Create A Healthy Personal Budget In 8 Steps
Creating a budget is essential to having a balanced lifestyle. A budget is a tool that helps guide spending and accomplish financial goals. A personal budget is a summary of your income and expenses over a period, often by the month. A budget does not have to be overly restrictive, but it sets a realistic plan for financial prosperity. Essentially a budget lists your necessary expenses and compares them to your income. Then you can determine from what is left over to use for discretionary spending and savings. A budget dictates what you earn versus what you spend each month and requires accurate information to be most beneficial. You can write a budget with a pen and paper, but a spreadsheet or budget application is highly recommended. Here are some 8 tips on establishing a budget plan.
- State your goals. As with any endeavor, stating our goals establishes a viable outcome. Budget goals could contain a range of outcomes from putting a down payment on a car/home to
planning out a vacation. Whatever your financial goals may be, stating them upfront is an excellent start to your budgeting plan.
- Gather your financial information. Accurate financial information is key to establishing a realistic budget. Gather any document that states financial income and expenses. This includes bank statements, investment accounts, recent utility bill, W-2s and pay-stubs, 1099s, credit card bills, receipts from the last three months, mortgage, or auto loan statements. These documents will take the guesswork away from creating a budget.
- Review your total income. For many in the working class, a weekly, bi-weekly, or monthly paycheck is their only source of income. Your net income, which is your income after taxes are drawn, reflects that amount of money you are bringing home. If you have other consistent sources of income, it is safe to consider that in your budget as well. Income that is inconsistent such as overtime or income tax should not be considered in your budget. Consistent sources of income that may not be a paycheck could include child support or Social Security.
- List your monthly expenses. This includes things like mortgage/rent, car note, insurance, groceries, utilities, entertainment, personal care, eating out, childcare, transportation cost, travel, loans, and savings. Try and use the last 3 months of statements to get a better estimate of spending.
- Note Fixed versus Variable Expenses. Fixed expenses are the ones that cost the same amount each month. These things include mortgage/rent, car notes, cell phones, credit card payments, and the internet. You can include fixed debt payments and fixed savings plans that you implement. Variable expenses shift monthly and include expenses such as groceries, gasoline, entertainment, eating out, and gifts.
- Compare your expenses to your income. Ideally, your income should be greater than your expenses. If this is the case, the additional money can be distributed to other areas of your budget. A recommended budgeting strategy is the 50-30-20 strategy. With this strategy, half of your budget should go toward essentials, your wants should compose 30%, and savings/debt repayment should compose 20% of your budget.
- Adjust your expenses. When your expenses are higher than your income, you must adjust your expenses. Find places in your budget where you can reduce your spending. Entertainment expenses could reduce despite how minuscule a payment you think it to be. A 7.99 subscription translates to roughly $100 annually, which translates to about 1000 in a decade. Small things matter. The goal is to have your income be equal to or less than your expenses. The equal balance reflects that all your funds are accounted for.
- Consider your budget as an active document. After your initial budget is set up, it is subject to change. Maybe you start to earn more/less money. Maybe you have a child. Maybe you have an unexpected expense ensue. You may have to modify your budget and that is ok. Be vigilant when it comes down to your budget because it is your livelihood, meaning it dictates, realistically, your standard of living. Continue to monitor and record your expenses month to month to stay informed about your expenses.
An honest budget can be extremely beneficial, especially if you have long-term financial goals. A budget requires a level of discipline that can seem intimidating if you are just starting or you make less than you would ideally like. A budget plan is there to help you, not to make you feel bad, and, over time, can help you achieve financial goals you may have thought to be impossible.