No one likes to be told what to do, especially when it comes to spending their money. If you’ve tried the familiar cookie-cutter internet budgets before and failed to stay motivated long enough for it to make any difference in your spending habits, you’re probably doing it all wrong. Your budget should be unique to you. And, if done right, it should be a liberating experience that allows you to spend money on the things that make you happy (as well as the things you absolutely need). So, if your bank account is telling you it’s time to give budgeting another try, here are a few simple steps to create a budget you’ll actually use.
First things first, you’ll need to find out exactly how much money you’re actually spending. Go to your bank or credit union’s online personal finance manager (PFM) to view your transaction history for the last three months. From there, look at the different spending categories to get an idea of your spending habits. They should fall under the general categories of rent/mortgage, utilities, auto, education, medical, groceries, credit card payments, and leisure/fun. Of course, everyone’s spending habits will be a bit different, so feel free to add categories as needed.
The next step is to add up your total net income. That’s your monthly income from your job, rental income, side projects, etc. after taxes and other deductions, such as 401K contributions. Of course, the whole point of making a budget is to ensure that your expenses don’t exceed your income, so this figure will be absolutely critical moving forward.
After you have a realistic picture of your spending habits and your income, it’s time to create your budget. Open up a spreadsheet on your computer, or do it the old fashioned way with pen and paper; either way, start by listing your spending categories and how much money you’ll need for each category every month based on your spending habits. This is the time to get realistic, so if you’ve been spending way too much money on food or clothing, try challenging yourself to make better spending decisions. And, if there’s enough left over, you can always draw from your discretionary budget (more on that later).
Nothing kills budget motivation faster than a huge unexpected expense that completely blows up your budget, along with all your good intentions. The best way to avoid these unfortunate occurrences is to expect the unexpected. Add an emergency funds budget category and allocate a little bit of money every month, just in case the unexpected strikes. If you want to get a better idea of how much you should set aside, go back to your PFM and look at your transaction history for the last year. Then, see how much you have spent on emergency car repairs, medical bills, etc. You may have to adjust your amounts down the road, but this will be a good starting point.
Aside from necessities and an emergency fund, the other absolute of every budget is to set aside some savings to create a financial cushion for the future. And, it’s probably a good idea to invest your savings money in a money market account or a certificate of deposit, rather than having it sit around in your savings account. The percentage of your income that you put toward savings is up to you, but many financial experts recommend saving 20% of your income. Of course, this isn’t always realistic, and will probably depend on your income and how much debt you have, but 20% is the eventual goal and it’s a good savings recommendation.
You’ve worked hard on researching your income and expenses. You’ve labored to create spending categories and allocation estimates. Now it’s time for a little fun. What is it that you love to do with your money? Have a vacation in mind? Maybe it’s something less grand and more ongoing like clothes/shoes shopping, video games, or date nights. Whatever you like to do, make sure you include a category for it in your budget. Of course, you probably won’t have money for that dream vacation all at once. And, depending on your income, you may need to exercise a little patience. But, your dreams are only as real as you want them to be, and setting aside even just a little money every month is half the battle. This is why making a budget can be so liberating. No more feeling bad about buying things you want to buy. You’ve budgeted for them, and once you have the money, they’re yours with no regrets.
Now that you have your budget set up, it’s up to you to keep it up to date. Use your discretionary spending goals as motivation for keeping your budget up to date. And, if some categories tend to be less realistic than others, tweak your budget to keep it realistic as life goes on.
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