Living within your means is essential for staying on top of both personal and household finances.
Creating a balanced budget allows you to do this and ensure that you have enough money to meet your financial goals.
But building a budget can sometimes feel overwhelming and confusing. How much should you save? How much should you spend? What should you prioritize?
If you’re looking for a way to get started with budget building, then you’ve come to the right place.
In this blog post, you’ll learn how to create a budget that works for you and your lifestyle.
You’ll find insider tips and strategies to help you save and meet your financial goals while also enjoying your life.
You’ll discover how to craft a budget that fits your unique needs and understand how to stay committed to it.
So, if you’re ready to build a budget that truly works for you, keep reading.
Determine Your Income
This initial step is a breeze if your wages remain steady from month to month. In the case of monthly paychecks, simply use your take-home pay amount.
If you are paid biweekly, multiply your net pay by two. There may be some months when you will receive an additional paycheck due to the timing of your pay cycles.
Even so, it is still best to budget for the normal two or four paychecks and make any necessary adjustments for months that you have an extra check.
If your salary changes often, take the past three to six months and figure out the average. Bear in mind that your actual net income is what is deposited in your bank account and thus that should be your focus.
Calculate Your Monthly Expenses
Once you have an idea of your income, it’s essential to analyze your expenses as well.
Glance over your bank and credit card statements from the past 3-6 months to get an accurate grasp on what you usually spend in a given month.
Break it down into two categories: necessities and discretionary spending.
Necessities can include rent, utilities, and insurance- anything you can’t live without.
With discretionary spending, categorize it even further; eating out and entertainment, for instance, should be split into two separate categories.
This will help you visualize where your money is going, and how to manage it better.
Additionally, plan ahead for bigger or annual expenses like car registration renewal, tax bills, and home maintenance.
This will help you stay on top of your finances and make sure you’re on track.
Set Realistic Goals
Once you know how you’ve been spending your money, take some time to establish objectives to manage your money responsibly.
For instance, if you are determined to pay off your debt quicker, decide on how much you can put towards your debt each month and then set goals to reduce spending in certain areas to make sure that happens.
It is essential to be sensible when setting these goals; be ambitious, but bear in mind it may take a while to form the habits you want.
It is possible to underestimate certain costs, even if you have past figures to back your assumptions up, so you should make adjustments as you become more used to the process.
Track Your Spending
Maintaining a budget is an important part of monitoring your finances, but all the budgeting in the world won’t do you much good if you don’t keep track of your spending.
If you’re guilty of making a lot of small purchases throughout the day, it can be difficult to keep track of where your money is going.
To make it a bit easier, consider utilizing apps like Mint or You Need a Budget.
These programs allow you to link up your financial accounts and see your income and purchases all in one place.
Additionally, you can categorize each purchase and compare it to your budget for the month so you can adjust your spending habits as needed.
Tracking your spending can also help you assess your goals and give you an idea of how to adjust them going forward.
Pick a Budgeting Plan
Now that you have the fundamentals of budgeting firmly in place, it’s time to decide on a plan that best suits your approach to financial management.
To help you in your selection process, here are four popular budgeting methods for you to consider.
Spend some time exploring each one and think about how it would work for you.
In the end, you’ll be able to confidently pick the budgeting plan that best fits your lifestyle and goals.
Envelope System
This method of budgeting is simple: assign a certain amount of money to each spending category and place the cash in an envelope labeled with that category.
This way, when the cash in the envelope runs out, you have to wait until the following month before you can purchase more in that category again.
Keep in mind that not all bills can be paid in cash, so you must leave enough money in the envelope to cover those expenses as well.
The Two-Account Plan
With the two-account plan, you can allocate your monthly expenses in two parts: the fixed expenses, which should be deposited in one bank account, and the discretionary spending, which should go into the other account.
This method is great if you prefer to pay with cash or debit cards, so you are always aware of your available balance.
However, managing your budget may be more difficult if you do not follow this exact framework.
Zero-Based Budgeting Plan
With a zero-based budget, the idea is to assign every dollar to something, essentially making your expenses equal your take-home pay.
This approach is similar to the envelope system, but it doesn’t require you to use cash for everything.
The zero-based budgeting method requires you to be detail-oriented, and there is less room for error, so it may be best used after you’ve been budgeting for a while.
This level of detail gives you an incredible view of where your money is going, but be sure to keep at least a small emergency fund in case your costs go up or you’re hit with a large expense.
How to Stick to Your Budget
Creating a budget may be the easiest part of budgeting. Keeping track of and limiting your expenses month after month so you can stick to your budget is usually the hard part.
Here are some tips for staying within a budget: Once you have created a budget, you’ll need to be focused and disciplined in order to stick to it.
It may require a shift in your habitual spending habits and lifestyle, so be prepared for some lifestyle changes if you want the budget to be successful.
Consider setting up alerts for yourself for when you reach certain spending limits so you can stop overspending before it’s too late.
If your budget includes tracking your credit card spending, consider using an app or website that helps you track your expenses and make sure you don’t overspend.
Additionally, it is important to review your budget periodically and make any necessary adjustments.
If you’re having difficulty sticking to your budget, reach out to your financial institution or qualified financial advisor for assistance and advice.
How Creating a Budget Can Help Your Credit
As you maintain a budget and get your finances in order, it’s likely your credit score will start to improve.
Budgeting is beneficial for many reasons: not only can it help you manage your money more efficiently, but it can also have a positive impact on your credit history.
Every individual’s financial circumstances are unique, so there’s no guaranteed way to say how budgeting will affect your credit score.
However, if you are able to stabilize your financial situation, you may be pleasantly surprised to find an improved credit history.
Calculate your after-tax income
To get started with the 50/30/20 budgeting rule, first, calculate your after-tax income.
Freelancers should subtract their business expenses and the amount set aside for taxes from their monthly earnings, while those with steady paychecks need to check their payslips to determine the amount they receive each month.
If any funds are automatically deducted from the regular paycheck, such as health insurance or pension, these should be added back in.
Categorize your spending for the past month
To get a good grasp of your expenditure, you can review your bank statement from the past 30 days.
An easy way to do this is to use an app like Mint or N26, which will sort your transactions into their respective categories automatically.
After that, examine your spending and separate it into three categories: needs, wants, and savings.
Needs are the essential things you cannot live without, like rent and groceries, while wants are luxuries that you can live without, such as entertainment.
Finally, savings can include extra payments on debts, contributions to your pension fund, or money saved up for a rainy day.
Spend 50% of your money on needs
In a nutshell, needs are unavoidable expenses that should amount to no more than half of your post-tax wages.
If you find that your needs exceed this, there are a range of strategies you can use to lower the expenses.
This could involve switching to a more economical energy supplier, searching for better-value grocery items, or making bigger alterations such as finding a more cost-effective place to live.
Spend 30% of your money on wants
With half of your take-home pay going toward essential needs, like housing, food, and utilities, you should consider allocating the remaining 30% of your after-tax income to wants.
These are luxuries or non-essential items that, while you may enjoy them, you could certainly live without them.
For example, if you earn $2000 a month after taxes, $600 can be set aside for wants.
If you find yourself overspending in this area, consider your expenses and determine which items are expendable.
Just remember, following the 50/30/20 rule doesn’t mean you can’t enjoy life – it simply means being mindful of your spending so you don’t have to sacrifice your needs for your wants.
When in doubt, ask yourself, “Could I live without this?” If the answer is yes, then this is more likely a want than a need.
Stash 20% of your money for savings
Approximately 20% of your monthly income should be dedicated to reaching your savings targets or repaying any debts.
While the minimum repayment amount is seen as a need, any extra money you can spare towards paying your debt off will reduce the total amount of interest as well as the debt itself and so can be classed as savings.
Consistently putting aside 20% of your income will really add up over time and help you to build a solid savings plan.
Whether it is for your emergency fund, long-term financial plan, or even a house deposit, this small step will make all the difference.
For instance, a salary of $2000 a month could result in a saving of $400 a month, which over the course of a year adds up to $5000!
Frequently Asked Questions
How can I create a budget tailored to my lifestyle?
Once you have a clear understanding of your financial situation, you can create a budget tailored to your lifestyle by determining how much money you want to save, how much you would like to allot each month for your needs, and how much you are willing to spend on your wants.
You can use either a budgeting app or a spreadsheet to input your information and adjust it as needed.
To ensure success with your budget, monitor your spending at least once a month and make any changes as necessary.
This will allow you to stay on top of your finances and ensure that you are creating a budget that works for you and your lifestyle.
How do I create an effective budget plan without limiting my lifestyle too much?
An effective budget plan should be tailored to your individual needs and lifestyle, so it is important to find a balance between being conservative with your spending and not being overly restrictive.
When setting your budget, take into account your wants and needs and try to strike a healthy balance between the two.
Your needs are essential expenses related to your day-to-day lifestyles, such as rent and groceries, while wants are luxuries that you can live without, such as entertainment.
Finally, savings can include extra payments on debts, contributions to your pension fund, or money saved up for a rainy day.
Practicing these steps and monitoring your spending regularly can help you create an effective budget plan and still enjoy your lifestyle without overspending.
Conclusion
When it comes to budgeting, the key is to find a balance that works for you and your lifestyle.
Creating a budget can be a great way to stay on top of your finances, set money aside for savings, and enjoy life at the same time.
With the right budgeting strategies and tips, you’ll be able to craft a budget that fits your financial goals and stick to them.
To get started, make sure to keep track of your income and expenses, live within your means, create a budget that you can actually stick to, and prioritize your financial goals.
With these steps, you can build a budget that works for you and your lifestyle.
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