If you find yourself living from one paycheck to the next with little savings, it’s time to learn how to budget money. Knowing how to live within a budget helps you make the most of your financial resources. Smart money decisions are vital to meeting both short- and long-term financial goals.
Start with your income
To get started, you put a budget plan in writing. An old-school notebook and pen works fine, or you may invest in online or desktop software, download one of many budgeting apps, or use a budget template. More about these options later.
When making your budget, it is important to be as comprehensive as possible. First, list all of your income, including money from the following sources:
- Child support
- Freelance income
- Reward program payments
Some individuals like to use their net (take-home) income as their starting figure, while others prefer to start with their gross income and make each deduction a line item in the budget. If you have numerous deductions from your paycheck, such as insurance premiums, retirement contributions and payments to flexible spending accounts, you may find it beneficial to include all of those items in your budget.
Then, turn to your expenses
Once you account for all of your income sources, list your expenses. Many find it helpful to divide them into two categories: fixed and variable.
Fixed expenses stay the same each month; usually, you don’t have a ton of control over them — at least in the short term. Variable expenses fluctuate, and often you can make immediate changes.
Expenses to incorporate in your budget include:
- Housing payment
- Insurance premiums
- Car payment
- Child care costs
- Monthly fees and subscriptions
- Car and home maintenance
- Debt payments
- Medical costs
Pay attention to irregular expenses
When making your budget, take note concerning the frequency that an expense falls due (monthly, weekly, quarterly, annually) and set money aside so that you’re paying toward the less regular ones during each pay period.
For example, if you pay your car insurance premium annually, divide the amount of the premium by 12 so that you know how much to put aside each month. Your water bill may require quarterly payments; divide the quarterly payment by three and set the required amount away each month until the payment comes due.
Monitor where the money really goes
After making your budget, you need to track your spending to see how it compares to your budgeted amounts. Once you know how much you are spending in a specific category, you can decide if you want to take steps to reduce your spending or if the budgeted amount is unrealistic.
You have a couple options for keeping track of your spending. As mentioned, a pen and pad of paper work fine for keeping a running total of your spending. However, those with loads of transactions to account for may find that writing it all down is very cumbersome. Another option is to use a spreadsheet to keep track of expenditures. Once you enter your transactions, use the spreadsheet to see totals for your various budget categories. This, too, requires discipline.
Electronic options include desktop or online software. Numerous apps are also available for your iPhone or Android smartphone to monitor your spending. These apps link to your bank account or credit cards to keep tabs on your money. You can even use the apps to categorize your spending. If you believe that you are likely to exceed your budget, an app keeps you updated on your spending so that you can adhere to your limits.
Pay yourself first
Though it’s a common piece of advice in the financial world, paying yourself first ensures that you are working toward your financial goals. Once your paycheck hits your bank account, it’s easy to view the entire amount as available for spending. Instead, set aside your savings right from the beginning. Payroll deductions to retirement accounts, such as a 401(k) or Roth 401(k), take care of this important line item immediately.
Set up your direct deposit to fund your savings goals. Some individuals like to have a certain account for each goal (vacation account, holiday account, car repair account), while others are okay with having their savings in a single account. Opt for the method that encourages you to work toward your goals and stick to your budget.
Using direct deposit into a high-yielding savings account will help you attain your goals more quickly.
When making your budget, it’s tempting to make the budget as bare bones as possible, eliminating categories such as entertainment or gift giving. Such lofty goals are not sustainable, especially in the long term. It simply isn’t realistic to say you will never eat out or avoid going out indefinitely. Instead, budget a reasonable amount for these non-essential items.
Once you learn how to budget money and design a comprehensive budget, keep track of your spending to see if your expenditures are in line with your designated amounts. By doing so, you pave the pathway to a bright financial future.
Use Bankrate’s home budget calculator to see how to start budgeting your money.