The first step in taking control of your financial life and making your money work for you is creating a good budget. This can help you get rid of your outstanding debts, allocate money to your savings, and feel more relaxed and less stressed. Budgeting doesn't always have to mean spending less. It may just mean putting your money down first before you indulge. By tracking your income and expenses every month, you can become a master of your money and meet your goals in a timely manner.
Method 1 of 3: Create a budget
Step 1. Create a spreadsheet to budget
You can create a simple spreadsheet in Google Sheets or Excel. Because your goal is to plot all your expenses and income over the course of a year, you should create a spreadsheet that clearly lists all of your information, allowing you to quickly identify areas where you can be smarter to spend.
Label the top row with the 12 months of the year
Step 2. Get your monthly income after taxes
Your net income, or the income you can spend, is your monthly income after taxes. In case you receive a salary, this will be a fixed amount every month that you can find on your pay stub. If your position is hourly, your income may vary from month to month, although you can get an average amount by looking at your last 3 or 4 pay stubs.
In case you are self-employed or self-employed, you may receive all your salary without deducting taxes. Try to set aside about 20% of your income to pay your taxes at the end of the year
Step 3. Make a list of all your fixed expenses
Fixed expenses are the things that you pay the same price for every month. It could cover rent, a mortgage, some utilities, student loan payments, or a car payment. Put a label for each expense in the column on the far left of the spreadsheet, and then write the monetary amount you spend in each box below the corresponding month. For instance:
- rent: $ 1,000
- electricity: $ 100
- car payment: $ 250
- student loans: $ 400
- credit card payment: $ 100
Step 4. Take note of your variable expenses
Variable expenses are those in which the monetary amount could vary from one month to the next. These are usually areas where it is easy to cut costs if you are trying to save money. Put these labels under your fixed expenses and then add them for each month that you can. For example, this could say in the month of March:
- supermarket: $ 350
- fuel: $ 120
- entertainment: $ 300
- personal items (hair care, makeup, clothing, etc.): $ 200
- vacation fund: $ 50
- savings: $ 200
Step 5. Compare your expenses with your income
To get a monthly budget, you must add the total amount of money you pay per month in fixed and variable expenses. Then subtract that amount from your monthly income. What's left is your disposable income or the money you have left over at the end of the month. If you have no money left or the number is negative, you are likely to spend more than you earn per month.
For example: $ 600 (fixed expenses) + $ 550 (variable expenses) = $ 1,150 per month. $ 2,000 (monthly income) - $ 1,150 (total expenses) = $ 850 disposable income
Method 2 of 3: Use your budget
Step 1. Pay all your expenses first
Before you move on to saving money or allocating money for a goal, you must be certain that you pay all your bills. Make sure you allocate most of your income each month to the bills you must pay for a home and food.
- There is no point in saving money if you still have bills to pay.
- You should make an attempt to allocate 50% of your income to your expenses or vital needs.
Step 2. Allocate your excess money to a specific goal
Now that you know how much money you have left at the end of the month, you can start to allocate that money to your goals. You can allocate it to your savings, pay your debts or add it to a college fund for your children. Make sure you know what you want to do with your extra money so that you can make a plan.
- For example, you could divide your extra money between paying off debt and putting it into a savings account every month.
- You could also give yourself an allowance to spend or invest the money you have left over each month.
- Try to allocate 20% of your income to your savings or to a specific goal.
Step 3. Make adjustments to your habits in case you overspend
If you calculated the amount of money you have left at the end of the month and it is not much, you may need to make adjustments to your spending habits. Try to spend less on optional items (for example, clothing, entertainment, and eating out).
- Not everyone is in a position to cut costs right now, and that's okay. Eating, paying your bills, and buying clothes are necessary to living life, and you shouldn't feel bad about it.
- Try to be realistic about where you can cut costs. While it's easy to say that you can cut your entertainment budget in half, it may not be fun to turn down a date with your friends every time they invite you.
- You should spend around 30% of your income on things you want but don't need.
Step 4. Set short-term goals that you can achieve in the space of 1 year
Now that you know the amount of money you receive and spend per month, you can set goals for your spending habits. Short-term goals are things that are achievable within 12 months and must be specific and achievable. For instance:
- deposit 5% of each salary in a savings account
- pay off your credit card balances in 12 months
Step 5. Set long-term goals that you can achieve in the space of a few years
Long-term goals are budget goals that could take a little over 1 year to achieve. They also need to be specific and doable, and you can think ahead. For instance:
- save $ 8,000 in an emergency savings fund
- pay off student loans in 3-5 years
- save $ 10,000 for a down payment on a home
Step 6. Write down what you spend every time you buy something
The best way to track how well you are doing is to take notes each time you spend money. You can do this on a piece of paper, make a note on your cell phone, or on a spreadsheet on your computer, whichever is easier for you. This will allow you to see where your money is going and where you may be able to reduce expenses in the future.
You must be very specific when writing down what you spend money on so that you do not forget it. For example, you could write "$ 22.95 on a new wristwatch for Mom's birthday."
Step 7. Buy cheaper items to cut costs
In case you find yourself spending too much, you may be able to make small changes to your habits that won't have a big effect on your life. For example, try going in bulk at the grocery store instead of going for brand name items. As another option, you can make your coffee at home instead of buying it from a coffee shop. Small changes like these can add up over time, so keep going!
You could pack lunch instead of buying it, exercise outside instead of a gym, subscribe to an online newspaper instead of buying it, or get books at the library instead of buying new ones
Method 3 of 3: Practice Good Budgeting Habits
Step 1. Review your budget every month
Your income or expenses may change from month to month, and it is important that your budget is kept up to date. Make sure to keep track of your total expenses and savings and make adjustments to your expenses if necessary.
- At the beginning of each month, look at the budget for the previous month and see how it went. This can help you make adjustments for the future.
- In case you got a raise or paid a debt, this can also have an effect on your budget.
Step 2. Make your budget easy by using a budgeting tool
While spreadsheets are great, it can be difficult to keep track of your information on your own. If you want your budget to run a little more smoothly, try updating your information on a budgeting app or website. This will allow you to already have a budget template and schedule reminders on the website to upload your spending habits there so you don't forget them.
Mint, YNAB, Quicken, AceMoney, and BudgetPlus offer budgeting services
Step 3. Indulge yourself periodically but within reason
Your money should serve you and not vice versa. You should not feel that you are a slave to your budget or money in general, so it is important that you allow yourself a little treat every month that does not throw your budget out of place.
Consider your budget and determine what you can afford to splurge on. Some months you might be able to buy a new pair of shoes, and in others you might buy a latte or a new notebook
Step 4. Pay off your debts every month, if possible
If you use credit cards or have student loan debt, you should try to pay at least the minimum amount each month to avoid high interest rates. If you are unable to pay your current balances, prioritize paying them within a reasonable amount of time so that you can reach a zero balance.
If you can afford to allocate more of your money to your debts each month, you should prioritize it. Paying the minimum amount each month can take a long time to pay off your debts and you may pay a lot of money in interest rates
Step 5. Keep money in savings for emergencies
You can never plan for emergencies, and if they catch you off guard, they can destroy your budget. Try to set aside some money every month just in case your car breaks down, you need medical attention, or you lose your job. This will allow you to have a "cushion" to help you.
- It's better to plan ahead for the unexpected right now than to let it catch you off guard.
- In the event that something unexpected should happen, contact your credit card company and your student loan company to find out if they can forgive you for some late payments or put off collection for a few months.
- The general rule of thumb is that you save enough money to cover 6 months of expenses. For example, if you spend $ 1,500 a month, try to save $ 9,000 for emergencies.