Time and time again, no matter how many articles you read about Personal Finance and taking care of your financial future, they always say that you need a budget! But if youâve never had one, how do you get started? How do you budget your money? Iâm going to show you how.
The good news is, the fact that youâre reading this and trying to understand how to get started on your journey to financial freedom, is a huge step!
Creating a budget is an absolutely necessary step to developing good spending habits and improving saving for a rainy day and saving for retirement.
The idea of setting up a budget and tracking your finances might seem difficult, frustrating, or complicated. This Beginners Guide will take you step by step on how to Budget Your Money Effectively!
1. Figure out why you want to budget
This is the first and most important step when trying to create an effective budget that youâll stick to. Without a why itâs easy to lose motivation.
Without a why itâs easy to lose motivation. Figure out your âwhyâ.
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There are many reasons why you would want to start budgeting. Here are a few examples:
- You want to stop living paycheck to paycheck
- You want to be able to save more for a rainy day
- You want to get out of debt
- You want to stop fights happening at home because of money
These are just a few examples, but your âwhyâ doesnât have to be one of them. Or it can be all of them! This plays a huge psychological role in keeping you motivated, so make sure you figure out why you want to budget.
2. Calculate your net income
You might be thinking to yourself I already know my income! But chances are, you donât know exactly what you take home to begin budgeting. What you make as a salary ($65,000 a year for example) is not what you bring home. You determine your Net Income by subtracting your monthly tax withholdings and other deductions like social security. These are things you donât have a choice in when you earn a wage.
If you are married, itâs also important to combine both you and your spouseâs earnings over a month. Most likely both of you are responsible for the bills around your household, so a household income is appropriate. Itâs also okay if only one of you earns an income.
If you earn additional income outside your daily job (like side gigs), you should also subtract anything that reduces it, such as mandatory business expenses and taxes.
3. List out all your expenses
This one is a bit more difficult, but an essential step in understanding how to budget your money. Youâll need to track and write down all your monthly expenses (from rent, mortgage, phone bill, utilities, etc) every dollar that leaves your bank account.
To have an accurate and clear picture of all your monthly expenses, this might take a couple of months to make sure that you havenât missed any expenses. Itâs good to list them all within an excel sheet so itâs easy to come back and make adjustments.
4. Subtract all expenses from income
After youâve figured out your monthly net income and monthly expenses, you just subtract the expenses from your income. If the end result shows more income than expenses, youâre off to a good start. That extra income can then be set aside for things like Retirement or Saving for a rainy day
If your expenses are more than your income, then you will need to take a long hard look at your list of expenses. Figure out which items on that list arenât necessities and cut them out. Spending more than you make is a bad sign, but itâs good that you recognized it, and can make the necessary adjustments.
5. Make adjustments regularly
Having this budget isnât a write once and forget type of thing. Instead, life changes regularly so do your list of expenses and possibly your income. Make sure you always keep track of what your budget dictates and make adjustments as needed.
You might start off with set numbers but you can always cut that unwanted cable bill in half, or start a side gig and thus increasing your income.
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This is very informative. We all know the importance of financial planning but we really don’t apply it our lives This tells us to differentiate between the need and necessity of life. Thanks for gearing up.