what is a budget?
You might find yourself asking, where is all my money going? Sometimes it seems to just slip through your hands. A good solution to get yourself on track with your money habits is creating a budget and sticking to it. A budget is an itemized and detailed plan stating where each dollar is going. This creates guidelines for you to follow in order of priorities or personal goals. For the best results, you want to make sure you are customizing your budget so it fits your daily routines in terms of necessities. Creating a budget can help you develop great money management skills!
How Do I Create One?
Creating a budget isn’t really a hard task at all. One just has to review their income and expenses and then put the all of the information in a summary format. Here are the specific steps:
Step 1: Calculate your income
The core of your budget starts with your income. That’s because it serves are your key performance metric. Now what do we mean by that? Well, if you are spending less than your income, you will be saving and creating wealth. Spending more than your income? Well at best you will be depleting your savings and at worse you will be going into debt! So you want to start by listing and tallying up the amounts of all your income sources. This will include things like your take home pay, investment income and any other money you earn like that from rental properties, gig or freelance work and even hobbies.
Step 2: Track your spending
The next step is to figure out where all your money is going and what you’re spending it on. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.
Begin by listing your fixed expenses. These are the things that you spend money on regularly and that can’t easily be changed or reduced. It will include things like your rent or mortgage, utilities and car payments.
Next list your variable expenses. These are the things that can change from month to month, and that you can easily adjust when compared to your fixed expenses. This will include thigs such as groceries, gas and entertainment. Reviewing your credit card and bank statements are a good place to start to analyze items like these since they often itemize or categorize your monthly expenditures.
The last thing to do is to record your daily spending with anything that’s handy. This can include a pen and paper, an app or your smartphone, or budgeting spreadsheets or templates found online.
Step 3: Compare your income to spending to stay on target
Now that you’ve documented your income and spending, you want to compare the two so that you don’t overspend and have money to put toward your goals. As we stated earlier, you want to make sure you keep your spending under your income amount.
If you find that your spending is routinely over your income amounts, then you’re going to want to look at areas to adjust or cut our entirely. We say begin by looking at “wants” as the first area to adjust. Can you skip movie night in favor of a movie at home? If you’ve already adjusted your spending on wants, take a closer look at your spending on monthly payments. On close review you might find that a “need” is actually a glorified “want” that has been created.
If the numbers still aren’t adding up, look at adjusting your fixed expenses. Could you, for instance, save more by shopping around for a better rate on auto or homeowners insurance? Such decisions come with big trade-offs, so make sure you carefully weigh your options.
One thing we often suggest people do is try and set up their spending using what is known as an “ideal budget.” Not sure what that is? Then check out this blog post which also includes a YouTube video from the early days of the channel.
Step 4: Review your budget regularly
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Very few of the components of your budget are set in stone. You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, make sure you get into the habit of regularly checking in with your budget and modifying or adjusting it as needed.
Understanding Budget Plans
As mentioned in Step 3 above, there are templates or plans to try and help you keep your spending to an “ideal” target or range. The thing to know is that there are multiple outlines and templates you can follow. Some of the popular budgeting plans are 50/30/20, zero based, two-account or the budgeting plan we like here at Wilson Rogers. The budgeting plan we like to stick to here breaks down the categories even smaller. In this budget plan we set spending to the following percentages of your monthly income:
- 10% to savings,
- 30-35% housing/ housing expenses,
- 15% in monthly bills/ installment payments,
- 10% transportation,
- 10% charity,
- 5% insurance,
- 5% entertainment,
- 5% personal care,
- and 5% investments.
You will need to find the budgeting plan that works best for and makes the most sense to you.
A budget is a detailed plan which includes guidelines indicating how you will be spending your money. This can be helpful from many different factors. A budget allows you to make wise and useful decisions with your money instead of spending it blindly and running out. Creating a budget might help you achieve or get closer to a goal you might have had for a long time.
Budgeting basically helps you align your money where your goals are. It also means that you must keep track everyday of your income and expenses. It takes a lot of consistency and discipline to make the most use of your budgeting plan. You might also want to review your budget regularly to see if it is working out as you had planned it would.
And if not? Then make the needed adjustments and keep working to your goals. Remember, it’s a marathon, not a sprint!