What is a budget?
The biggest problem with money is that it doesn’t spontaneously multiply, no matter how nicely you ask it to. With that in mind, the best way to stay on the right financial track is a word that makes many people wrinkle their noses: a budget. Essentially a plan for how much you want to spend, and where that money will go, it can help rein in unexpected expenses and shortages for a less-stressful financial outlook.
Knowing how to make a budget is the first step toward keeping your wallet and bank account healthy and setting aside savings for the things you want but might not necessarily need in the short term. Whether you’re making a personal budget for yourself or a household budget that includes your partner and/or family, there are a few things you’ll need to keep in mind.
Why is budgeting important?
Writing things down and keeping records is a vital part of any adult responsibility, from buying a car to renting an apartment. Having a hard-and-fast record of what you agreed to allows you to review it if anything’s in question, and a budget follows the same logic.
Consider it this way: if you go to the grocery store hungry, and without a plan, there’s a good chance you’ll end up with a lot of expensive, unplanned-for snacks in the cart, right? Go into the store with a list and a plan, however, and the checkout experience is bound to be far less chaotic. That’s what a budget does, only for your finances rather than your pantry.
Budgeting lets you save money for the things that are important to you in the medium-to-long-term, such as taking vacations or buying gifts for others around the holidays. It helps with planning for the future, especially when it comes to big purchases. Finally, it gives you much-needed peace of mind when it comes to your finances, removing some of the anxiety of wondering if you can pay your upcoming bills without overdrafting.
How to make a budget
Making a budget that will stand the test of time starts with being honest. That means sitting down with your bank statements, your banking app, or your online account statement and really considering how you’re currently spending your money.
These three questions will give you the big picture you’ll need to start crafting your budget.
How much do you have coming in?
Be conservative with your estimate of income if you work hourly or have a variable paycheck. Use an average, rather than assuming best-case scenario for your direct deposit or paychecks.
How much do you have
Tally up your auto-payments, including utility bills, mortgage/rent, car insurance, and so on. Again, if these costs vary, use an estimate that factors in several months’ worth of figures.
How much do you have
Be truthful with yourself when it comes to your periodic spending. If you spend $8 a day on coffee, write it down; don’t try and minimize that number yet. This is just a fact-gathering step, and you aren’t making spending decisions just yet.
Finalizing and utilizing your budget
Once you have a complete financial picture of your income-vs-spending habits, now’s the time to figure out how you can cut back or move around your spending to better align with your periodic income. Determine how much you have to spend voluntarily versus how much you need to spend on bills, and arrange your habits accordingly.
If you have trouble with reining in your spending, consider getting gift cards to specific stores (like that daily coffee habit) and using those throughout the month. This practice will give you a set amount of money to use, and you’ll know that once the card zeros out, you’ll have to adjust your practices until the next paycheck drops into your account.
Why you need a budget
If possible, it’s best to build in some savings with your budget—if you’re wondering why budgeting is important, this is your answer. Savings are very hard to lock in (and not raid) without a plan in place. Bear in mind that setting up a budget and keeping yourself in financial control requires discipline. Even the best program, spreadsheet or list won’t work without frequent account check-ins and willpower.
Stay in touch with your budget by making a habit of entering receipts and expenditures, or taking a long look at your finances, at the same time each week. By setting aside specific time to concentrate, you’ll be better able to spot patterns in your spending habits, or an ongoing expense you forgot to factor in. This is also a great method for finding and weeding out unnecessary recurring charges, like that streaming or subscription service you no longer use.
Finally, remember that the ultimate goal of a budget is to make your life easier. It’s true that setting up a budget will require some research, digging, and organization in the short term, but it’s time well spent. Ultimately, your household budget will keep your finances running smoothly by avoiding issues like insufficient funds and ‘surprise’ bills that get lost in the paperwork shuffle.
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