Knowing how to properly manage money is important, yet a good majority of adults don’t have a budget plan. In fact, only 41% of Americans have a budget, meaning that almost 60% of the country doesn’t keep close tabs on their finances. While budgeting may not be the sexiest part of being an adult, it’s a necessity if you want to have a clear understanding of how much money you make and where your money is being spent.
Having a budget is beneficial in that it gives you control over your money and keeps you focused on achieving your financial goals. It can even help you get out of debt. Here’s everything you need to know about creating a budgeting plan.
Figure Out What You Make
The first step in creating a budgeting plan is determining how much you make each month. By knowing how much money you bring in each month, you can ensure you have enough to cover your costs with enough left over for other financial goals, such as building an emergency fund or putting more money into your savings account.
When calculating income, always look at your post-tax and payroll deduction total. While your annual salary may be $60,000, you likely don’t make $5,000 a month, especially after taxes.
By knowing exactly how much you have coming in each month, you can determine how much you can afford to spend.
Know Your Expenses
In the budgeting world there are two types of expenses: fixed and variable. Tracking your expenses is a must for budgeting. Fixed expenses are those that don’t change from month to month. Common fixed expenses include:
- Car insurance
- Car payment
- Cell phone bill
- Cable bill
What’s good about fixed expenses is that they’re easy to budget for. Even better is the fact that you can often negotiate a lower rate from the service provider or lender.
On the other hand are variable expenses. These are expenses that change from month to month, including utilities, grocery costs, clothing, and entertainment. You have a lot more control over variable expenses and can lower them as needed, especially as you solidify your budget.
Compare Income to Expenses
In the ideal world, your income should far exceed your expenses. However, we all know this isn’t the case for many people, especially those who live paycheck to paycheck. An effective budgeting strategy is zero-dollar budgeting. This involves assigning every dollar you make to go towards a specific purpose. From your rent or mortgage to your car payment to your savings account, zero-dollar budgeting gives you a clear path as to where your money is going and mostly importantly, why.
If you have money left over after creating your zero-dollar budget, be sure to reward yourself. Put money into your savings account or an investment account – pay yourself first! If you’re lacking money after creating a budget, now’s the time to find ways to boost your income.
Set Goals in Your Budget Plan
Creating a budget is an accomplished goal in itself, but once you have a better handle on your finances, it helps to create goals. Maybe you want to be debt-free in the next five years. Maybe you want to buy a new car. Or maybe you need to improve your credit so that you can get approved for a mortgage. Whatever your financial goals may be, write them down and find ways to incorporate them into your budget.
For example, let’s say you want to pay off a high interest loan. To start, you could lower your variable expenses by cooking at home or shopping less often, which keeps more money in your bank account. From there you can put that extra money towards your debt, allowing you to pay well over the minimum so that more of your money goes towards the actual balance owed and not interest.
As you start to reach your financial goals, set more of them, and don’t forget to reward yourself along the way.
Keep Track of Your Expenses
With a budget and goals all figured out, the next step is to keep track of your expenses. To make this a painless process, download a mobile app like Wallet, PocketGuard, or Clarity Money. These apps not only track where you’re spending your money, they also tell you when you’re coming close to going over your budget. Many of the apps also allow you to set short and long-term financial goals so that you have something to work towards.
Budgeting apps are also beneficial in that they let you visualize where your money is going. This can be a big eye opener for people who tend to spend more than they should.
Creating a budget isn’t the most fun part of life, but it’s for sure a necessity. Follow these steps and you’ll be well on your way to financial security and clarity. If you have any helpful advice for setting up a budget, leave a comment and share your best tips in the section below.