It’s time to talk about the B-word. Budgeting.
Just like buying may bring you euphoria, budgeting may bring you anxiety. If it does, don’t run for cover just yet! The following steps will help you navigate the process of budget-building and help you come out the other side unscathed. Just remember, getting started is half the battle.
Understanding the Benefits of a Budget
The first mistake many people make when they write off budgeting is that they think of it as a diet: restrictive and determined to leech the fun out of everything.
But budgets aren’t all that restrictive or fun-sucking. Think of your budget as a means to have close to total visibility of your finances. Think of it as necessary reinforcement needed to feel financially secure. It’s a system designed to keep your spending in check, so you don’t spend money you don’t have on what you don’t need.
In other words, budgeting is a tool for guidance—affording you a better understanding of how you spend your money and where you can make adjustments.
Who knows? By calculating your budget, you might even find that you can go out and splurge on date night more often!
Step 1: Calculate Your Monthly Income
The first step to calculating your monthly budget is to calculate your monthly income. Your monthly income consists of the total amount of money you take home from however many paychecks you get per month. Don’t forget to include any payment you receive from side-hustles!
*Only calculate the total amount of money you earn after deductions like taxes, social security, and 401(k) are taken out of your paycheck!
Step 2: Calculate Your Fixed Monthly Expenses
Next, you need to calculate your fixed monthly expenses. These are reoccurring expenses that you consistently spend the same amount of money on per month, like your rent or mortgage, loan payments, and monthly minimum credit card payments. These expenses should take priority.
You may also want to add the amount of money you spend on groceries and commuter fees to your fixed monthly expenses. However, this depends on whether or not these costs fluctuate drastically month-to-month.
Subtract the total of your fixed monthly expenses from your monthly income. That’s how much money you have left to spend on shopping, going out, food, etc.
For example, let’s say that your income is $3,000 per month, and your fixed monthly expenses add up to $2,000 a month. You will then have $1,000 to spend or save as you please. Take note that it’s best to save as much as you can, just in case unexpected expenses like home or auto repairs come out of the blue.
Step 3: Track Your Spending
Dig through your bank statements. Write down each charge you have on your debit and credit cards to determine how much you spend on food, shopping, and other miscellaneous things.
Every time you spend money, write down the transaction like you would in a check register. Add these totals up. Seeing the totals laid out in front of you may be jarring, but it allows for clarity.
This step takes willpower and consistency. But knowing how much money you spend shopping or going out to eat each month can help you become more aware of your habits. In turn, awareness can help you adjust these habits if you have to.
Step 4: Make Adjustments & Have Fun With the Leftovers!
By tracking your spending, you might find that you spend half of your $1,000 budget just on going out! Instead, you could cut back on your trips to that expensive Italian place down the street and stash more money into your savings account. Or perhaps you could put those extra funds towards a summer vacation, or an additional loan payment.
Once you have a budget established, you will know how much cash you have to put towards responsibilities like rent and bills. You can do whatever you want to do with the money you have left.
Budgets get a bad rap. They can be frustrating, stressful, and time-consuming to sort out. And if you start your budgeting journey in want of willpower, it makes it that much harder to stick to a consistent plan.
Don’t lose hope. Budgets are meant to keep you on the fast track to achieving your financial goals. They are intended to provide security and structure while illuminating the appropriate amount of spending freedom you can indulge in without compromising your monthly necessities like rent and groceries.
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