Nearly 65% of Americans have no idea how much they spent last night which shows budgeting isn’t something we’re used to. Having a budget plan is crucial because it highlights any areas where you’re overspending, prevents you from slipping into debt, and helps you make better financial decisions. Perhaps you’re struggling with budgeting and you want to make a plan. Sounds familiar? Luckily, you’ve come to the right place. Here is how to make a budget plan.
Set Your Goals
The first step on how to budget is understanding your short- and long-term financial goals. Perhaps you’re planning to pay off loans or save for a down payment on your dream house.
Regardless of how extravagant or tiny these goals are, write them down so they motivate you.
Find the Right Budgeting Method for You
There are different personal budget methods so find one that works for you. For instance, there’s the 50/30/20 approach where your salary is divided into 50% for needs, 30% for wants, and 20% towards savings or debt repayment.
Needs include rent or mortgage, utilities, groceries, or anything else you can’t forgo. You should also include minimum payments on debt so you stay atop of it. If you can’t get to 50% then dip into the “wants” budget for a while.
And to calculate your “savings or repayment” pile, multiply your income by 0.2. This will show you how much to contribute towards your emergency fund or retirement account. Note if you still don’t have enough to pay off your debt, then dip into the 20% budget as it’s a priority.
The second method is the zero-based budget, perfect if you want to track every cent.
For instance, if you have an extra $500 then figure out whether you’re dividing it into categories or putting it all towards your child’s college fund. Keep doing this until your outgoings equal zero. Although this takes time, you’re assured that you’re not overspending or making any unnecessary purchases.
Another popular approach is using the envelope system which is useful for overspenders. This is where you withdraw your income and split it into individual envelopes for your utilities, rent, and so on. If you run out of cash before the month is up, that’s bad luck.
You either have to dip into another envelope (without getting into debt) or wait for your next paycheck.
Calculate Your After-Tax Income
You’ve chosen a personal finance budget plan, now figure out your after-tax income. This is everything that you and your partner receive from work, government benefits, and side hustles. But remember to focus on the after-tax sum, not your gross income.
Note that the remaining balance is the amount you’re budgeting.
List Your Expenses
Your expenses fall into two categories “fixed” and “variable”. Fixed expenses like a mortgage are easy to calculate because it’s generally the same each month. But to figure out the “variables” (e.g. utilities or grocery bills), you must find an average.
To do this, consider how much you spent on each variable over the last three months. So if you spend around $544 then give yourself a spending limit of $550.
Track Your Spending
Budgeting only works when you’re tracking your spending every month.
You can create a budget spreadsheet to figure out where your money is going. This should include savings, income, expenses, and a financial summary.
Or, to make your life easier, download an app as they automatically break down your expenses for you. You could also keep it simple and record your spending using a bullet journal. Just make sure you don’t lose it!
Problems arise when new budgeters accidentally overspend or they have to spend their entire emergency fund to cover an unexpected expense.
Hang in there! Accept that your budget is flexible and know that as long as you’re committed to returning to it, you will eventually achieve your goals.
Make Lifestyle Adjustments
A surefire way to help you budget is making certain lifestyle adjustments. For instance, instead of buying clothes at full-price, check out the latest deals on Amazon.
You can save a fortune by ditching your gym membership and working out at home instead. You can either go for a morning jog, exercise alongside YouTube videos, or sign up for a one-off yoga class.
Or, if your workplace has a wellness program, take advantage of it. Your employer may offer discounted gym memberships and even provide a Health Savings Account. This means you can save on health expenses as they’re tax-deductible.
Further, consider whether you have any bad habits as they’re likely costing you. For instance, you could commit to an alcohol-free month or smokers could try quitting. If that’s not realistic, dial back how much you attend Friday night cocktails and swap soda for water.
Another way to save is reducing how much you dine out.
The average American eats around 4 commercially prepared meals a week which adds up to 18 a month. To avoid this unnecessary spending, plan your meals on Sunday so you know which ingredients to buy at the grocery store. Plus, this will stop you from getting tempted when you’re driving past your favorite fast food joint.
That’s How to Make a Budget Plan
Hopefully, after reading this article, you now know how to make a budget plan.
Start by defining your goals, choosing the best budget method, and figure out your expenses. You should also regularly monitor your spending and make necessary lifestyle adjustments to help you save. Good luck!
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