Learning how to budget money doesn’t take a genius and these easy-to-follow steps would show you the sensible way of creating a budget.
In this article:
- Begin with What Comes into the Budget
- Make a List of All Monthly Expenses
- Separate Them into Fixed and Variable Expenses
- Total Your Expenses and Subtract Them from Your Income
- Revisit Your Budget Frequently
How to Budget Money | Five Steps to Save and Build a Secure Financial Future
1. Begin with What Comes into the Budget
Knowing how to budget money spells a world’s difference between living in debt and securing your financial future.
A US News and World Report Money data suggests:
- Two-thirds of Americans would have difficulty coming up with $1,000 to fund an emergency.
- About 35% of American adults (some 77 million people) have debt collections reported in their credit files.
- Only 46% of Americans have some form of a rainy-day fund.
- A mere 24% of millennials demonstrate even basic financial literacy while 69% consider themselves to be highly knowledgeable when it comes to financial matters.
Creating a monthly budget can be overwhelming, especially if you’ve never done it before, but it’s possible. In fact, it doesn’t require extensive financial skills.
To begin with your personal budget or home budget, you need to know your income. Some people would consider their gross wages, but keep in mind, you have contributions and taxes to pay.
Learning how to create a budget, therefore, is to consider your possible salary deductions. These include the following:
- 401(k) contributions
- HSA contributions
- Payments to company-sponsored insurance plans
The balance will be the amount your household has to work with. Ideally, your budget should have enough room for savings and some wants. Otherwise, you may need to reassess your lifestyle and make some sacrifices for the sake of your financial health.
2. Make a List of All Monthly Expenses
A budget sheet has two general components: cash in and cash out. The latter refers to your expenses.
To learn how to budget money, list down all your spending. These may include the following:
- Mortgage/rent payments
- Car payments
- Home and auto insurance
- Groceries and Food
- Credit card payments
- Student loan payments
- College fund contributions
- Dry cleaning
- Trash collection fees
- Lunch money
- Tuition for daycare and school for your kids
- Mobile phones
- ATV, RV, and PWC loan payments
- Subscription services (boxes, magazines, memberships, etc.)
Besides the monthly expenses, consider your yearly cash-outs such as annual insurance premiums or gym memberships.
The best way to know your expenses is to list them down. This can be time-consuming, but it works. If you want a snapshot of your spending, you can do it for at least 15 days to a month. The most important thing is you know where your money is going.
3. Separate Them into Fixed and Variable Expenses
To learn how to create a budget – and a good one at that – determine your fixed and variable expenses.
Fixed expenses are the ones that do not fluctuate every month. In other words, their value remains the same throughout the year. Some of the examples are:
- Mortgage payments
- Car loans
- Cable and Internet
- Garbage collection
- Credit card payments (to some extent)
- College fund contributions
Variable expenses, on the other hand, may experience wide swings seasonally. For example, they may increase significantly during the holidays. These may be:
- Entertainment expenses
- Food costs
Defining them is essential when you’re trying to know how to budget money. You will have an idea where to adjust in case your funds are not enough. Variable expenses, for instance, often provide the greatest opportunities for savings. You may even remove some of them entirely.
4. Total Your Expenses and Subtract Them from Your Income
This part is easy, but it can be challenging for some people. It can be painful to see how little money is left in the end.
Knowing the total, though, helps you make wiser choices, which is one of the objectives of creating a budget. If you have extras, you can decide whether to add more to the emergency fund or pay credit card debt. You can speed up mortgage or auto loan repayments or pay your back taxes. (Conventional wisdom suggests whittling down the debt with the highest interest rates first.)
It may also be possible to have a deficit. This happens when your expenses are bigger than your income. At this point, you have two choices to make: increase your wages or cut back on expenses. If you want to do the latter, start with the ones you can live without such as subscription services.
You can also take note of these budgeting tips:
- Stop the coffee runs. Invest in a quality coffee maker that allows you to make your favorite cup at a fraction of the cost. Doing this can also help you cut fuel costs by avoiding long drive-thru lines.
- Get rid of unnecessary recreational equipment (such as RVs or ATVs). In the process, you can save insurance.
- Switch to a prepaid mobile phone service with fewer frills and lower costs if possible.
- Consider eliminating cable for an online subscription service.
- Skip the night at the movies and hit Redbox.com instead or one of the streaming services.
- Park farther away from the office. Spaces may be much cheaper.
- Cut entertainment expenses by limiting your dining out. If you’re craving for something fancy, opt for food deliveries or ingredient subscription such as Blue Apron.
The key is to get creative with cutting costs, so you can live better within your means. It may even help increase your emergency fund.
5. Revisit Your Budget Frequently
One of the best tips on how to budget money is to reassess it regularly. It can be monthly or quarterly. It doesn’t really matter. Reviewing it frequently helps keep you on track and vigilant about following your budget, so you can accomplish your goals. Furthermore, you may need to adjust it to reflect your changing needs or financial status. For example, you may have received a salary increase. It can improve your disposable income but may also potentially raise your tax liability.
Learning how to budget money is not for the faint of heart. It isn’t always easy to decide which expenses are essential and which are not. Plus, it’s normal to want a certain lifestyle. You need it, though, if you want to achieve financial goals such as paying taxes on time or a debt. If you need help, Tax Relief Center is here. With our financial expertise, we can provide you with a better understanding of your wealth. We can help improve your financial knowledge so you can make smart decisions.
What are your tips on how to budget? Don’t forget to leave your ideas below.