Have you gotten a raise at work, yet still can’t seem to escape the paycheck-to-paycheck cycle? Does it seem like every time you pay off one bill, two more appear in its place? If you answered “yes” to any one of these questions, chances are, you need to make or re-evaluate your budget.
Create and stick to a budget plan to build a nest egg for retirement or to use as an emergency fund. A budget will help you know where your money is going each month and help you make the most out of every dollar in your paycheck.
Don’t have a household budget and need a place to start? We’ve created this guide to teach you how to create a budget and stick to it!
5 Benefits of Creating a Budget
Creating a budget may seem like a tedious and time-consuming task, but the benefits far outweigh the effort involved. A budget serves as a financial roadmap, providing a clear picture of your income and expenses. Let's explore some of the key benefits of creating a budget.
Create an Emergency Fund
As a whole, Americans don’t put much thought or money into preparing for emergency situations. Estimates suggest that two out of three Americans don't have enough to comfortably cover a $400 emergency expense.
Emergency expenses can range from unexpected medical emergencies to overlooked bills, and even a small expense can hurt you in the long-term if you aren’t prepared for it. Factors such as compounding interest can put you in a situation where you’re completely strapped for cash. Budgeting will prevent you from putting unanticipated bills on a credit card, taking out a personal loan or a high-interest payday advance. The ideal emergency fund has three to six months of living expenses saved up, but experts advise building a small $1,000 emergency fund to start.
Reduce Your Dependency On Credit Cards
If you’re like most Americans, you probably rely on a credit card to cover at least a portion of your expenses. While responsible use of credit cards can help you build credit in order to ease the loan approval process and additional lines of credit, you may quickly find yourself in over your head. Statistics suggest that credit card debt has steadily gotten worse over time; the average American carries about around $5,733 in credit card debt. That’s 18.5 percent higher than in 2013. Credit card debt does more than just add an interest payment to your monthly list of payments; it also makes it more difficult to live within your means and determine how much money you’re really spending on a month-to-month basis.
Budgeting can help you avoid excessively spending money that you don’t have and relying on credit cards to bail you out of unfortunate circumstances. It can also help you make sure you’re not overspending in a certain area, a detail that can be obscured when you constantly charge expenses to a credit card.
Less Stress And More Control Over Your Finances
One of the primary advantages of a budget is that it helps you gain control over your finances. By tracking your income and expenses, you can identify areas where you may be overspending or making unnecessary purchases. This allows you to make informed decisions and prioritize your spending, ultimately leading to better money management. With a budget, you can set realistic financial goals, such as saving for a down payment on a house or paying off debt, and work towards achieving them.
At the same time, budgeting also helps to reduce financial stress. When you have a clear plan for your money, you are more likely to feel in control of your financial situation. Budgeting allows you to allocate funds for various expenses, such as bills, groceries, and entertainment, so you can avoid living from paycheck to paycheck. This financial security can alleviate anxiety and give you peace of mind, knowing that you are prepared for unexpected expenses.
How to Create A Budget in 5 Steps
Creating a budget is an essential step in taking control of your finances. It gives you a clear understanding of where your money is going and helps you make informed decisions regarding your expenses. So, how can you create a budget that works for you?
Step 1: Calculate Your Monthly Income
The first step to creating a sustainable budget is figuring out how much money you have coming in. If you have a salaried paycheck, this is a pretty simple feat. Just make sure to consider tax deductions and contributions to your employer-sponsored 401(k) plan. If you work part-time, you’re an independent contractor or your pay is hourly, calculating your monthly income is a little more complicated. Look at your total income from the last few months to give yourself a general idea of how much money you expect to take in each month. Give yourself a cushion in case you work a few fewer hours than expected. Don’t forget to include income from any extra contracting, consulting, or side hustles you’re involved in.
Step 2: Calculate Your Expenses
If you want to save effectively and stop spending more than you earn per month, calculate all your expenses. Sit down with last month’s bank and credit card statements and divide your expenses into “needs” and “wants.” Your “need” category should only include things that are absolutely necessary for your continued quality of life. Your “needs” list may include mortgage and car payments, student loan and credit card minimum payments, rent, utilities, groceries and office supplies if you run your own business. Everything that is not an essential expense should be classified in your “want” category. “Wants” can include clothes, restaurants or delivery, cable expenses and entertainment.
Step 3: Divide and Conquer
After you’ve calculated how much money you have coming in and out for essentials, budget the remainder into the “wants” category. Budget a little more money than you think you’ll need to start. Make sure you don’t budget more than your total monthly income after tax and deductions, and remember to leave money for debt payments. Don’t forget to leave a cushion of about 10 percent of your monthly income for emergency or unexpected expenses, and budget in a percentage to save each month if you’re able.
Step 4: Record Your Spending and Track Your Budget
Record your spending and track the amount spent on each category. If you mess up and overspend, move funds from another nonessential category or have miscellaneous expenses cover it. A good budget app is an essential tool in making sure you stay within your limits.Try to stick to your budget as well as you can. Over time, you will find that it gets easier and easier to save.
Step 5: Review Your Budget Regularly
Lastly, it's crucial to review and adjust your budget regularly. Life circumstances change, and your budget should reflect that. Review your budget monthly and make necessary adjustments to accommodate any new expenses or changes in income. This helps you stay on top of your finances and makes it easier to achieve your financial goals.
Helpful Tips For Sticking To Your Budget
Sticking to a budget is often easier said than done. We all know the importance of managing our finances wisely, but sometimes it feels like our money just slips through our fingers. Whether you're saving for a big purchase, trying to pay off debt, or simply want to have more control over your spending habits, these helpful tips can assist you in sticking to your budget and achieving your financial goals.
1. Be Realistic
Creating a budget plan is critical, but you want to make sure that it's both realistic and detailed enough to be useful. Take the time to track your income and expenses, and identify any areas where you may be overspending. This will enable you to set clear financial boundaries and determine how much you can allocate to different categories such as groceries, entertainment, and savings. Be sure to include a small allowance for unexpected expenses or emergencies.
It's particularly helpful to set specific goals and rewards for yourself. Saving money can be challenging if there is no clear end goal in sight. Whether it's a vacation, a new gadget, or paying off a debt, having a tangible reward can make it easier to stay motivated and resist the temptation of impulsive purchases. Additionally, breaking down your goals into smaller milestones can provide a sense of accomplishment along the way and keep you focused on the bigger picture.
2. Use a Budget App
Keeping track of all your expenses by hand can be annoying and tedious. Budgeting apps can automatically import your spending data, analyze your spending habits and even suggest places where you can afford to cut back. S
Some even offer budget alerts to help you understand if your sticking to your budget plan or if you need to make the effort to steer back on course.
3. Automate Your Minimum Payments and Savings
Do you seem to constantly forget when bills are due? Sick of racking up overdraft fees, late charges and interest on your accounts? Many credit card companies and service providers allow you to automatically schedule minimum payments in advance, allowing you to avoid excessive charges with virtually no effort.
4. Hide The Credit Card
Credit cards make it easy to spend. When you want to buy something that isn’t in your budget, it can be easy to feel like you’re not really spending money if you don’t see the cash leave your wallet or be deducted from your bank account.
To limit temptation, try hiding your credit card somewhere it won’t be easily accessible, except in the event of an emergency. You could stash it in a locked desk drawer or give it to a trusted friend or family member. Do you find the allure of your credit card too strong to resist?
Check out our guide on how to pay down credit card debt for some tips to curb your spending.
5. Wait to Splurge
Have a bit of extra cash burning a hole in your pocket? Instead of immediately giving into temptation, wait it out. Install a 48-hour wait on impulsive purchases to help curb their appeal, which allows you to re-evaluate your budget to see if you truly can afford that gorgeous new pair of high heels or the latest video game release.
Plus, if you wait until next month (when your “wants” category resets), the item might be on sale!
Final Thoughts
Creating a budget plan is an essential tool for financial success. With a budget, you'll have the knowledge of where exactly your money is going and put yourself in a stronger position to build wealth.
By establishing clear goals, evaluating your income and expenses, setting realistic spending limits, and regularly reviewing your budget, you can take control of your finances and work towards achieving your financial goals.
Frequently Asked Questions
How do I start creating a budget?
To start creating a budget, first gather all your financial information, such as income and expenses. Next, categorize your expenses into fixed (rent, utilities, etc.) and variable (groceries, entertainment, etc.). Then, subtract your expenses from your income and allocate some funds for savings or emergency funds. Finally, monitor your budget regularly to ensure you stay on track.
What are some common budgeting mistakes to avoid?
Some common budgeting mistakes to avoid are not tracking your expenses, underestimating or forgetting irregular expenses (like car repairs), not revisiting and adjusting your budget periodically, and not accounting for unexpected emergencies. It’s crucial to be realistic, flexible, and diligent when creating and maintaining your budget.
How can I manage my budget effectively?
To manage your budget effectively, consider using budgeting tools or apps to track your income and expenses automatically. Additionally, set specific financial goals, such as paying off debt or saving for a vacation, to stay motivated. Furthermore, be aware of any unnecessary spending habits and find ways to cut back on expenses. Regularly reviewing and reassessing your budget will help you stay in control of your finances.