Whether you are a young adult striking out on their own for the first time or an established couple who’ve been running their financial lives for decades, having a budget is a smart move. It ensures you have oversight over your income and spending. Plus, it makes it easier to monitor and track your progress toward your goals. But on estimate shows that approximately 33 percent of Americans don’t have any form of a budget in place. It’s never too late to start budgeting. If you don’t know how to begin, follow these five steps.
1. Outline Your Debts
Take a moment to really get to know your debts. Grab a sheet of paper or open a spreadsheet program and record the name of every creditor. Then, list your remaining balance, interest rate, and minimum monthly payment. For installment loans, you can also write down how many payments are remaining if you wish.
The goal is to get a thorough understanding of what you owe. Additionally, you want to review the repayment arrangements. That way, you are well-informed about your lender accounts before moving onto the next step.
2. Calculate Your Other Expenses
Households have expenses beyond debt repayment. Utilities, food, insurance, gasoline, and similar fluctuating costs that ensure you can handle the obligations in your life and remain safe, secure, and comfortable often fall in this category.
Review your bank statements and past bills to learn what you’ve been spending in these categories. Often, it’s wise to average your past six to 12 months of activity in these areas, particularly since these costs can fluctuate.
3. Review Your Income
Now that you have had a look at your expenses, it’s time to review your income. Determine how much money comes into your household every month, including both regular income and any extra funds, like gifts, that you usually receive.
Along with paychecks, include sources like child support, rental property income, or anything else that brings money into your account. This will make your budget more accurate and ensure you account for every penny.
4. Set You Categories and Amounts
At this point, you can craft your budget. List every debt, expense, and spending category on a piece of paper or in a spreadsheet. Make sure to create a category for savings, particularly if you need to build an emergency fund or increase your savings account balance.
Next, write down how much you spend in those areas every month. For those that you can’t easily change, you might want to make them a different color than areas that you might be able to cut. That way, you know where changes should occur if needed.
Then, compare your expenses to your income. If you have money left over after handling all of your costs, you can direct the excess toward savings or debt repayment. If you have a deficit, then it’s time to take some cost-cutting moves.
For example, you can reduce expenses by lowering your entertainment costs, such as cutting cable, eating at home instead of dining out, shopping grocery sales, or taking other actions that reduce your spending in those categories.
If cutting back won’t work, you may need to explore opportunities for more income. This might include a new part-time job, asking for more hours or a raise at work, selling items you don’t need, or freelancing for extra cash.
5. Monitor and Update
Ideally, you want to follow your budget once it’s set. In order to make sure you’re on track, you need to monitor your spending. That way, if you are putting too much money into the wrong area, you can take corrective action.
Additionally, you need to update your budget regularly. Your life circumstances may change. For instance, you might pay off a debt or acquire a new expense. In those cases, review your budget and make adjustments. That ensures it accurately reflects your current circumstances.
Do you have any other tips that can help someone create their first budget? Share your thoughts in the comments below.
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