Intro
Budgeting your income and expenses can be a hassle, but it does not always have to be a headache. The first step to budgeting is thinking about doing it in the first place. Once you’re there, you just need a solid plan of action and some calculations to get your expenses on a check. We have outlined the best ways to create a budgeting plan based on your expectations and goals.
Remember to make changes, adapt and encourage yourself to be smart about your spending. Budgeting will help you go a long way in maintaining your expenses and savings.
Where Should You Start When Creating A Personal Budget?
The first question is always – where to start? Budgeting can seem like quite the ordeal. However, the answer to that is quite simple. Your earnings. The first step to budgeting is not looking forwards but looking back at how much you earn and how much you spend. So, read further to understand the first steps you can take to budget your money efficiently.
Figure out your net income
The first step to understanding your budget and the amount you can spend is knowing what you have in your bank. This involves calculating your net income. And no, your net income is not your total salary. Your net income will be the total amount you get after deducting your taxes and any employer-based programs, including insurance and funds that you add to your income. Most of these funds are also savings for your benefits but must be excluded from your preliminary budget because they are not cashed in hand for you to spend. So, figure out your net income before you budget your spending.
Check your monthly spending's
The second step is to check your monthly spending. This means going back in your past and looking at how much you spend on average every month. These include all your spending, gas money, rent, personal belongings, groceries, etc. Keep even the most minute of your spending on the list and calculate your total. This will give you the average expenditure of a total year.
If you do not have a habit of tracking your spending, then a credit card or bank statement would be a good place to look into your monthly expenses. Once that is figured out, you can use a sheet, a simple pen, paper, notepad, and even an app to begin including your monthly expenses.
Set a goal for yourself
Once you have laid out your net income and monthly expenses, you need to set a goal. Before we lay the plan for a purpose, remember to set a realistic goal based on your average spending. Do not set yourself up for failure by creating a plan you know will not leave any room for contingency. We will discuss the contingency plan later ahead.
Your goals must be divided into what your savings or spendings are for. Ever heard of a SMART plan? It means an S- Specific, M – Measurable, A- Attainable, R- Realistic, and T- Time-bound goal.
To make these factors fit your goal, start by dividing short- or long-term goals with your money. Short-term goals can include goals you want to achieve in the next one or two years, whereas a long-term goal of saving can be for the next five or ten years of your life. If you want a shorter plan for every month where you get your money, that is completely attainable and realistic.
The 50/30/20 budgeting rule
Once your goal is set, there is a golden rule that people abide by for budgeting which is called the 50/30/20 rule. You may have heard of this already and wonder why everyone talks about this rule? Because it is both realistic and makes sense when you have your income and expenses laid out.
The 50/30/20 rule is quite simple. 50% of your net income should be allocated for your monthly needs, 30% should be earmarked for any wants you may have, and 20% should be given for insurance and savings.
Whether you are saving in a bank fund or an investment, remember to calculate your savings according to your budget plans. Moreover, always keep track of the amount you spend for your wants, as these are the ones that tend to tip your budget overboard.
Create budgeting categories
You may be wondering what you should categorize in the 50/30/20 rule. We have listed out the possible categories here for a general rule placement. However, these can be changed according to your lifestyle. Remember to allow yourself room for pleasure while also being strict on whether you are giving too much room for excuses. So, here are all possible budgeting categories based on the 50/30/20 rule.
50 ( Everything You Need) – Utilities, Groceries, Vehicle Upkeep, Rent or Mortgage, Travel Expenses, Food, Clothing, Medical and Healthcare, Household supplies, Education.
30 (Everything You Want) – Shopping, Vacation, Entertainment, Gifts.
20 (Savings, Insurance, and Investment) – Savings, Insurance, Investments, Debt savings, Emergency Fund, Credit Card payments.
Keep room for contingency
Once you have set your categories, always keep room for contingency. This could also be called the emergency fund, but you may want to save some when you allow yourself to indulge more than you expect. We add this because having a safety net can keep people at ease, making individuals more calculative about their spending. So, adding a couple of dollars here and there for contingency could be smarter than keeping yourself on a tight noose of a budget.
Review your budget
Finally, review your budget every month, whether it is a change in net income and expenses or simply checking in on how you are following your budget. You should make it a habit to check in and adapt to the necessary changes. Adjusting spending habits and your budget can make things much easier for you in the long run.
Key takeaways
Creating a budget can be daunting, but it doesn’t have to be. With our guide, you can create a personal budget that works for your unique needs and lifestyle. Being mindful of your spending is the key to successful budgeting, so take the time to evaluate your regular expenses and make changes where necessary. Remember, adjusting to living on a budget may take some time, but the benefits are worth it!