No matter your financial situation in life, everyone needs a budget. With a budget you can plan for needed expenses and prepare for the things you want. In fact, the most simple budget only needs a couple lists, a calculator, and some goals. Below are the the main points our post will go over to help you set up your budget:
- List Your Monthly Income
- List Your Fixed Expenses
- Set Up Your Savings
- List and Portion Out Your Varied Expenses
- Budgeting Tips
Budgets are an important tool in anyone’s financial arsenal. Budgets can help you organize your needed expenses, like rent and bills, prepare for emergencies and get ready for whatever your future might hold. By knowing how to budget you can learn to stop living paycheck to paycheck and start building up your savings. it can help you save up for big expenses or future life events like a wedding, starting a family, buying a car or a house or moving to a new state.
Budgeting can also help you save for retirement, something else that even younger people just starting out on their own sometimes forget to think about but should. But most of all a it can grant you financial power and freedom and help you provide for your wants and needs. But for those just starting out on their own especially, it can be hard to know where to begin.
There are several key elements you’ll need to include in your budget. You need to think about all your necessary expenses and plan them out accordingly so you are aware of how much of your monthly income you need to spend each month no matter what. Then you’ll have to think about unnecessary expenses. This is where you have the most freedom to plan out the numbers and make adjustments.
How to Budget
There are many ways to budget and there is a lot of advice out there in the financial spheres about how to do it. You can also choose to plan for certain events by making a specific wedding budget, or for major purchases like car payments. But if you’re making a simple budget for yourself, then the main thing you’ll want to decide first is whether you want to make a monthly or yearly budget. Most people like to create a yearly one to get a general big picture view of their financial goals and future plans. But, a monthly one is more helpful for everyday use. We’re going to try and condense all that down to the bare bones minimum of what every smart budget needs.
#1: List your monthly income
List out all your forms of income. This would include the paychecks from your job, but also any extra money you make from any of your side hustles. Here is also where you can decide whether you want to organize your finances for gross income or net income.
Gross income is simpler and easier to calculate. You just need to know how much you get paid and use that money for your calculations.
Net income isn’t as simple to figure out but there are advantages to using it. You figure out your net income by looking up what the income tax is in your state, and taking out that percentage from your gross income. Using net income instead of gross income is perhaps better because it more realistically reflects what you will actually receive from your paycheck.
#2: List your fixed expenses
After you have all your sources of income written down you’ll want to form another list for all your fixed expenses. Fixed expenses are the expenses you have each month that don’t fluctuate in amount. Everyone’s list is going to look different depending on what expenses do and don’t apply to you, but here is an example list of some fixed expenses:
- Rent or Mortgage: A calculation you’ll want to do when looking at your housing expenses is to check that your total housing expenses aren’t over 28% of your monthly gross income.
- Debts: A calculation you’ll want to do when looking at your debts is to check that your total debts aren’t over 36% of your monthly gross income.
- Student loans
- Credit card payments
- Streaming services like Netflix, Hulu, and Spotify
- Phone bill
- Medication you pay for each month
- Child support
After you’ve listed all your fixed expenses total the amount, subtract it from your monthly income, and that’s what you have left to spend on varied expenses . . .
#3: Set up your savings
Before we go into varied expenses though, let’s take a moment to think about your savings and retirement. Get a savings account if you don’t have one already, and set aside a portion of what’s left over after fixed expenses. Any amount you can afford to put away into a savings account each month will set you up for success in the long term, even if it’s only 5 to 10 dollars a month.
Aside from general savings and saving for retirement, you also want to set money aside in an emergency fund. It’s recommended that you have at least 3 months worth of your fixed expenses put away into an emergency fund at all times.
Digit is a great app you can use to help you plan and organize all your savings.
#4: List and portion out your varied expenses
Everyone’s list of varied expenses is going to look differently depending on what expenses do and don’t apply to you. Varied expenses are any expenses that are going to fluctuate in amount each month, or are considered more like luxury expenses than needed ones.
Varied expenses are a big reason to do a budget in the first place so that your varied expenses each month don’t overtake your more important fixed expenses and your savings. Here are some examples of varied expenses you might need to consider:
- Eating out
- Gas and transportation
- College textbooks
Another way to figure out the reality of what you’re spending on varied expenses is to look at your transaction history for the month and see 1) How much in total you were spending on varied expenses that month, and 2) What those varied expenses were on. Do this for a couple months back to get a more realistic idea of what you are spending on varied expenses each month.
Organizing your varied expenses is where you have the most control over your budget. Whatever is left over after your fixed expenses and your monthly payments to your savings account is what you have to spend on all your other spending for the month.
Here is where you will list out what all those varied expenses might be and portion what you have left in the budget into them. Remember that you don’t necessarily want to portion out 100% of what’s left into these categories so that you can accumulate a comfortable cushion in not just your savings account but your checking account as well.
Making investments is a great way to beef up your financial portfolio. There are probably a trillion ways to invest, but the idea behind investments is that you put money into something that will give you more money in return later. This is called compounding interest.
A helpful tip to remember when going into any investment is the rule of 72. This rule means that if you take 72 divided by the interest rate you’ll figure out the estimated number of years it will take for your interest to double your initial investment.
Where should I put my budget?
Figuring out where to even put your budget can get complicated. You can use excel or make your own table in Word or Google Docs or any note taking program of your choice. There are also many free budget templates online that you can print out and use. Budget tools are all around if you take the time to look and decide on which ones best suit your needs.
Click here for a free budget worksheet from the Federal Trade Commission.
You can also use budgeting apps to keep track of all your bills, expenses, plans, and goals. Some of these apps even allow you to connect your budget to your financial accounts.
Control your spending
Sometimes it can be difficult to control your varied expenses throughout the month and track your spending. You can make controlling how much you spend each month easier by using a prepaid debit card. With a prepaid debit card you put money on it like a gift card to yourself almost. You can also use a similar method of spending control by just taking money out and only using that cash for your varied expenses each week.
PocketGuard is an app that can help you track your purchases.
Get a Side Gig
Getting an extra source of income can really come in handy. There are a million different kinds of side hustles any ambitious person these days can get into. You can babysit, drive for uber, or sell your own products. The possibilities are endless and it never hurts to have a little extra money each month.
Plan to Decrease Debts
Debt can be a real financial weight on your shoulders, but it can also be a necessary evil in order to get a house, get a car, get through college, and much more. Decreasing the amount of debts you owe can still help alleviate some of that weight and provide more financial comfort and peace of mind.
So it’s important to budget with paying down your debts in mind. You can pay down debts quicker by planning to spend more on that fixed/necessary expenses each month, by spending less on varied expenses, or by getting another job to provide more income to put into your debts each month.
Budgeting doesn’t have to be hard. All you really need is 4 lists and a calculator! Everyone should practice using a budget now so that you can control your finances instead of your finances controlling you.
Check out some of other Check City articles on budgeting:
“Budgeting for Dummies”
“What is a Budget?”
“Budgeting Tips You May Not Have Thought of Before”
“3 Simple Tips to Building a Budget”
“Ways to Keep Track of Your Spending“