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 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 a guide to help you create that budget and stick to it.
Why You Need A Budget
Budgeting helps you create an emergency fund
As a whole, Americans don’t put much thought or money into preparing for emergency situations. According to data from the Federal Reserve, 40 percent of Americans cannot 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.
You won’t rack up credit card debt
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 now carries about $6,354 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.
Budgeting helps you find out where your money actually goes
Off the top of your head, do you know how much you spend on takeout and restaurants for one month? One of the biggest benefits of making a budget is that it forces you to take a detailed look at what you’re actually spending money on. For example, if you put off saving for retirement because you never seem to have enough money at the end of the month, but you’re paying for a massive cable package you rarely use, budgeting will highlight this discrepancy. Chances are, you’ll locate a few places you can cut back and save for retirement, a new home or a child’s college fund.
How to Create A Budget
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.
How to Stick To Your Budget
Step 1: Use a budget app
Keeping track of all your expenses by hand can be annoying and tedious. Budgeting apps like Mint can automatically import your spending data, analyze your spending habits and even suggest places where you can afford to cut back.
There are also a number of Mint alternatives available for free or a low monthly fee to suite each saver’s individual needs. For example, if you share your budget and finances with a spouse, you might want to consider using Goodbudget, which allows multiple users to be logged onto the same account simultaneously.
Step 2: 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.
Step 3: 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.
Step 4: 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!
Budgeting isn’t a solo mission. To be successful, you’ll need to have every member of your family working together towards the same goal. Create a Goal Board with your monthly budget to compel a spouse to see the bigger picture. Get kids in on the action and turn saving into a game. When kids resist the urge to use their allowance to make impulse purchases, reward them with a fun, free activity like a movie on Netflix or an extra hour of their favorite YouTuber!