I am an investor who has turned my life around by getting out of debt, reading books and taking courses on financial education.
Budgeting is a key component of saving money. It helps you track your spending and find ways to reduce your expenses.
There are many ways to successfully budget, but the most important thing is that it has to be easy for you to follow.
Also, when creating your own budget, make sure it fits into your lifestyle and does not put too much financial strain on you.
Following are six basic steps to budgeting your way to savings.
Step 1: Figure Out Your Income
First you need to know the total amount of all your monthly income.
Start by listing all of your monthly income.
If your income varies every month, take the last 3 months of income and do the average. Now use that as your monthly income.
Step 2: Calculate Your Monthly Expenses
Now that you know your monthly income, start listing all of your expenses.
Break down all of your expenses into categories such as medical, food, rental, etc. Then think which one of them are fixed costs, variable costs, and discretionary costs.
Fixed costs are those that you must pay and remain the same amount (rent, mortgage, loans etc.).
Variable costs are those that you must pay and vary (electric bill, gas bill, groceries, fuel etc.).
Discretionary costs are those that are nonessential and you can do without (entertainment, travel, dining out etc.)
A good spreadsheet should have at least three columns to accommodate your fixed, variable, and discretionary costs.
Now add all your fixed expenses and you will know the total of your monthly obligations.
Then, take the total monthly income, subtract the total monthly obligations (your fixed and variable costs), and you will have a clear idea of how much money you have left over each month for discretionary spending and financial goals.
Step 3: List Your Financial Goals
At this point, it’s time to list your financial goals. Financial goals have to be listed in order of priority and can include anything, such as saving for a down payment for a house, paying out all your debts, saving for retirement etc.
You will use part of your income to cover your long term financial goals.
I would personally start with saving for emergencies or an emergency fund so to cover unexpected expenses such as doctor visits, car repairs, dentist, etc.
Step 4: Identify Your Discretionary Expenses
Next, take the monthly discretionary costs you have previously identified and add them up.
Now, after allocating the monthly income into the financial obligations and financial goals, you can use the remaining money for your discretionary expenses.
Step 5: Create a Complete Budget
By subtracting your total expenses (fixed, variable and discretionary) from your income, you'll create a complete budget view.
To have a full picture of your expenditures, add up all the monthly expenses from the fixed costs, variable costs, and discretionary costs and subtract it from the monthly income.
If the result is a negative number, that means you are spending more than you are making.
If the number is positive, then congratulations, you spend less than what you are making, which means that you can speed up the process on becoming financial independent.
Step 6: Check Your Budget Regularly
Constantly monitor your budget plan for any changes in your financial situation and make the proper adjustments as needed.
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The 50/30/20 Rule
If you are struggling to follow you budgeting plan, try to manage your money using the 50/30/20 Rule.
The 50/30/20 rule can help you stay in control of your spending by showing where the money are going and therefore, by creating a budget.
Here is how the 50/30/20 Rule works:
Fifty percent of your budget should be spent on needs which are things essential to life and that you literally cannot live without.
Things such as: groceries, basic utilities, housing rent or mortgage, any minimum loan payments, transportation expenses, insurance, childcare, any other expenses that are necessary for your work, etc.
If your needs exceed the 50% budget, then you can try to save money by shopping for cheaper insurance, refinance your mortgage, change with a better phone plan, etc.
Or you can take away from the wants for a while, I know that it can be difficult, but if you're eager to get out of debt as fast as you can, all of this is needed until you have some savings or your debts are under control.
Thirty percent should be spent on wants which could be classified as things that bring you joy and happiness but are NOT essential to living, such as: dining out, entertainment, hobbies, gifts, travel, etc.
I feel like a lot of people confuse wants for needs, and we know the difference deep down, but we really need the self-discipline to say no.
The final 20% should be spent on savings or emergency funds, paying off debt, and retirement planning.
Try to start your emergency fund with $500 if you can. You should have three to six months' worth of living expenses in the emergency fund so to cover for emergency expenses.
When paying off debt, such as credit cards and personal loans, start from the ones with the highest interest rates.
This will help you figure out where you can cut back in order to save more money!
Extra Tips For a Successful Budgeting Strategy
In order to be successful in your budgeting strategy you must rely on the following principles:
- Be consistent with what you're doing
- Be realistic with what you're doing
- Track and monitor every penny that goes out of the account
- Create a spreadsheet. You can make a spreadsheet by using Google Sheets or Microsoft Excel. Once you know where your money goes, it's easier to decide how to spend less, or in other words, how to successfully budget.
As seen, you have many options to help you succeed.
Consider that money management is 90% discipline and 10% knowledge.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Alex Farris