Essential Steps to Build a Budget
Budgeting is a tool that helps you achieve the financial goals you set for yourself. Whether you want to build wealth, pay off all debts, or save money for a retirement fund, creating a working budget immensely contributes to achieving these objectives. A budget gives you a clearer picture of where your dollars are going each month. Religiously sticking to this budget (while still enjoying life) will give you more financial freedom.
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What is a Budget?
A budget is a plan for your monthly income minus taxes. With this, you’ll know exactly how much to spend on essentials, wants or needs, savings, debts, and miscellaneous expenses. A budget lets you spend your income with a purpose or a goal in mind. By being intentional with where your dollars go each month, you can live a life with less financial stress and more freedom.
A good practice is to always be honest about your expenses and monthly income. How much are you earning each month minus the taxes? Do you receive a regular paycheck?
To make your budget work for you, it’s imperative that you are willing to work with accurate and detailed information especially when it comes to how much you are earning and what your spending habits are.
If you want your financial house to be in order, start creating a budget. You can either start with a notebook or on your laptop and phone or use a budgeting app for better assistance. An app may be more convenient as you can access it everywhere, so long as you are connected to the internet.
How to Build a Budget
There are essential steps needed to be able to effectively create a budget and make it work for you.
First, gather all your financial statements for reference. It may include:
- Investment accounts
- Bank statements
- Utility bills
- Mortgage or car payments
- Credit card bills
- Receipts for expenses
Calculating Your Income
If you have a regular job, your monthly income minus the taxes may be the same each month. For those who have inconsistent income from freelancing, a good rule of thumb is to use your income on a really bad month. If you have a lot of expenses to pay, find out which to prioritize first. Make a list of all your expenses then ask yourself, “If you only had enough to pay for at least one or two of them, which would they be?”
Make a List of Your Monthly Expenses
The next step would be to find out where you are spending all your money. List all of your monthly expenses. Your list may include:
- Car payments
- Personal care
- Transportation cost
- Travel expenses
- Child care
Be as honest as possible with your list. You are off to a good start when your income is greater than your expenses. That means you can put the extra money either into savings, building wealth, or paying all of your debts.
If expenses are higher than your income, find areas where you can cut your expenses. Make a few sacrifices for your financial goals. Know how to prioritize spending for just your needs. Don’t worry as these are only temporary. As soon as you are back on track, you should be able to work on some of your wants.
To those with higher expenses vs their income, consider adopting a budgeting philosophy that works.
The 50-30-20 Rule
With this type of budget, you are spending half of your income for the Essentials such as food, utilities, shelter, basic clothing, and transportation; not more than 30% for your Wants and 20% for Savings and Debt Repayment.
When you create a budget, make sure it covers all of your needs. Always allot money for your savings especially for emergencies and for the future.
To make sure that you are still on track, track your progress from time to time. Record all your spendings either in your notebook/laptop/phone or through online savings and budgeting tools.
One helpful tip is to consider automating your savings to make it effortless for you to save. Perhaps you could schedule automatic payments as well.
Also, your budget will not be the same every month. On certain months, you may have to spend on your routine car maintenance or other home appliances maintenance, back to school supplies, birthdays, Christmas, and other holidays and vacations. You need to adjust your budget accordingly.
From time to time, revisit your budget. If there are major changes in your life such as marriage or having a baby, your priorities will change. Adjust as needed.
Spending on Essentials
Essentials make up for 50% of your income. To help you keep track, an accountability buddy may help. This could be a family member or spouse.
50% includes basic utilities such as electricity and water; housing payments, groceries, transportation expenses, and child care. Consider cutting up all your credit cards so you won’t have to make minimum payments to them every month. This really alleviates the hassle of paying up for interest rates.
If essentials make up for more than 50% of your income, revisit your wants. You may have to cancel a gym membership that you don’t really need. You can always do your cardio at home. Do you really need to have a
? There are movie apps that you can use for watching free movies online.
To further help you, make a schedule for all your payments. Pick specific dates as much as possible. Get your groceries on the same day every week or every two weeks.
Tracking your progress lets you keep your goals in place. Also, never forget to celebrate your small wins. Reward yourself if you are able to stick to your budget every month.
It’s also a good plan to create a buffer in your budget each month. A buffer is an amount that you set aside for expenses that may come up unexpectedly. This way you won’t be forced to take out money that you have already set aside for something important.
30% for Your Wants
If you want to really save money, avoid dining out every month or signing up for every subscription that you think you need.
If one of your financial goals is to get out of a huge debt, it may be best for you to adjust this. Do not be afraid to make budget cuts especially if you really need to.
When you are finding it difficult to work on your wants and needs, consider doing the envelope system. Withdraw the cash that you need for your wants and store them in an envelope. It will be easier for you to find out how much you have left. As soon as it runs out, just stop spending.
Also, do not be too hard on yourself. With budgeting, it doesn’t mean that you do not enjoy life. It’s just a tool to help you manage your income and expenses well.
Savings and Repayments
This makes up 20% of your savings. Your first priority will be to save up for an emergency fund. It should be enough to cover up for emergencies, repairs, and other expenses that may come up. Never take out money from your emergency fund. As soon as you have saved enough money, you can start saving up for your other goals.
The next priority will be to pay your debts. If there is a toxic debt that is affecting your sleep and daily life, consider paying this off first. For some people, adopting the debt snowball method may work.
The debt snowball method is a strategy that you use for debt reduction. You pay off your bills from smallest to largest, regardless of how much interest you are paying for each. This strategy is designed to help you change how you behave with your earnings so you would never be in deep debt ever again. It lets you pay off small debts until you are debt-free. Do not forget to reward yourself every time you pay off a debt. Doing that motivates you to pay off your other debts.
After your emergency fund and debts, save up for your retirement fund or start building wealth.
If you’re new to budgeting, it may take a couple or a few tries for you to make it work. Give yourself about 4 months and you should be able to get the hang of it. Take it one step at a time. You will soon get to where you want to go: a place where you are financially independent.
Never Lose Sight of Your Goals
Your why’s help you stick to your budget better. You will be more motivated when you know why you are saving up or who you are saving up money for. Knowing why you are making such sacrifices makes creating and sticking to a budget a cinch. Find out how you can get a title loan today.