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 you’ve never had one, how do you get started? How do you budget your money? I’m going to show you how.
The good news is, the fact that you’re 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 you’ll stick to. Without a why it’s easy to lose motivation.
Without a why it’s easy to lose motivation. Figure out your “why”.Tweet
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 “why” doesn’t 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 don’t 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 don’t have a choice in when you earn a wage.
If you are married, it’s also important to combine both you and your spouse’s earnings over a month. Most likely both of you are responsible for the bills around your household, so a household income is appropriate. It’s 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. You’ll 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 haven’t missed any expenses. It’s good to list them all within an excel sheet so it’s easy to come back and make adjustments.
4. Subtract all expenses from income
After you’ve 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, you’re 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 aren’t necessities and cut them out. Spending more than you make is a bad sign, but it’s good that you recognized it, and can make the necessary adjustments.
5. Make adjustments regularly
Having this budget isn’t 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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