Budgeting can be very intimidating. Between spreadsheets, apps and banks there are endless ways to manage your money. Finding a budgeting method that works for you is essential in maintaining financial responsibility. The more you like and understand the way you budget, the more likely you are to stick to it. There is never a bad time to start budgeting, even if you’re starting from the beginning. There are a few things to consider when beginning to budget. Things like how much you get paid, your pay cycle and when your bills are due.
Calculating your income and expenses is the first step when making a budget that works for you; it allows you to see the unique flow of your money. For example, while someone might budget $100 on gas because of their far commute, someone else might only budget $25 because they can walk to work. You can easily calculate your spending by looking at bank statements or receipts from the past 6 – 12 months. And if you get paid hourly, check out this website to calculate your income to include taxes.
Tip #1 Divide Your Spending in to “Wants” and “Needs.”
“Needs” are things like your rent, mortgage or groceries. “Wants” are things like new clothes, seat covers or going out to eat. Separating your wants and needs can help put in perspective where all your money goes and might help you make fewer impulse purchases.
Use your “wants” as savings goals. Having one long-term goal, like saving for a car or a downpayment on a house, will establish how much money you need to save and how long it will take you to save up. Savings goals don’t have to be for a purchase, a great goal to have is to establish an emergency fund.
Smaller wants can be used as rewards for reaching savings milestones. Plus, waiting to purchase things you want gives you time to make sure it’s something you want to invest in. Setting goals also gives you the motivation to maintain your budget and savings goals.
Tip #2 Begin Budgeting for Your Pay Period
This is where your “needs” come in to play. Let’s use the example of a bi-weekly pay period, or getting paid every two weeks. Write down what you need to spend money on in the next two weeks on a calendar. So, you got paid on the 1st and need to pay your rent that day. Then, your electricity and water are due before the 10th so you also need to pay for those. If your car insurance and student loan aren’t due until the 22nd, then those can wait until the second pay period of the month. From there you add your other needs, like groceries and gas. Subtract the total cost of your needs from your income, then you’re left with money for your savings and wants.
Tip #3 Pay yourself first
Pay the “needs” you can as soon as possible, then move the amount you want to save into your savings account. It is commonly thought that about 20% of your monthly income should go to savings or 10% of your paycheck for a biweekly pay period. But it’s important to know that there is no amount you “should” be saving because it’s different for everyone. You just have to make sure that it is a realistic amount and to leave yourself enough money for everything else. Keep the money for your groceries, gas and other needs easily accessible.
The first step to making a budget that works for you is accurately estimating your income, second is to determine what you’re spending money on and separating them in to “wants” and “needs.” Then, making a calendar to have a visual layout of what “needs” are due, how much they’re going to cost and calculating how much you have left to save/spend. And lastly, paying for what’s important first.
It doesn’t matter if you use a pen and paper, an app or the computer; having a visual representation of your budget makes understanding it easier. Whether you recently moved out, got your first job or just want to learn the basics, there is never a bad time to start budgeting. It won’t be perfect the first time, just be open to adjusting it to fit your needs. Good luck!