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How to Create a Budget that Works

Kathy T. believes that the best way to improve our finances is to create a budget and stick with it.

Do You Really Need a Budget?

The thought of setting a budget can be really stressful. The thought of potentially not having enough money for the things we want can be difficult. However, without a budget it is all too easy to spend money on items we don't need, leaving us without enough to actually meet our expenses. Everyone needs a budget because it's the only way to really keep our finances on track.

I used to think I didn't need a budget, but I have learned that unless I know where my money is going, I end up giving in to impulse purchases and losing track of my long term goals. This is the process I use.

Live a Fun and Enjoyable Life by Budgeting

Budgeting gives you the freedom you need to enjoy your life. Worrying about money isn't fun, and sticking with a budget will give you confidence in your finances.

Budgeting gives you the freedom you need to enjoy your life. Worrying about money isn't fun, and sticking with a budget will give you confidence in your finances.

Follow These Steps to Create Your Budget

Creating a budget doesn't have to be scary or uncomfortable. In fact, it can be simple. All you need is to know how much you make, and then understand exactly what to do with it.

Read on to find information about the basics of creating a budget. It is based on a rule referred to as the 50/30/20 rule, which is a good benchmark for having enough money for your expenses, entertainment, and even for saving and investing.

Keep in mind that you should also leave a little bit of space in your budget for some flexibility. That is also one of the reasons why having a savings account can be a good thing. It will allow you to save for future purchases, and also give you a buffer for months where you spend more than you take home. Ideally you'll want to have enough for expenses, some fun extras, and also be able to save for your future.

1. Calculate Your Net Income

Your first step to setting a budget is to figure out exactly how much money you are taking home after expenses expenses (if you work for yourself) and/or taxes are deducted. This is referred to as your net income. You need to know exactly how much money you have before you can allocate it.

So, how do you do this, exactly? Well, if you are working as a salaried employee, check your pay stub or bank account. If you have a business or are self employed, you will need to reconcile your books at the end of each month to determine what your pay for the coming month will be.

Why Budgeting Is a Good Idea

A budget is telling your money where to go, instead of wondering where it went.

— Dave Ramsey

2. Determine Your Essential Expenses

Make a list of everything you absolutely need to spend money on each month. Essential expenses include rent or mortgage, groceries, bills, etc. This should make up about 50% of your net income.

It makes sense that this is the second step because you need to figure out if you have enough money to afford the essentials. If you don't, you may need to make some adjustments because it means that you are living above your means.

3. Leave Room for Entertainment Expenses

Many people think that once you budget, your life will be boring. However, this isn't the case. Budgeting can help you learn how to spend your money wisely so that you can not only have a fun life, but also afford everything you want.

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This category includes money for going out, money for streaming services, and even for vacations. This category should make up about 30% of your income.

I found this detail about budgeting to be very freeing. I know that our ultimate goals is to be financially abundant, but it was a wakeup call to realize that I could actually have some fun along the way.

We must consult our means rather than our wishes.

— George Washington

4. Have a Savings and Investments Plan

The remaining 20% of your net income should be set aside for your future. This includes an emergency fund, investments, money in your savings account, etc. In other words, this is where you will meet your long term financial goals. These include:

  • Getting out of debt
  • Buying a home
  • Saving for a child's college education
  • Building an emergency fund
  • Saving for retirement

Those are just some examples of possible goals, and there are many more that you can achieve. By having a budget, you will have enough money to put towards your future.

Choose a Method to Track Your Budget

Although the basic process is always the same, there are several ways that you can track your budget. Here's an overview of some of the main methods:

  • Envelope method. This strategy is ideal for those who like to use cash. Write the category of everything in your budget on a new envelope. When you get paid, place the money for that category in the envelope. You'll want to repeat this every month.
  • Spreadsheets. A simple spreadsheet, broken up into categories, can also get the job done. You can create a new tab for every month, or you can run your budget off the same spreadsheet for the year.
  • Accounting software. If you are savvy with finances, consider using an accounting software program, such as Quickbooks, to help you create and stick to your budget.
  • Track in a notebook. You can also track your budget by hand in a notebook or a bookkeeping journal.

The method that you choose doesn't matter, as long as you find a method that you won't have difficulty following.

Follow a Budget to Help You Spend Wisely

Sticking with your budget will give you freedom to afford your lifestyle.

Sticking with your budget will give you freedom to afford your lifestyle.

Budgeting Gives You Freedom So You Can Enjoy Your Life

Have you ever failed to pay a bill or run out of money for the month between paydays? If so, it is likely because you didn't follow a budget. The thing is, it may seem like you have a lot of freedom when you spend money on whatever you want. However, it doesn't feel so great when you run out of money and are scrambling to make ends meet.

Although it may seem restrictive, having a budget actually gives you the freedom you need to enjoy your life. Having enough money is freeing, and budgeting will help ensure that you can afford your life.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2022 Kathy Tsoukalas

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