How to set up a budget in 5 simple steps

Creating a budget and sticking to it doesn’t have to be dull or a daunting task. Simply put, it’s a summary that compares your income against your expenses during a given period, typically every month. Budgeting is an essential part of your financial well-being that encourages intentional spending while ensuring you have enough saved for things that are most important to you. A budget is like a roadmap that can help you live comfortably, whether your goal is to get out of debt, invest for your retirement, save for a down payment, create an emergency fund, or what have you; a budget can help you make it happen faster than you think.

Ready to set your budget and leverage it to your advantage? Here are a few quick and easy steps to help you get started.

1. CALCULATE YOUR MONTHLY INCOME AND ORGANIZE YOUR FINANCIAL DOCUMENTS
Whether you’re a salaried employee, self-employed, or receiving money through other means like social security, child support, or unemployment benefits, you can still predict your monthly income regardless of your employment status.

For freelance professionals, you can pick your lowest-earning month that year as your baseline income for your budget. Also, it is crucial to design your budget based on your current financial status and not what you hope to bring in. So, focus on what you know.

Once you’ve figured out your monthly income, it’s time to gather all your financial paperwork. This includes your pay stubs, bank statements, investment accounts, tax returns, rent and utility bills, debt payments, credit card statements, miscellaneous receipts, etc. You can either file this information physically or electronically to suit your convenience. You’ll need this information to set up a monthly budget. So, the more information you can gather, the more helpful it is to create a realistic budget.

2. DETERMINE YOUR MONTHLY EXPENSES – LIST BOTH FIXED AND VARIABLE COSTS
Every month you spend your money on basic and essential aspects of your life. You can group these expenses into different categories such as housing, food, transportation, debt payments, savings, entertainment, etc. Refer to your receipts, bank and credit card statements to get a clear picture of your spending over the past three months.

Identify which of these expenses are fixed or variable. Monthly recurring costs are considered fixed expenses such as rent or mortgage, loan payments, retirement accounts, insurance premiums, utility bills, daycare costs, etc. Variable costs include groceries, travel, entertainment, clothing, gifts, and so on. Variable expenses tend to offer the most flexibility within your budget, so use that to your advantage to ensure you aren’t depriving yourself. If your net income is higher than your combined expenses, then you’re off to a good start.

In addition to dividing your expenses into fixed and variable buckets, it’s important to set aside some money as a rainy-day fund for those unexpected expenses that could derail your budget.

3. PICK A BUDGETING STYLE THAT FITS YOUR NEEDS
If your goal is to keep your expenses lower than your take-home income, then tracking your spending each day can prevent you from overspending compared to putting it off until the end of the month. There are multiple budgeting plans out there; here are a few popular ones:

THE 50/30/20 RULE
This plan allows 50% of your income for your necessities, 30% for your wants, and the remaining 20% should ideally go toward your savings and debt repayment. The simplicity of this plan can maximize your money to make your debt payment more manageable, handle unexpected expenses, and help you retire comfortably.

ZERO-SUM BUDGET
The basic concept of this plan is that – dollar in minus dollar out should equal zero. That way, nothing is left up in the air, and every dollar is accounted for or assigned a “job.” For this plan, track all your expenses and adjust your spending as the month progresses.

ANTI-BUDGET
Despite what the name suggests, it’s still a budgeting plan of sorts. With this plan, you don’t need to worry about the specific categories; you simply spend as you go. However, it’s vital to save first and cover your top priorities before spending on miscellaneous purchases.

Personal finance is a journey, which budgeting plan seems like a good fit depends on how much effort you wish to put into your budget. So to get started, pick one method and try it out.

4. AUTOMATE YOUR FINANCES AND USE BUDGETING TOOLS
Setting up an auto-transfer to manage bill payments and contributing to your savings accounts makes spending effortless and prevents the risk of missing a payment. Plan to automate the funds soon after your payday. Whatever remains can be used for additional expenses until the following payday.

Further, you can refine your budget by using budgeting tools, and apps such as Microsoft Excel spreadsheets, Mint, Wally, You Need A Budget, Digit, Personal Capital, to name a few.

If you use credit cards, pick those that offer incentives for certain purchases so you can earn points, miles, or cash back. The timely payment of your credit card dues will ensure a low credit utilization rate and improve your credit score.

5. ADJUST YOUR BUDGET WHEN NEEDED AND LEAVE SOME WIGGLE ROOM
If your expenses are equal to or greater than your income, then think of ways to adjust your spending and determine if there’s anything you can cut back on. If your expenses are lower than your income, you can create some wiggle room by rolling over surplus money to the next month’s budget.

Remember to plan ahead for the festive and expensive months of the year to avoid over-splurging and dipping into your savings. One way to tackle these unexpected costs is by allocating extra funds each month toward shopping expenses without accruing debt. Review your budget at least once a year to ensure you’re in line with your budgeting plan to achieve your desired goals.

FINAL THOUGHTS
Budgeting for the sake of it won’t get you anywhere. Determine your “why” to customize your budget to fit your specific needs to increase your odds of sticking with it. Setting a budget can enable you to lead a happy and balanced life with a firm handle on your finances. It can also help you see the bigger picture by understanding your spending patterns and encouraging healthy financial management.

If you’ve been saving for a down payment for your first or next home and are unsure where to begin – get in touch with us today and let us know how we can help!