Budgeting may sound like an unenjoyable chore to most people, but it’s an essential exercise to create self-awareness around spending habits, plan ahead, and reach desired financial goals.
Understanding how a household’s cash flow moves can allow people to create a plan for how to spend reasonably and live within their means. A monthly budget is a specific plan that ideally includes fixed expenses, housing costs, savings for the future, an emergency fund, as well as enough funds for other purchases, splurges, activities, or travel.
Determining how much money a household is working with may sound like an obvious first step, but many people are not intimately aware of how much money they bring home every month. So, the first step to building a manageable budget is understanding how much money is incoming and outgoing each month after taxes.
All sources of income should be incorporated into a budget—including salary, benefits or assistance programs, tips, and side hustle funds.
If there is more than one household earner, their salary should also be included.
Figuring out fixed expenses is relatively simple and provides a framework for determining how much can be put away for savings and an emergency fund. Fixed costs, like rent or a mortgage, utilities, or loan payments, generally don’t change.
Sometimes the proper strategy can help adjust these payments to a more manageable level over time. For example, if a private student loan payment is too high, student loan refinancing may be wise option. When a borrower chooses to opt for student loan refinancing, they can lengthen or shorten the repayment term, which will change the amount owed monthly.
Figure out a Budgeting Technique
Figuring out a budgeting technique is the next step. However, there is no one-size-fits-all approach. In fact, several budgeting methods may be helpful for those looking to reach their financial goals.
The Traditional Budget
The traditional budget simply involves keeping a record of a household’s income and monthly expenses before deciding where to cut costs. Setting goals with the traditional budget requires understanding those expenses and deciding how to make changes in spending.
The 50-30-20 budget is a method where a percentage of your income is assigned to a relevant expense category. The proportions are specific:
- 50% towards fixed needs or necessities, like housing, food, loans, etc.
- 30% for the soul, so anything a person wants but doesn’t necessarily need.
- The remaining 20% is put aside in an emergency fund, savings, or investments.
Refine Budget When Necessary
Budgets are living, breathing documents that can shift and evolve whenever necessary. So, even once a budgeting method has been established, tracking incoming funds and outgoing expenses is still essential in case readjustment becomes necessary.
Getting the household together for a family meeting every quarter of the year to look at the budget can help determine whether the budget is ideal. This way, revising based on spending habit changes can be done quickly.