A budget helps you track your spending and ensure that you save enough to meet your goals. It can also help you pay off debt and invest in your future.
To create a budget, start by reviewing your monthly expenses. This might mean digging up old receipts or using a budgeting app to analyze your bank account.
1. Determine Your Needs and Wants
The first step to a healthy budget is to determine your needs and wants. Needs are expenses that are essential to your survival, such as rent or car payments, utilities and food. Wants are other expenses, such as entertainment and gym memberships.
Courtney Jespersen of NerdWallet suggests identifying your needs by asking yourself if removing the expense would negatively affect your ability to live and work. For example, a car may be a need at one point in your life but it could become a want when you no longer need to drive.
Once you’ve figured out your list of needs, reorder it to prioritize the most important items. Then, go through your list of wants and identify the ones that you can eliminate or live without.
2. Track Your Expenses
Keeping track of your expenses can help you pinpoint problem areas. It will also let you see how your actual expenses compare to the ideal ones you set when creating a budget. For example, you might be surprised to find that a certain category of spending is higher than expected.
You can use a spreadsheet or some type of tech tool to keep track of your expenses. To start, compile a list of your monthly spending categories. These should include fixed expenses such as rent or mortgage payments, utilities and insurance. Also consider listing recurring discretionary expenses such as streaming services, clothing and dining out. It may be helpful to categorize these even further, between needs and wants. This might help you avoid an unnecessary subscription service or an impulse buy at the department store.
3. Set Aside Money for Irregular Expenses
While you can plan ahead for some regular expenses like rent or fuel, other expenses such as car repairs, property taxes, holidays, vacations or unexpected events are irregular and often unpredictable. If these expenses hit all at once, they can ruin your budget or even cause you to go into debt. One way to manage these expenses is to create a savings account just for irregular payments.
The goal is to save enough money that when these expenses do come up, you can afford them without affecting your other financial goals. Another strategy is to use the 80/20 rule where 80% of your budget goes towards your needs and 20% goes toward your wants. You can also find software programs like EveryDollar that are specifically designed to manage irregular expenses.
4. Create a Savings Account for Irregular Expenses
Irregular expenses can easily throw off your monthly budget. They might be as expected as a seasonal vacation or annual membership fees for a gym, but they can also be unexpected, such as an expensive car repair or surprise medical bill.
To make sure you don’t get hit with a sudden irregular expense, start tracking your spending now. Look over bank or credit card statements for even up to 12 months to spot any non-monthly costs.
Tracking your spending is a critical part of creating a budget that works. Start by separating fixed and variable expenses, such as rent or mortgage, utilities, food and entertainment. Then use your monthly income to subtract each expenditure and see where the remaining money goes.
5. Create a Budget That Works
Whether you’re saving to buy a house, paying off debt or building an emergency fund, creating and following a budget can help you achieve your money goals. It also helps you get a handle on your spending and puts you in control of your finances.
Start by listing all the money you bring in each month, including salary, tips, side gigs and investment income. Then add up your monthly expenses, including bills and food shopping.
Use a budgeting method that works for you. This could be the classic category-by-category approach or something more manageable like the popular 50/30/20 budgeting rule. Track your expenses on a regular basis, such as once or twice per week, to make sure you’re staying on track with your budgeting goals.