A budget (or spending plan) helps you manage your money and enables you to build financial stability and security. When you have a plan for tracking your income and expenses, it’s easier to pay bills on time, save for major purchases, and build an emergency fund for unexpected expenses. It’s also a terrific way to put you on a firmer financial footing today and for the long term.
This guide will help you learn basic budgeting rules that can help you get started building your monthly budget.
Step 1: Identify and Set Financial Goals
The first step to creating a monthly budget is to think about the future. Where you want to live, what you want to have, and towards what you are working. In short, your purpose.
One of the best ways to achieve your purpose is to think about what incremental steps to take in the short term so these build to your achievement over time. A few examples of short-term goals for many people include:
- Creating an emergency fund
- Paying off a credit card or loan
- Saving for a family vacation
While longer-term goals might be:
- Eliminating debt like college loans
- Increasing earning potential
- Buying a house
- Saving for college
- Building for retirement
Whatever your personal financial goals are, consider sharing them with someone else. Sharing your goals may help motivate you to stay on course with your budget and, according to at least one study, can lead to a 71% greater likelihood of reaching your goals.
Step 2: Know Your Income
Start by reviewing your pay statements to understand your monthly income. The amount you are earning will have a direct impact on your budget.
Budgets are about money coming in, and money going out. So try to keep your monthly budget simple and less emotional, because that will help you successfully stick to it in the long run.
Budgeting experts suggest listing your wants and needs before calculating your after-tax income to help clarify purpose. Then, you can adjust the numbers later when your income increases or your priorities change. By using this method, you can make more rational budgeting choices and eliminate or start saving up for some of your wants that don’t fit into your monthly budget.
Step 3: Track Your Expenses
Tracking where your money’s going monthly helps you determine where and how you need to adjust your spending habits. If you don’t keep an eye on your spending, you’re far more likely to spend money on things you want but don’t truly need. There are plenty of free online budget calculators you can use to calculate everything from life insurance planning to saving for higher education and growing your investments.
Another helpful tip is to open accounts for specific purposes. Instead of using your debit card for everything, open a separate checking account for your bills and savings accounts for short or long-term goals. You can even have your direct deposit:
- Put a percentage of your pay in savings for that trip or new car you’re saving for
- Put another percentage of your pay in checking then auto-pay your bills
- Have the remainder go to your debit card, and treat that like cash
Using a deposit system like this for certain purchases helps you know when you start to run low on cash. Reviewing daily spending also helps prevent you from going over your budget or dipping into your savings at the end of the month.
Step 4: Calculate Your Plan
One popular strategy many use to plan their budget is the 50/30/20 rule which suggests you:
- Focus 50% of your income on needs like housing, groceries, childcare, insurance, utilities, and transportation.
- Allow 30% for wants like eating out, travel, gifts, and entertainment.
- Designate the remaining 20% of your income to savings.
Dividing your income between needs, wants, savings, and debt repayment can lead to more financial freedom. It will also show you where you are spending too much to reduce those expenses and have a more stress-free life.
However, keep in mind that the 50/30/20 rule doesn’t work for everyone. It may not be feasible for you to save 20% depending on where you are at in life. You can aspire to this, but if it’s not perfect, don’t stress over it. Just keep it simple, start the habit of saving, and do what works best for you. Then make adjustments when things change – like getting a promotion or a raise.
Step 5: Commit to Your Budget & Reevaluate When Needed
Once you have it defined, the most important part of a budget is sticking to it each month. When you commit to a budget, over the long term, you’re more likely to:
- Feel in control of your finances
- Be prepared for unplanned emergencies
- Build an emergency savings account
- Be able to save more for retirement
- Pay off your credit cards each month
- Repay debt on time or ahead of schedule
Creating and sticking to an individual or family budget just takes a little practice, but you can do it. If your budget is simple and starts with a specific, realistic purpose, you’ll find it easier to stay on course over time. Be sure to reevaluate your budget a couple of times per year to ensure it’s still in line with your current income. And remember to add any new expenses that come up throughout the year. Here are some additional times that it’s a good idea to reassess your monthly budget:
- When you change jobs or lose a job
- When you have a significant life event like getting married or having a child
- After you take on added debt, like a mortgage.
Wherever you are in your financial journey, Community First Credit Union can help you plan for your monthly expenses and save for the future. To learn more or schedule an appointment, contact us online today or call us at 904.354.8537.