Setting a budget for yourself is an important part of personal financial planning.
A budget can help you eliminate unnecessary expenses, enabling you to save more and achieve your financial goals faster.
Budgeting is a stressful and overwhelming experience for many so here are five steps to get you started.
Step one: Figure out your discretionary income.
Calculating your discretionary income starts with your net income, which for most people is the amount direct deposited into your bank account.
From that, subtract your fixed costs like rent or a mortgage payment, utilities, and any other fixed expenses which are necessities. The amount you have left is available to save or spend on dining out , entertainment, transportation, and any other categories.
Step two: Decide on your budgeting style.
There are many different budgeting apps and techniques to choose from so you can find what works best for you.
Some people prefer to enter every expense into a spreadsheet or other spending tracker while others prefer to use a transaction aggregator like the Mint app. Another strategy is to use cash wherever possible with the idea that you will spend less if you can see your bills disappearing.
The right technique for you is the one you will continue to use.
Step three: Plan your savings.
Decide on your financial goals and then assign a goal amount to each.
These goals can be paying off debt, saving for a down payment on a home, building up your emergency fund or your retirement fund. Whatever it is, divide your goal amount by the number of months before you would like to achieve it and you have the amount you need to save each month to meet your goal. If the savings amount is too high, you will have to lower your goal amount or extend your time period. Every dollar you can put into savings helps.
One great strategy is to open a new savings account for a specific goal and set up an automatic deposit from your paycheck to that account.
Step four: Examine your expenses.
Reviewing your spending habits and bills is a great way to keep your expenses under control.
Shopping around for services like insurance, phone, and internet can help you get the best deals. Pay particular attention to anything set to autopay like streaming subscriptions or app renewals. Include any transactions made from your Paypal, Venmo, or Zelle accounts.
Categorizing your spending will also help you evaluate if you are spending money on the things most valuable to you and if your spending reflects your priorities. Can you cut down on take-out spending by picking up the food yourself rather than ordering delivery? Is the free shipping from that online retail store really worth the annual fee? Every dollar you cut down your expenses can be used to pay yourself by contributing to your savings.
Step five: Make regular checkups.
January is a great time for an annual spending review.
The holiday spending season is over and the New Year’s Resolution delight has yet to wear off. Make it a habit to review your autopay bills and reduce or eliminate unnecessary subscriptions for the year ahead.
Review your past year of spending and try to notice any habits you can plan for over the coming year. Did you spend more on travel in the summer months and more on your electric bill in the winter months? A year of spending will give you the perspective to plan for those variations in your spending and to revise your budget as needed.
Whatever your financial goals are, keeping an eye on how much you’re spending and where is important.