Want to save for a dream vacation, pay off debt, or achieve a more stable financial future? According to a 2023 survey by Forbes, more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses. Thus, a monthly budget is the first basic step towards financial success
So, buckle up and get ready to master the art of budgeting basics – your path to a secure and stress-free future starts here.
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Breaking down budgeting basics
Budgeting is a plan you create that determines how you’ll spend your money each month. It makes sure you have enough money for living expenses, buying the things you want, and money for the future. The steps involved in creating a budget include: calculating your net income, tracking your spending, setting realistic financial goals, planning, adjusting spending, and reviewing.
What’s the best way to budget monthly?
First, track your income and expenses diligently to understand where your money is going. Next, categorize your expenses into needs (rent, utilities, groceries) and wants (dining out, entertainment) to prioritize necessities.
Set realistic spending limits for each category based on your income and financial goals. Automate bill payments and savings contributions to avoid missed payments or neglecting your savings. Finally, review and adjust your budget regularly to account for changes in income or expenses.
How to create a monthly budget in 8 steps
Budgeting is a great way to help you set your priorities in order and meet your goals. To make a budget, you’ll need to consider how you plan to spend your money. You can create a budget in eight easy steps.
1. Understand your income and expenses
The first step in crafting a monthly budget is the money coming in and going out of your account.
Assess your monthly income. Is it consistent? Does it vary by month? Make sure you’re planning around the baseline or the lowest end of what money you plan to bring in so that you can stay consistent in your budget. Any extra cash you may get here and there can be treated as extra money that you can spend how you like or put in your savings account.
Make sure to track and categorize your expenses. Divide them into those that are consistent each month, like your Wi-Fi and cable bill, and those that will vary a bit, like your electric and water bills. Make sure you’re planning around the higher end of those bills so that you don’t wind up spending money elsewhere and coming up short on your bills.
Then, consider expenses that come up somewhat frequently but are not consistent. Examples of those types of spending needs are car maintenance and visits to the dentist or other doctor.
2. Set financial goals
Having a budget you stick to also helps you meet your financial goals. Consider what you’d like to save for in the long term versus the short term. Then, prioritize those goals based on importance and how feasible they actually are. Saving for college should likely take precedence over saving for a yacht, for instance.
The SMART goal-setting technique is a great way to help with this. That’s an acronym for this method:
- Specific: Make sure you have a clear definition of what you’d like to accomplish and what it’ll take to do so.
- Measurable: Have a quantifiable objective (how much you need to save and by when) so you can keep track of your progress.
- Achievable: Make sure your goal is actually something you can reach. Setting the bar too high can lead people to feel discouraged.
- Relevant: Make sure the goal you’re saving for aligns with your greater mission in life.
- Time-bound: Your goals should have a deadline so that you can more accurately track progress. Even if this timeline has to be adjusted, it’s crucial to have one.
3. Create a budget
Budgeting is determining your income allocation and dividing it in a planned way. The first things you’ll need to apply your money toward are your essential expenses like rent and utilities.
When you’re making your budget, you shouldn’t focus solely on the needs — consider what you want as well. Make sure to allocate funds for discretionary expenses like entertainment and Having a budget will help you make smarter spending decisions even in the things you do for fun. If you’re craving something but don’t have enough money in the budget to afford your favorite restaurant, you may be motivated to check for any discounts or coupons at a similar eatery. That satisfies your craving and keeps you from overspending at the same time.
4. Monitor and adjust your budget
Once in a while, you may have to make adjustments to your budget. That could be for a good reason, like a raise that means you have more money to move around. It could also be for an unfortunate reason like a new ongoing medical expense. Regularly reviewing and updating your budget will help keep your goals realistic so you can better cope with unexpected expenses.
If you run into situations of financial emergencies leading to unexpected expenses, look for ways you can save a bit of money to cut down on some areas of your budget. You may also be able to review your payment plans on certain purchases or loans so that you don’t have to pay as much upfront.
5. Manage debt
If you have different loans to pay off and credit card payments to make, that debt can build up. Try some different strategies to help you pay off your debt.
One big way to make a dent in your debt is to focus on the payments with the higher interest rates first. Make an effort to consistently pay more than the minimum so that you don’t have to spend quite as much on interest overall.
If it comes down to it, you may want to talk with a professional about other ways to help you save. Consolidating your debt, for instance, may earn you a lower interest rate and may make it easier for you to keep track of payments.
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6. Save and create emergency funds
Your savings account should be a huge feature in your budget. You’ll want to set aside money to build toward goals you have, such as a new car, a home, or a loved one’s Christmas present. It’s crucial to have an emergency fund. That means putting money aside now in case something goes wrong in the future, like running into an unexpected hospital bill or car breakdown.
To help you figure out how much you want to save, consider what you’re saving for. Think about when you might need that money and how much you’re capable of putting aside each month. Once you’ve calculated that, stay true to it. Write it into your budget as an inflexible expense so that you’re always saving at least some money. Then, add any extra money you may make to your savings as well.
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7. Tips to live frugally
A great way to help with your budget is to make smart shopping decisions. Rather than dining frequently at restaurants, save money by cooking your own food and shopping for groceries based on sales. Be mindful of your energy and water usage so you can reduce your bills. Think about different ways to save money and consider ways you could take in more money in a pinch such as doing side work or selling items you don’t need.
8. Stay motivated and accountable
Staying motivated is a big part of keeping up with your budget. Track your progress, review your financial goals, and celebrate the milestones you hit. Even small victories should prove to you that your budget is working and encourage you to keep up with it.
Setting up automatic bill payments can help you ensure you’re using your money responsibly, making sure your highest priorities are accounted for no matter what. Seeking support from friends and family can also help keep you accountable.
Budgeting basics: How to make a plan and stick to it
Creating a good budget means considering how much money you have and how you want to spend it in such a way that accounts for your immediate needs and saves for your future ones. Doing so helps you spend responsibly so you can prioritize your long-term financial goals
FAQ
What’s the first step in budgeting 101?
The first step in budgeting basics is to track your income and expenses for a month or two. This budget breakdown will give you a clear picture of where your money is going and help you create a realistic monthly budget.
How do I categorize expenses when creating a monthly budget?
When creating a monthly budget, categorize your expenses into needs (rent, utilities, groceries) and wants (dining out, entertainment). This budget breakdown allows you to prioritize necessities and allocate funds accordingly.
What’s the best way to stick to my budget?
The best way to stick to your budget is to automate bill payments and savings contributions. This way, you can ensure that you’re paying essentials on time and consistently contributing to your financial goals.
How often should I revisit my budget?
Review and adjust your budget regularly, at least monthly. As your income or expenses change, updating your budget breakdown is crucial for successful budgeting basics.
What’s the key to effective budgeting 101?
The key to budgeting 101 is being realistic. Create a budget breakdown that accurately reflects your income, expenses, and financial goals – and be prepared to make adjustments as needed.
