Building a budget is a great way to get a handle on your finances and spending habits. It allows you to track where your income goes each month, helping you to cut back where you need to or reallocate portions of your income to different areas in your life. But it can be overwhelming knowing where to get started. Here are a few tips for anyone looking to create a budget from scratch.
Determine Your Goals
Budgets can help you meet your goals, whether you’re looking to save for a big purchase or simply want to know where all your income goes each month. So it’s important to understand your motivations for starting one. Consider the benefits of creating a budget and what you want to accomplish. Having a clear understanding of your goals and motivations can help you be more frugal where you need to be and adjust your spending habits to better meet your financial goals.
Calculate your monthly income
Before you can create a budget, you first need to know exactly how much you bring home each month after taxes. Take a look at your paychecks and add up your total take-home pay each month. This gives you a clear number that you can then use when creating your budget.
If you have automatic deductions for insurance, it’s recommended that you add that total back into your after-tax income since it can give you a more accurate understanding of what your money is going toward each month.
Embrace the 50/30/20 rule
The 50/30/20 rule is one of the most common budgeting techniques. In this method, the first 50 percent of your income goes toward reoccurring necessary expenses like housing, groceries, insurance, and debt repayment. The next 30 percent is dedicated to your wants, things like eating out and entertainment that you don’t necessarily need. The last 20 percent of your income goes into savings and debt payments beyond the minimum requirement. This method is a basic starting point that you can use to create your budget. However, these percentages aren’t set in stone. Use them as a place to begin and adjust as necessary.
Calculate your necessary expenses
With the 50/30/20 method in mind, you’ll need to keep track of your necessary monthly expenses. Ideally, these expenses will only account for 50 percent of your after-tax income. But if you find that your necessary expenses exceed the recommended percentage, then you can change the percentages. For example, if your expenses are 60 percent of your income, then perhaps you can cut back on your wants and make that only 20 percent of your income.
Calculate your wants
While it might be harder to calculate your wants since they can differ from month to month, the 50/30/20 method shows you that you should only be spending roughly thirty percent of your income on these. You can look at your spending from the past few months, and add up how much you spent on things like entertainment, clothing, home goods, and eating out. You can then see how it compares to the recommended percentage, and then adapt your spending as you begin budgeting.
Put money into your savings
The last twenty percent of your income should go into your savings. This allows you to build up a rainy-day fund or save for a larger purchase down the road. You can also make larger debt repayments since paying beyond the minimum could help you pay off those debts faster.
Track and Adjust Your Spending
Budgeting requires staying on top of your spending by tracking where your money is going. This means looking at your accounts to see how much you’re putting toward your wants, needs, and savings on a monthly basis. You can see where surprise expenses pop up, where you may be spending too much on clothing, or that you can afford to put more money into your savings account than you originally thought. Tracking expenses requires personal accountability for your own habits, and it can help you build better habits to meet your financial goals.
If you want some assistance building a budget and setting financial goals, reach out to a financial advisor who can help you reach your goals faster.