Introduction
Life today is extremely hard! Actually, according to CNBC, 58% of Americans considered themselves to be living paycheck to paycheck. Consequently, a solid budget is the solution to managing your finances as effectively as possible, in order to avoid living paycheck to paycheck. If you create a well-planned budget, you will be able to track your income and expenses, save for the future, and achieve your financial goals. By the end of this 7-step guide, you will have all the necessary knowledge to create a budget that works for you!
Step 1: Calculate Your Income
The foundation of any budget is firstly to understand your total income. You must include all the ways that money ends up in your pocket, such as salary, freelance earnings, rental income, and any side hustles. Moreover, leave out the money that the government takes from your pocket (taxes) in order to have an accurate estimation.
Step 2: Create a List of Your Expenses
It’s time for the sad part! Track all your monthly expenses. The expenses must include fixed expenses like rent or mortgage payments, utilities, insurance, and loan payments. Additionally, don’t forget variable expenses such as groceries, entertainment, dining out, and transportation.
Step 3: Split Your Spending Into Categories
Now that you have listed your expenses, let’s organize them a bit. Therefore, organize your expenses into categories. Some of the most common categories can be:
- Expenses for Housing
- Expenses on Utilities
- Money you spend on Food
- Money you spend on Transportation
- The amount spent on Insurance
- Debt Payments
- The amount spent for Entertainment
- The money you put on Savings
- Miscellaneous
I know this can be boring, so I am here to help you! You can use apps like Mint or YNAB (You Need A Budget) that can help automate the process and give you insights into your spending patterns.
Step 4: Set Goals Regarding Your Financials
Not having goals regarding your finances is like being in a ship and not knowing where you are heading! Therefore, it is very important to set both short-term and long-term financial goals so you know for sure that you are heading in the right direction! Short-term goals might be saving for a kickass cruise to the Bahamas or a one-week dream vacation to Europe. Or it can also be an emergency fund to be safe in case everything in life goes wrong! Regardless of the type of person you are and the life you want to live, it is always good to have the funds you need to live it!
Moreover, you should not live just for today! Instead, you should always be ready for tomorrow! This is where setting up your long-term goals comes into play. Setting up long-term goals is what motivates you to get up each day! For example, some people are motivated by buying a house to live their family dream. On the other hand, others could be saving for retirement. Whatever the case, it’s very important to have clear financial goals to remember why you are doing all this budgeting effort!
Step 5: Create a Budget Plan That Fits Your Goals
Not having a plan is like planning to fail! Thus, it is a must to allocate your income to cover all your expenses and your savings goals. The most popular method to achieve this is the 50/30/20 rule:
- 50% of your income should be allocated for your essential needs for survival (housing, food, transportation)
- 30% for making your life fun (clubbing, dining out, that dress you love, etc.)
- 20% for your saving account or debt repayment or investing in the next big thing!
Theory is nice to exist as a baseline! However, you can adjust the theory to your lifestyle on a month-to-month basis! Nevertheless, you must always keep in mind that the math should be mathing! You should never be going above 100%! If you want to buy that dress, you should stay at home this Saturday night!
Step 6: Know What You Spend
Be the manager of your budget! From time to time (every couple of days), it is important to check out your spending in order to be sure that you are sticking to your budget! But be careful not to become Mr. Krabs! Just be sure that you are on target until the end of the month and adjust only if necessary!
You can use budgeting apps, spreadsheets, or even a simple notebook to record your expenses! If you track your expenses, you will be able to identify areas where you overspend! Identifying these areas gives you the choice to replace them with cheaper options (if you can’t afford them) or reduce them according to your goals!
Step 7: Adjust and Review Regularly
As briefly mentioned throughout the article, it is very important to review and adjust both your budget and, not so often, your goals! Life is going on each and every second that goes by, so it’s important to review and adjust your budget regularly. You can schedule weekly or monthly days to check your progress and make the necessary adjustments if needed! This step will help you stay flexible and adapt to any circumstance!
Tips to Make Your Life Easier to Stick to Your Budget
- Separate your Savings Automatically: Set up an automatic transfer to your savings account the exact date your paycheck arrives in order to ensure that you will not rob yourself!
- Whatever is Fun, Pay in Cash: Withdraw cash to have in hand for categories that are easy to overspend on! Dining out and entertainment can quickly get out of budget. Paying in cash lets you be in control of yourself to avoid overspending!
- Avoid Unnecessary Purchases: As much as you want those shoes or clothes, calm yourself down for 24 hours! If after that you still feel the need to make the buy, please do so but adjust your budget accordingly to fit your goals!
- Hunt the Discounts: Use whatever can offer you a good discount on your money! Coupons, discount apps, and cashback offers are your friends to free money on your budget!
Conclusion
Creating a budget is your number one weapon to use in order to become the king of your finances and achieve all your dreams! Following the 7 steps mentioned above will be the beginning of you taking control of your money and heading towards a secure financial future that will make you a happier and healthier person! You can always scrap whatever you have read above and continue your life as it was before or you can start today and watch your life get better day by day.
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