When it comes to budgeting, do you take on a, “I’ll spend here and there and put some in the bank every month.” approach? If you’re nodding your head yes, read on because it’s time to consider another plan.
Knowing how much money to spend on yourself and how much to put away is important especially during the holidays when spending gets out of control. There is a fear involved with budgeting: “I won’t have a life”; “I don’t know how much to put aside”; “I’ll start budgeting next month.”
No more excuses. Let’s start managing our money like a pro!
Start With Your Income
The first thing that you need to do is know exactly how much money you make and where it is coming from. Any inaccuracy in these calculations could really give you a money headache down the line.
So, calculate how much money you’re making (don’t forget to calculate this number after taxes and additional reductions). Plus, add in any other benefits or costs that you might receive throughout the year.
Account for expenses
Figure out how much money you spend every month. Include both fixed and variable expenses.
Fixed expenses—mortgage/rent, auto loan, insurances (health, life, auto, home), 401k/IRA contribution, personal loans.
Variable expenses—utilities, food/consumer goods—estimate these items, but make sure you stick to those estimates when spending the money each month.
Be realistic with your spending habits. It’s easy to miss credit card expenses for shopping or eating out.
Examine the Essentials and make the cut
At this point, you need to take note of what you are spending your money on. The chances are your living expenses represent way more than 50 percent of your income. If you find that you don’t have enough income to cover all of your expenses, you are going to have to start making cuts to your spending.
What are the least necessary things that you are spending your money on? Is there anything that you are spending money on right now that you don’t need?
Some quick items to look at:
- Cell phone plan
- Cable or satellite package
- Clubs/memberships that you don’t use
- Expensive habits like eating out or getting coffee.
4. Budget for unexpected costs
Your first financial planning priority should be to create an adequate emergency fund. The point is to have enough money to cover your living expenses in case of a life emergency, such as an accident or the loss of a job.
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, and income, the rule of thumb is to put away at least three to six months' worth of expenses.
These funds can help get you through if something were to happen unexpectedly.
Budget for your future self, and debt payments
Once you build your emergency fund, start investing in tax-efficient retirement accounts such as a 401(k) or IRA. 15% of your pre-tax income should be diverted to the retirement account for your future self.
Create a separate account to save for future financial goals, like business savings, saving for a home purchase, college savings, saving for a trip, and so on.
Also set aside money to pay off any debt you have (e.g. your credit card debt, car loan, personal loans, student loans, etc.) because it is essential that you pay off your debt as soon as you can and start focusing on building wealth.
Decide What To Do With The Leftovers
Subtract your fixed and variable expenses from your monthly income to determine how much money you have left to spend, as you wish.
While it’s tempting to spend this money leisurely, the smart thing would be to set it aside for future payments.
So, determine what percentage you want to set aside each month from your earnings toward an investment account for future you.
Review your budget periodically
You did it! Now it’s time to check back on things and make sure that the numbers are still working for you. As income levels change or expenses go up or down, you will need to adjust things accordingly.
For instance, if you get a raise, decide how that money will be spent. Consider paying off your credit card bill or investing in your retirement fund.
It can be helpful to use a mobile app like TimelyBills or other technical advances to track your budget and take control of your money like a pro.
Budgeting doesn’t mean giving up everything you enjoy in life; it’s just designed to give you a better understanding of your finances and your financial goals.
A good budget is your passport to freedom. It is what will liberate you from the constraints of debt or the job that you hate. It can give you more time with your children or the chance to travel the world. That’s how good budgeting is.