Budgeting can be a great way to help you achieve your financial goals. From reducing unnecessary expenditures to maximizing savings and effectively allotting funds, budgeting can help you enjoy your money now while saving for the future. You can budget at any stage of your career, and it is a life skill that may help you effectively manage your money as you grow older. Here are six steps to building your own budget.
1. Determine your income
The first step to budgeting is to determine your after-tax income. Your income consists of your salary as well as any money earned from side jobs. In some cases, it may include child support, alimony, and similar sources of income. Knowing your total monthly income lets you know what you’re working with and can help you start to figure out how to allocate it best.
2. Know your expenses
After you understand your monthly income, the next step is to know your expenses. This includes monthly regular payments and essential expenses like your rent or mortgage payments, car payments, life insurance premiums, groceries, utilities, and any other regular bills. You can also factor in occasional expenses, such as car repairs or doctor visits.
3. Don’t forget discretionary spending
In addition to necessary monthly expenses, a budget also takes monthly recreational spending into account, too. These are non-essential expenses or wants, and could include eating out, the occasional new outfit or gadget, entertainment, and more. Sometimes discretionary spends can be impulse purchases that you cannot predict while budgeting, but in most cases, it helps to allot funds towards the activities that you like to do regularly.
4. Allocate your funds
Once you know your income and expenses, you can put it all together and start to build a budget. Begin by allocating money for your essential expenses, such as housing. Then, factor in your other expenses and try to stay within your overall budget. If you have no money left over after allocating expenses, you may have to reconsider some of your expenses, especially the discretionary spends. If you do have money left over, you may want to allocate it toward specific financial goals, long-term savings, or investments.
5. Set goals
Within your budget, you can include as many goals as you want. Repaying debt, avoiding overspending, long-term saving for retirement, short-term saving for a vacation, or just building an emergency fund can all be goals for you to aim for. That said, it’s best to keep your goals realistic. Ambitious goals could be great for some people, but they may feel too restrictive, and not achieving them within your timeframe may cause you to become frustrated and fall off the budgeting wagon. When you’re just getting used to budgeting, it can help to aim for achievable milestones – the small wins can keep you motivated.
6. Review and adjust as needed
Finally, the sixth step is to review and adjust your budget as needed. Budgeting is an ongoing process, and adjustments may look different for everyone. One way to start is, for the first few months, at the end of each month, take a look at how well you stuck to your budget and make adjustments as necessary. If you find that you are consistently overspending in one area, consider cutting back in that area or finding ways to allocate more money to that expense. Remember that your budget only works if you stick to it.