Do you ever feel like you don’t have enough money at the end of the month? Do you struggle to save money for emergencies?
You may think that you are not making enough money. However, you may be able to save most of your money issues by simply setting up a budget. Here’s a look at how you can make a budget that sticks.
Importance of Budgeting
Budgeting is important because it allows you to be efficient with the money that you make each month. Also, having a budget can help prevent you from missing bills and getting hit with late payment fees. Finally, budgeting can help you save for investing and for emergency situations.
Steps to building a budget that sticks:
If you want to create a budget that works for you, then follow these 10 proven budgeting steps. They can help you cover just about every aspect of your financial life.
1. Gather Your Financial Paperwork
The first thing that you need to do is get all of your financial paperwork together. This will allow you to have all the information that you need to create your budget. Here’s a look at the financial information that you need.
- Your work stubs
- Other sources of income (side hustles, dividends, royalties ect.).
- All of your bills
- Your recurring payments on credit cards and debit cards
- Your savings and checking account statements
- Your loan repayments
- All other debts
2. Calculate Your Income
Once you have all of your paperwork, you will want to get started with the income side of your budget. This is all of the money that you have coming in. Your income will include the money that you get from your job. Also, consider any side income that you make each month. Finally, take a look at any dividend or interest income that you are getting from your savings account.
Once you have gathered all of your sources of income, see how much you are getting each month. You will want to see a monthly income because your bills usually have to be repaid on a monthly basis. After you have calculated your monthly income, you can now get started on your monthly expenses.
Side note, when it comes to income, it’s always a good idea to have multiple sources. Here are 49 side hustle ideas you can try to increase your income.
3. Create a List of Monthly Expenses
Your monthly expenses are all the bills and financial obligations that you have to pay each month. At this time, you will want to list all the bills that you will have to pay. Here’s a checklist to help you get started:
- Electric/utility bill
- Water bill
- Garbage bill
- Cable/streaming services bill
- Phone/internet bill
- Loan repayments
- Car payments
- Car fuel
- Insurance payments
- Health and beauty expenses
- Medical/prescription expenses
Once you have a list of all of your monthly expenses, you can then get ready for the next step which is to your fixed and variable expenses.
4. Determine Fixed and Variable Expenses
One of the most important parts of budgeting is being prepared for the variable monthly expenses that you’ll have to pay. Chances are that your income is going to be a fixed amount. Therefore, you need to make sure that you have enough “breathing space” to handle the viable expenses that come in.
Here’s a look at some of the monthly expenses that can vary in amount:
- Electric/utility bill
- Car fuel
- Medical bills
- Water bill
- Car fuel costs
If possible, go back and see what the range in expenses is for these bills. For instance, if your electric bill ranges from $250 to $350 per month, then you will want to budget the upper range of your electric bill each month. This will prevent you from being caught short each month.
5. Determine your needs and wants
Many people end up short for the month because they overspend on their wants. This type of overspending could prevent you from paying your needs. Therefore, you need to have a good idea of what you want and your needs are.
Your needs are the things that you will need in order to maintain a basic standard of living. That includes your rent or mortgage, electric and utility bills along with your groceries.
Your wants will include your streaming services, non-essential groceries such as junk food, alcohol and gourmet coffee.
By knowing your wants and your needs, you will be able to better cut down on your wants to meet your needs if your income drops.
6. Have an emergency plan
You never know when the unexpected is going to happen, therefore, you will want to make sure that you have emergency cash on hand. It is recommended that you have about six months of living expenses available. As the year 2020 demonstrated, an emergency can pop up at any time that can affect your income or your expenses. Here’s a look at some common emergencies that may cause a disruption in your budget:
- Job loss
- Medical emergency
- Emergency home repair (Plumbing leak, electric outage, backup sink, etc).
- Vehicle repair
- Natural disaster
- Lawsuit/Legal issues
7. Save and invest
One of the most important reasons to budget is to find the extra income that you need to “pay yourself” and invest in your future. The fact is that your Social Security income may not be enough to fund your retirement. Therefore, you will want to start saving and investing as soon as possible.
It is recommended that you save at least 10% of your income each month and invest it. If possible, try to save more than that. Financial expats recommend that you “pay yourself first.” This will ensure that you have the funds to invest for your future.
Where should you invest? If you are just starting out, financial experts recommend that you put your money in a low-cost index fund. The Vanguard 500 index Fund (VFIAX) has an annual expense ratio of only .04%. That means that for every $1,000 you invest, you only pay Vanguard $4 per year.
8. Put your plan into action
Now that you know the basics of creating a budget, it is time to put your plan into action. Here are the steps that you should take to create your budget.
- List your sources of income
- List your expenses
- Take out 10% for savings and investing
- Take out 5% for your emergency fund
- Pay your essential bills “needs” first
- Pay your discretionary bills “wants” last
If you still find yourself short after creating your budget, then start cutting the “wants” from your monthly budget.
9. Make adjustments accordingly
There are going to be certain situations that will cause some dramatic changes in your budget. Some of these situations may be good such as a job promotion, raise or a new career. Some of these adjustments may be painful such as a job loss or a medical emergency. However, you need to be prepared for both instances.
When you have a major change in your income or your expenses, be sure to revisit your budget and make the changes as needed. If you are fortunate enough to experience a rise in your income, shore up your savings and emergency funding first. Don’t start upgrading your car, home or wardrobe right away.
This is known as lifestyle creep and can adversely affect your budget no matter how much income you have.
10. Set long term goals
Budgeting will put you in a great position to meet your long-term goals. These long-term goals can include anything from home purchase to retirement. If you have such long-term goals in mind, be sure to start saving now. The earlier you start planning for retirement, the easier it is. The earlier you start saving for a home, the better prepared you will be.
Ideally, you will want to start planning and saving for retirement at least 30 years ahead of time. If you are planning to buy a house, start saving about five years before you start home shopping.
Budgeting apps you can use
Fortunately, there are a number of free budgeting apps available at the iOS App Store as well as Android App Store. While there are literally hundreds of budgeting apps available, these three are considering the best free budgeting apps available:
1). Mint by Intuit – Mint is one of the oldest and most popular budgeting apps. This is considered the best overall app due to its ease of use and vast amount of features. Mint allows you to link debit and credit cards so your transactions can be tracked against your budget.
2). Pocket Guard – Have trouble sticking to a budget? Then you will want to download the popular Pocket Guard app. This budgeting app is designed to keep you on track. You can link Pocket Guard to your bank account and track your earnings as well as your spending.
3). Personal Capital – If you are already investing, Personal Capital is the ideal budgeting app that also offers investment services. Personal Capital will not only help you keep a budget, it will analyze your investments and help you keep on top of your portfolio.
Getting started with your budget today
Budgeting is the single smartest way to ensure that you can have financial peace in your life. Be sure to follow the 10 budgeting steps above and download a free budget app. Before you know it, your budget will look better than ever.