At its core, a budget is a map to achieving your financial goals. It requires basic math to create - although, with today's technology you can create a budget without so much as even touching a calculator. It is truly easy to build an efficient budget. The hard part? Sticking to it. But, that's a topic for another day. Today we're going to look at the different steps to building your budget.
Step 1: Identify your monthly net income
The first step in building anything is knowing what you have to work with! The same goes for your budget; you need to know exactly how much disposable income you have. Once you have a number, goal number 1 is to spend less than this number.
Step 2: Identify you expenses
The next step is to understand where you are currently spending your money. The easiest way to do this is to make a list of all your expenses, and separate them into two categories: recurring expenses and variable expenses. Recurring expenses = fixed, monthly expenses. For example: rent, car insurance, phone bill, debt repayment, etc. Variable expenses = expenses that change month-to-month. For example: groceries, gas, personal care, dining out, etc. To make an accurate list, go back and look at your spending for the last 6 months. Before going through 6 months worth of bank statements, see if your online banking is equipped with a money tracking feature - most are! So, you know how much you make, and you know how much you spend.
Are your expenses less than your income?
Not quite!
You have two options: Increase your income or decrease your spending. The easier of the two is to decrease your spending. This is the time to turn to your variable expenses! Because you have more control over this category, it is good place to start when cutting down.
Yep!
Step 3: Budget with a goal in mind So, you've reached goal number 1 and are spending less than you make. Now it's time to put that surplus money to work. The best place to put it? Towards your goals. I am an indecisive person and always struggled when it came to goal setting. If you're like me, don't worry - you don't need to have clearly defined goals in order to do this. Think about your goals in more general terms:
Savings
Debt Repayment
Investing
Choose as many general goals as you'd like, and start putting your surplus money towards them. It helps to prioritize your goals!
For those who do have very specific goals, that's great! This will allow you to be more intentional with your budget. Looking to buy a $6,000 car in 2 years? You need to set aside $250 a month. By looking at your monthly surplus, you can clearly see if this goal is realistic or not, and adjust accordingly.
Step 4: Stay on track
The key to a successful budget is not only making sure that you spend less than you make, but also ensuring that your leftover money has a purpose - even if that purpose is as simple as saving as much as possible or going on an exciting trip. Staying on track also means that you are able to adjust your budget as your situation changes. Good news: you don't have to stay on track all on your own! There are tons of budgeting tools out there. It's a good idea to try out different tools to find one that you like best. But, as a starting point, most online banking platforms have a budgeting tool - check yours out!