One of the most important things you need to do when it comes to your financial health is to create a good budget. Having a budget, and sticking to it, can lead to greater financial stability, regardless of your socioeconomic status.
Having a budget means setting limits, being disciplined and being responsible. When you have a good budget, in writing, you know exactly how much money you have, and what you are spending it on. You will also probably find a few surprises and notice some ways in which you can have more money in your pocket!
Here are the steps you need to take to develop a budget:
1. Write Down All of Your Income
This part is pretty easy if you only have one regular job. But, if you have any part time work, or you have any other sources of income (e.g., tips, odd jobs, etc.) then be sure to include these numbers in your total income section of your budget. Most people will develop a monthly budget, so do some calculations based on your weekly or bi-weekly paycheck to get the most accurate numbers. If you prefer, you can certainly make a weekly budget, but this may be a little more tedious than most people want.
2. Write Down All Fixed Expenses
Fixed expenses include all of the monthly expenses that you are “always” going to have. This generally includes things like rent/mortgage, phone bill, car payment, insurance payment, student loans, utility bills, and anything else that you pay on a regular, monthly basis.
Typically your fixed expenses will be around the same amount each month. Fixed expenses are generally those expenses that you cannot NOT pay, rather than being the type of expense that you can get rid of. Sure, you could always find a cheaper apartment, but you will, most likely, always have to pay rent or mortgage. Lowering your fixed expenses is more difficult than lowering your flexible expenses.
3. Write Down All of Your Flexible Expenses
Flexible expenses are those things that you spend money on that might change from month to month, and you may have a bit more control over how much you spend in each category. Not all flexible expenses can be eliminated—you definitely need to spend money on groceries and transportation, for example—but you do have ways to cut these costs in many instances.
Other variable expenses may include fitness center memberships, entertainment, travel, clothing, dining, personal needs and spending money. When you make this part of your budget, you need to prioritize the expenses, and make sure you have enough for the essentials, like food, medication, personal grooming and other critical things. Less important, and more flexible items would be entertainment and dining out, for example.
Take a look at your spending in each category—this is the part where you might find some real surprises. That tasty coffee you grab each morning on the way to work? Is it really worth $80 per month? These are decisions that you have to make.
4. Plan for Saving Money
As part of your budget, you should be planning to save some money. Many financial advisors will encourage their clients to save at least 10% of their net income into a retirement account. The more you save, and the earlier that you save it, the better off you will be later on.
Saving money should be included as part of your fixed expenses, as it is so important for your future. In addition to saving for retirement, you should plan to put a little bit of money away for emergencies, or even something special, so that you are not tempted to put a large purchase on a credit card (unless you can pay it off right away and get points!).
5. Track Your Budget Carefully
It is important to not only develop a budget, but to pay attention to it and stick to it. Monitor your spending and your savings, and you will find that you have more control over where your money goes. Whether you use a formal online tool (there are many to choose from), a simple spreadsheet on your computer, or even a pencil and paper, keeping track is an essential part of having a budget and being financially responsible.
Budgeting your money is the first step toward financial stability and financial freedom. Understanding where your money comes from and where it goes makes it easier to save and spend. Set reasonable goals and reasonable limits, and you will quickly become aware of your money. You will find ways to cut your spending and redirect your funds toward what you really want to be spending your money on!