How to Start a Budget in 7 Steps
Budgeting can help you plan for short- and long-term goals, spend only what you need and reduce debt. You can create a budget plan that fits your objectives and needs by following certain guidelines. Learning about the steps you can take to start a budget can help you be a more conscientious spender. In this article, we explain how you can start a budget.
Why is budgeting important?
Budgeting allows you to allocate your money toward expenses, ensuring you have enough to meet your financial goals. Following a budget can keep you out of debt or help you pay off debt. It can also allow you to spend money on leisure or recreational activities. Creating a budget to fit your needs can help you spend within your limit while saving for different needs.
There are many different budgeting options you can choose from based on your goals and living expenses. Additionally, there are many applications that can help you keep track of your spending so you stay within your budget.
How to start a budget
Follow these seven steps to start a budget:
- Calculate your income
- List your spending
- Set your goals
- Choose a budgeting strategy
- Adjust your habits
- Automate your savings and bills
- Track your progress and revisit as necessary
1. Calculate your income
The first step in starting a budget is finding out how much money you make. Calculate your net income, which is your final, after-tax take-home pay. You should include your full-time job, freelance work and any other income sources, like income from rental properties or dividends. It can be helpful to divide your net income into monthly amounts to prepare a more accurate budget.
2. List your spending
Begin by listing all of your fixed expenses, such as mortgage or rent, car payments and student loan payments. These are expenses that stay the same each month. After you have listed these expenses, list your flexible expenses, such as dining, entertainment, travel, groceries and other expenses that vary from month to month. Looking at your credit card and bank statements can be useful. Finally, add in other expenses, such as taxes and insurance, which may be billed annually, semi-annually or quarterly.
3. Set your goals
Setting your goals will determine your success in planning and keeping a budget. You should make a list of both short- and long-term financial goals you want to accomplish. Short-term goals, like saving up for a vacation, should take a year or less. Long-term goals, such as saving for retirement or your child's college education, are goals that will take years to accomplish. Identifying your goals will make it easier to follow your budget. For example, it can be easier to decrease your spending if your short-term goal is to reduce credit card debt.
4. Choose a budgeting strategy
There are many budgeting strategies, but it's important to find the one that is right for you. Some of the more well-known budgeting strategies include the envelope system, the zero-based budget and the 50/30/20 budget:
- Envelope system: This strategy is best for beginners as it only allocates a month's wages and spending at a time. With this system, you take a few envelopes and write what you plan to buy on them—groceries, rent and other expenses. Then, you put the money you expect to spend on each expense in the envelope. When the money is gone, you can't spend any more.
- Zero-based budget: Also called the zero-sum budget, this is a popular option that justifies each dollar you spend. All your money goes to expenses, savings and debt payments. In this way, it is similar to the envelope system. If you have money left after all your expenditures, you either assign it to next month's budget or allocate it to another category.
- 50/30/20 budget: In this system, no more than 50% of your income goes to needs, no more than 30% goes to wants and at least 20% goes to savings and debt repayment. This budgeting system is best for a long-term plan. It allows you to have manageable debt, occasional indulgence and savings to pay irregular or unexpected expenses. This budget is popular for many people, as it's easy to set and follow.
5. Adjust your habits
Once you assess your income and spending, consider adjusting your habits to meet your budgeting goals. In many instances, there are ways to reduce or eliminate spending to fit into a budget, even if it's for a short amount of time. For example, if you buy coffee five days a week at $4 per coffee, you're spending $20 per week on coffee. Over the course of a year, that's more than $1,000. If you stop buying coffee or reduce the days you make the purchase, you can put that money toward other financial goals.
6. Automate your savings and bills
Try to set up auto-pay on your savings account and different expenditures, such as your electricity and internet. Automated payments can help you budget with less hassle. Sending money directly to your savings account can reduce the temptation to spend money as well.
Many payroll systems allow you to set up your paycheck to automatically deposit in different accounts, meaning you can send some money to both your checking and savings accounts. Some companies also offer discounts when you set your account to auto-pay, saving you additional money.
7. Track your progress
It is important for you to track your progress and review your budget frequently. Your budget will likely change over time depending on your salary and financial goals. For example, if you get a raise, you can increase certain areas of your budget. If you pay off a debt, you can reallocate that money to savings or a new goal. Reviewing your budget each time you reach a milestone or encounter a change can help you keep your focus on long-term financial goals.
Article published by indeed