Starting a budget can be hard. Keeping a budget is even harder. But it doesn’t have to be. Today we want to talk to those of you who have had a hard time keeping a budget over the years. Today we will simplify it for you so it becomes less of a headache. There are many ways to keep a budget, the most effective way being the one that works for you.
Here is the most common way to keep a budget:
- Calculate your monthly income: This is any income from your salary or any side jobs you may have. If your income is inconsistent, use the average income for the last three months.
- Calculate your monthly bills and expenses: These are your necessities. Rent, utilities, gas for your car, groceries, phone, car payment, student loan payment, etc.
- Calculate your monthly discretionary expenses: These include personal care, entertainment, dining out, gifts, clothes, etc. Assign a monetary amount for each category. These are costs that can be adjusted based on what you can afford. Your monthly expenses take priority over your discretionary expenses.
- Calculate money to go towards savings. In this step, you define your savings goals. Everyone should start with a savings goal of having an emergency fund with $1,000 in it. Once you have $1,000, then increase that savings goal to equal 6 months’ worth of income. That way, if you lose your job, you can still live for 6 months on savings until you find something else.
After that, you should think about what other savings goals you might have. Setting aside 15% of your income for retirement can be a good target savings goal. You might also consider upcoming vacations, big purchases, saving for a new vehicle, down payment on a home.
As a side note, once you list out your savings goals, you might go back and look at your discretionary spending budget again an readjust. This is when priorities can begin to set in once you see it in front of you. For example, maybe you have $300 / month set aside for dining out, but you realize that trip you want to take in 6 months is more important than going out to eat so much, in which case you might reduce your dining out budget to $200 / month.
Allow your savings priorities to dictate how much of your income is spent on discretionary spending.
- Subtract your monthly expenses and discretionary expenses from your income: Hopefully, you have money left over. Whatever you have left over is the amount you have to work towards your savings goals or debt reduction.
If you get a negative number, you are spending more money than you take home. You have two choices. Either adjust your budget so that your discretionary expenses are lower or find another source of income. Also look at your non-discretionary expenses to see if there are savings opportunities within your necessary purchases. An example here would be when shopping for groceries: find coupons, sales or go for the store brand item.
The key is to assign a place within your budget for all of your money. All of your income should be assigned to a certain category in your budget so that you know exactly where your money is going.
If you simply can’t stick to the first method of budgeting, then scrap it and try a different method. The important thing is that you have a budget that works for you.
One of the simplest ways of budgeting is by having two separate bank accounts, one for your bills to auto-withdraw from and one to live off of. Have your employer direct deposit part of your check into the account for your bills, and the other part of your check into the account to live off of. Then you can simply look at the account for your discretionary spending and know what you have to spend!
Budgeting is important because it keeps you on track for your goals. If you don’t have goals, well, that’s the first place to start. Sit down, determine what’s important to you in life and understand that money is simply a tool to help you realize those dreams. Happy budgeting!