There are plenty of articles out there on how to start a budget. There are even more articles on how to stick to your budget. But there seems to be a lack of information on how to set up a budget in the first place. I’m hoping that this series will help fill that void.
On my last day in college, I went back for a final meeting with my financial adviser. “So,” he said, “what do you have lined up for after graduation?”
“I’m moving back home and going to work as an analyst at my dad’s company.”
“And what kind of salary are you looking at?”
“Um, $75k?”
He chuckled. “That’s not going to happen.”
My jaw dropped. “What? Why not? You told me it was possible!”
“Yes, but you need to be realistic.” He pulled out the calculator and ran some numbers. “You’re going to be living at home and driving an old car, and you’re planning on dating some dude you’ve been seeing since high school. That’s not very high maintenance. On top of that, your father owns the business, so you’re going to have significant flexibility with your schedule — probably around $30k per year
Budgeting is one of the best ways to ensure that you’re actually spending less than you earn. Here’s a simple way to set up a budget and stick to it.
Step 1: List your monthly income. List all of your monthly income from all sources, including wages, income from other jobs, interest from savings accounts and investments, bonuses and so on.
Step 2: List your fixed costs. These are things that you have to pay out no matter what; for example, rent or mortgage payments and utility bills.
Step 3: Subtract your fixed costs from your total income. This is the amount of money you have left over each month for flexible (or discretionary) spending.
Step 4: Identify an amount equal to 10-20% of your remaining income, and put the money aside in a savings account dedicated to paying off debt or building up savings. You just created a budget!**
Budgeting is a crucial part of every household. It helps you track your income and expenses, manage your cash flow, and plan for the future.
At the same time, however, budgeting can seem like a difficult task, especially if you’ve never tried it before. You might wonder how to start a budget or how to stick to it once you’ve started. The key to starting a budget, as with anything else, is beginning with a plan. By planning ahead and calculating your expenses over time, you can set up an easy to follow budget that will help you get back on track with your finances and let you save more for the things that matter most.
Ways to Start a Budget**
1. Use an Online Calculator: Using an online calculator is one of the easiest ways to set up a basic budget. These calculators are usually free and allow you to customize the calculations based on your income and expenses.
You enter in all of your monthly income from all sources (paycheck, alimony, investments, etc.) as well as all of your expenses (rent/mortgage payments, food costs, bills/utilities, etc.). Then the calculator will show you what amount of money is left over each month for savings or discretionary spending
“When it comes to your money, you may not be able to control everything that goes on around you, but you can control yourself and your actions. You can’t control the economy, but you can control how much you spend.”
Start a budget by figuring out how much money you have coming in and how much money you need to go out. For example, if your rent is $1,300 a month and you make $1,400 a month then you have $100 left over for gas, food and other expenses.
It will take some time and calculations to figure out where your money is going but once you know where it is going then making a budget will be easier. Start by calculating your net worth which is assets minus debt. Then calculate what your income (wages or salary) is each month minus any debt like student loans or car payments. Subtract that number from the net worth to get what your discretionary income amount is. After subtracting the amount needed for bills, taxes and insurance the remainder of your monthly income goes toward paying down debt or putting into savings.
If possible try to pay off all debts before making investments such as buying stocks or bonds.
Budgeting takes effort at first but once it becomes habit it will
Start writing down everything you spend, from the moment you get up in the morning until the time you go to bed at night. It doesn’t matter whether it’s a $5 purchase or a $50 purchase. Regardless of the amount, write it down. It’ll be easier than you think.
Once you have this list you can try to categorize your expenses. There are plenty of ways to do this, but I prefer to sort mine into three categories: necessities, wants and savings. This way I can see exactly how much I’m spending on things that are “must-haves.”
Another benefit is that it will help keep your wants in check because once you know how much money is going toward your necessities and your savings, it will be easier for you to realize how much money you actually have left for your wants.
*Categories may vary depending on personal preference and/or specific situation (e.g., rent or mortgage payments may be included in “necessities”).
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