How to Build a Budget that Works
Whether your goal is get out of debt, save for a big purchase in the future, or invest for your retirement, having a plan for each dollar you make and tracking your expenses will help you reach your savings goals faster.
Over the years, I have met people who struggle to make ends meet even though they are earning a decent steady income. This is the type of common phrase that I hear: “after paying for my rent/mortgage, food, and all these expenses, I just don’t have any money left to save…” What many people don’t realize is that saving should be part of their regular “expenses”. Have you ever heard of the phrase “pay yourself first“? It means that before you pay for the rent or mortgage, before you go to the grocery store to shop, before you buy those nice brand new shoes, you should pay your “future self” first by depositing a portion of your income into a savings and/or investment account.
But how do you actually figure out how much of your income to save? To do so, you need a budget. Each person’s situation is different (different income, responsibilities, financial constraints, etc…), but I find that there is one important thing that is common in terms of budgeting: budgeting works best if you set a realistic goal for yourself. If your budget is too challenging for your personal financial situation, you are more likely to fail after a short while and you might give up. Below are some steps I put together to help you set a realistic budget that fits your personal needs:
1- Realize your spending habits. Track all your expenses for one month and categorize them (rent, restaurants, groceries, entertainment, etc..). You would need to write down every dollar you spend during the month, and I mean EVERY dollar: from the $1 candy bar to the hundreds of dollars spent on housing. Do not forget to factor in funds for irregular expenses, such as annual insurance premiums, property taxes, gifts, etc…This step is very important because you are not simply tracking your expenses but you are also becoming more aware of your spending habits. There are many tools nowadays to track expenses but you can actually start by using a simple spreadsheet on your phone. Google has a good monthly budget template that is fairly easy to use but you might need to customize it a bit.
2- Figure out how much you are currently saving. Add up all your income for one month (salary-after tax, side gigs, alimony, child support…) and deduct the total expenses in step #1. The remainder is your current monthly savings. If you get a negative number, it means that you are probably accumulating debt or using up your savings or some other funds that are not regular income, and you may want to consider seriously cutting back on your spending (see step #3). However, if you get a positive number, congratulations! you are actually putting some money away each month as savings. But, if you think that you are not saving as much as you could, proceed to step#3 as well.
3- Decide where to cut back. Review your list of expenses in step # 1 and figure out some non-essential expenses you could cut back and/or eliminate. This step could be the hardest but it is a necessary step if you want to save more and/or reach a particular goal such us paying down debt, fund a vacation, or buying a house. Some areas that are typically easier to cut back include restaurant meals, gifts, entertainment, and subscriptions such as cable TV and magazines.
4- Set your monthly maximum budget. After making these adjustments, set maximum dollar amounts on each expense category. For example, if you were spending 200/month on restaurants, you could decide to cook more of your meals and limit your restaurants budget to $100/month. Once those limits are set, you need to continue tracking your expenses monthly to make sure you stay within your overall budget.
5- Set your monthly saving target. Your net income minus your total monthly budget represents the amount you can comfortably save each month. The best way to save this amount is to automatically deduct it from your paycheck and deposit it into your savings and/or investments accounts. Remember: Pay Yourself First!
Voila! This should help you get started if you want to start making changes to your spending habits and save more!
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