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Every time budgeting comes to mind, you might feel like burying your head in the sand!
Budgeting can seem daunting at first, but there’s no need to be intimidated.
Once you grasp a few basic budgeting principles, you’ll start seeing immediate improvements in your finances.
Budgets may not be thrilling, but most people agree they’re crucial for managing money effectively.
According to NerdWallet’s 2023 report, 74% of Americans maintain a family budget, and nearly everyone acknowledges the necessity of having one. Despite this, many still find themselves overspending.
Creating a budget doesn’t have to be stressful. If your budget is too complex, it’s likely to fail.
You Will Learn About:
How To Create A Budget Plan
If you’re reading this, you’re likely ready to take control of your finances and end the cycle of living paycheck to paycheck. Crafting a personal budget should adapt to your busy lifestyle and be a tool to assist you.
A budget is meant to work for you, not the other way around. Follow these 7 straightforward steps to create a budget that will help you start and maintain a financial plan.
Step 1: Determine Your Income.
Begin by examining your income from the past month. This includes all earnings from full-time or part-time jobs, government benefits, side gigs, and any other sources.
Make sure to calculate your after-tax income, which is the amount you actually receive after taxes are deducted.
For those with regular bi-weekly paychecks, your monthly take-home pay is your after-tax income.
Include any additional income from freelance work or side jobs in your total income calculation.
Seeking ways to boost your income can enhance your budgeting flexibility.
Step 2: Track Your Spending.
It can feel like your money vanishes as soon as it enters your bank account. To understand where it goes, review your past few months’ transactions.
Download statements from your credit cards and bank accounts, then categorize your expenses into groups like:
- Home: Mortgage or rent, property taxes, insurance, repairs, utilities.
- Food: Groceries, dining out.
- Health/Medical: Health insurance, prescriptions, life insurance, fitness, dental care, doctor visits.
- Transportation: Car payments, insurance, fuel, repairs, public transport, parking.
- Debt Payments: Minimum payments on debts, plus any additional payments to accelerate payoff.
- Family Expenses: Education, childcare, school supplies, books.
- Entertainment: Electronics, hobbies, vacations, subscriptions.
- Personal Care: Beauty products, clothing.
- Pet Care: Pet food, insurance, grooming, veterinary care.
- Miscellaneous: Gifts, donations, and other expenses.
Avoid making excuses for overspending or being overly critical of yourself. Reflect on your habits and commit to improvement.
Understanding your spending is crucial for effective budgeting. Before I started tracking my expenditures, I underestimated my grocery budget, discovering it was almost twice what I had anticipated.
Ignoring the reality of your spending will only leave you with confusion and regret.
Related Post On Budgeting And Cutting Expenses: How To Stop Buying Things: Things I Quit To Save Money
Step 3: List Your Monthly Bills and Due Dates.
Next, you need to compile a list of all your recurring monthly bills.
If you’ve been monitoring your expenses as suggested in Step 2, this should be straightforward.
These are bills that you consistently pay each month, typically for fixed amounts. Such expenses are referred to as fixed costs.
With fixed expenses, you generally have less flexibility in altering the amount you pay.
To get started, take a sheet of paper and list all your recurring bills.
Uncertain about your bills? If this is your first time organizing this, print out your bank statements for the last 2-3 months.
Review each transaction and highlight the recurring bills. Add these highlighted items to your list of regular monthly expenses.
Examples of fixed monthly expenses:
- Rent / mortgage
- Cell phone bill
- Internet
- Cable TV
- Utilities
- Insurance
- Childcare
- Subscription services
- Minimum debt payments (car loan, student loan, credit cards)
Step 4: Budget for Your Variable Expenses.
Variable expenses cover your everyday spending, such as groceries, dining out, coffee shop visits, clothing, and social outings.
These costs vary from month to month.
Start by budgeting for essential items first, including food, transportation, and household needs.
Determine your average monthly spend for these categories. Then, distribute this amount evenly across your paychecks.
For instance, if you spend about $400 on groceries monthly, allocate $200 from each paycheck to manage this expense.
Bob and Suzy’s Paycheck Budgeting Example:
After reviewing their spending over the past few months, Bob and Suzy decided that with a bit of budget adjustment, they can manage the following expenses per paycheck (every 2 weeks):
- Groceries – $250
- Restaurants and takeout – $50
- Gas – $75
- Household supplies – $100
- Entertainment and other personal spending – $200
- Total – $675 per paycheck
How to Use the Cash Envelope System
To manage and track your monthly variable expenses effectively, consider the cash envelope system. This classic approach, while simple, is highly effective for controlling spending.
Here’s how it works: Use cash exclusively for your purchases, leaving credit cards out of the equation. Assign each spending category its own envelope.
When you spend, take cash from the corresponding envelope. If an envelope is empty, no more spending in that category until the next month.
This system helps you reconnect with your money. Paying with cash feels more immediate and impactful compared to using credit cards.
Step 5: Incorporate Sinking Funds
Sinking funds are an excellent way to save for large expenses like holiday gifts, birthdays, or recurring bills like insurance or car maintenance.
To set up a sinking fund, allocate a small amount from each paycheck toward a specific goal. For instance, if you plan to spend $1,000 on Christmas, divide this amount by the number of paychecks you receive in a year.
Saving $100 per month from January to November will prepare you with $1,000 for the holiday season.
The aim is to eliminate the stress of unexpected expenses by having funds available when needed. Adding sinking fund categories to your budget might fill gaps in your financial planning.
Tip: Opening multiple bank accounts for different categories, such as “Vehicle Expenses” or “Vacations,” simplifies saving.
This allows you to regularly deposit funds and have them ready when needed, avoiding the hassle of cash or mixing funds in one account.
Bob and Suzy’s Paycheck Budgeting Breakdown
Bob and Suzy have planned for several annual irregular expenses as follows:
- Vacation – $2,000 annually
- Car maintenance – $1,000 per year
- Gifts – $600 yearly
- Car insurance – $1,200 annually ($600 every six months)
- Summer camp for kids – $400
- Total – $5,200 per year or $200 from each paycheck
Step 6: Allocate Every Remaining Dollar
When there’s any extra money left after covering all your expenses, ensure every dollar has a specific purpose in your budget.
Failing to assign leftover funds can lead to spending on unnecessary items.
Consider using the extra funds to:
- Boost your emergency fund for unexpected expenses
- Increase your retirement savings via a 401k or IRA
- Speed up debt repayment by applying additional money toward your balances
- Invest in further education or costs for starting a side hustle to earn extra income
Step 7: Regularly Review and Adjust
After setting up your budget, it may take some time to get used to the new plan.
Be patient and realistic—sometimes sacrifices are necessary.
Regular reviews are crucial because life is unpredictable.
Your financial situation can shift suddenly, so adapt your budget to stay aligned with your goals.
For instance, unexpected car repairs or last-minute events like a friend’s wedding may arise!
To manage both your finances and social commitments, flexibility in your budget is essential.
REMEMBER…
Budgeting is an ongoing process. Strive to improve each month by understanding your spending and finding ways to cut costs.
What Is a Reasonable Monthly Budget?
A practical budgeting approach is the 50/30/20 rule.
This method involves dividing your take-home income into three categories: 50% for essentials (housing, transportation, groceries), 30% for discretionary spending (vacations, dining out, shopping), and 20% for savings and debt repayment.
Adjust these percentages based on your personal lifestyle and financial goals.
Starting a Budget From Scratch – Conclusion
To wrap up, I want to share some final thoughts on budgeting.
For a long time, I didn’t use a budget or track my expenses.
It was only by becoming more intentional with my spending that I truly understood where my money was going and set achievable savings goals.
Some people believe you need to track every penny, while others suggest saving 10%-20% of your income and not worrying about the rest.
Here’s my perspective:
Prioritizing savings is crucial, but understanding your spending helps you manage your money more effectively.
Be patient with yourself. Budgeting is a skill that improves with practice.
Though the adjustments may seem challenging at first, they will soon become second nature.
PRO TIP: Set a weekly budget review session as a self-care ritual for your finances and goals.
Remember, it took me years to refine this system. I’m providing you with the steps, but it’s up to you to tailor it to your needs.
Don’t let others dictate your spending; your budget should reflect your circumstances.
Ultimately, as long as you’re saving, planning for the future, and enjoying life, you’re on the right track.
What budgeting challenges are you facing? What’s stopping you from starting your budget today?
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