Budgeting 101: The Basics of Budgeting
Creating and maintaining a budget can feel like a daunting task. What’s scarier than having a spotlight shined on your personal finances? As stressful as building a budget may be, it's a fundamental part of maintaining a financially healthy lifestyle and a habit that can not only keep you out of debt, but help you achieve your goals. As one of our top financial resolutions for 2018, we're sharing how to create and maintain a personal or family budget in 4 simple steps.
1. Look at how much money you have, make, owe, and spend
Determine how much money you have in checkings accounts, savings accounts, investments, funds etc. Now, figure out what your average monthly income is. This might be difficult if you are not a salaried employee or if you receive income from more than one place. If this is the case, a good technique is to average your income from the last 6-12 months and use that figure. Next, total your monthly recurring debt payments, making note of each monthly minimum. This includes credit card debt, student loans, car loans, mortgages, and any other debt that you pay on a monthly basis. Lastly, determine your average recurring fixed expenses. A good way to do this is to hold onto all of your receipts for monthly expenses (utility bills, car payments, groceries) and record them at the end of the month.
2. Set a goal
Establishing a personal goal and writing it down can be a great way to stay motivated. If you don’t know why you're budgeting, you’re more likely to fall off track. Figure out what your priorities are for the short and long term + determine how much money you will need to save to reach that goal. Keep in mind that the ultimate objective in order to meet your goal is to get to a place where your expenses become less than your income. Some excellent budgeting goals are:
- Paying down debt + loans
- Starting a new savings account, like an emergency fund
- Contributing to your retirement plan
- Saving to buy house, car, or vacation
3. Figure how much you should be spending
With a clear picture of your current financial situation and one or more goals in mind, you should be able to determine how much of your monthly income you need to allocate toward each area of spending. If you’re not sure how to prioritize, a good rule to follow is the 50-20-30 rule. The 50-20-30 rule maintains that:
- 50% of your budget should go to essential expenses, such as housing, transportation, groceries and utilities.
- 20% of your budget should go to to financial priorities like paying off loans, building savings, contributing to retirement (think back to your goals here!)
- 30% of your budget should go to lifestyle choices, which include variable expenses, such as dining out, shopping, etc.
4. Track and Trim
Physically creating your budget is sometimes the scariest step of the budgeting process. First, figure out which tracking method works best for you, whether it’s pen and paper, an excel spreadsheet, or an app. Once you have your framework in place, enter in your income and expenses (fixed and variable) and track the difference. Remember- the ultimate goal is for your monthly income to be higher than your monthly expenses.
Update and review your budget on a regular basis to be sure you are staying on track. With the numbers in front of you, you’ll be able to approach your budget more realistically and identify areas of spending that can be allocated towards saving, debt reduction, or any other goal you built your budget for!