills such as mortgage or rent, utilities, car payments, and student loan payments. While you will most likely not be able to cut back on these expenses, it is good to get an idea how much of your monthly income is going towards these.
Next list all your variable expenses. Unlike your fixed expenses, your variable expenses vary from month to month and include things like travel, dining, entertainment, and groceries. These are expenses that you may be able to find ways to cut back. Since your expenses will change from month to month – making it a bit challenging to calculate, you can try going through your bank and credit card statements to help determine your average spend per month.
3. Come up with a plan
Now that you have a better idea of your expenses, it is time to determine which expenses are absolute necessities and which ones you may want to reduce your spending.
Reference your financial goals and make sure you are putting yourself in the best position to accomplish them. Are you putting enough money into your retirement fund? Are you in the process of paying off your debts or are you just making the minimum payments?
Take your time when creating your budget and make sure you allocate your money in a way that works best for you and towards your financial goals. You may be feeling ambitious and want to cut out all the fun stuff, but it is harder to commit to a budget if you cut out all the entertainment. Remember it is not about cutting out everything that you enjoy, but rather allocating your money better to allow it to work for you.
Everything in moderation.
4. Revisit your budget and adjust as needed
As your income, expenses, and financial situation changes over time, be sure to revisit your budget and adjust it accordingly.
If you never created or followed a budget before, it will take some time to get used to it. However, just stick with it and keep track of your spending. It will get easier over time.
Do you have other budgeting tips? Share them in the comment section below.