It can be hard to create a budget in 2024. Thing are getting very expensive so it’s not crazy to feel like your money disappears before it even hits your bank account?
You’re not alone and in this day and age, where everything is online, it’s very easy to lose track of your money and overspend. But the good news is, you can take charge of your finances by creating a budget. A budget is a roadmap for your money, showing you where it comes from (income) and where it goes (expenses). It’s a key part of starting a healthy relationship with money.
Here’s a step-by-step guide to build your financial foundation:
Step 1: Track Your Income
This one is simple but very important.
List all your income sources: salary, side hustles, rental income, etc. Be sure to factor in taxes and deductions to get your net income – the money you have after everything is taken out. Most people, including myself, use a spreadsheet for this type of work. It may seem daunting to start but can actually be sort of fun to see exactly how much money you have coming in each month.
At the end of the day, you want this income to be greater than what you spend so once you’re done tracking what’s coming in, it’s time to start figuring out where it’s all going.
Step 2: Identify Your Essential Expenses
These are the non-negotiables that keep your life running smoothly:
Housing: Rent, mortgage, utilities
Groceries: Food and essential household items
Essentials: Personal care products, toiletries, transportation costs
Job-related: Work wardrobe, professional subscriptions, internet and phone bills
Healthcare: Insurance premiums, copays, medication costs
Debt: Minimum payments on credit cards, student loans, etc.
These expenses are locked in for the most part. You need a place to live, you need to eat, you need things that allow you to make your income, have healthcare and buy toilet paper and the like when it’s needed. On top of that you need to at least pay the minimums on any debt you maybe have.
Once you have those figured out, write them down and compare them to your income and see how much flexibility you have in your budget.
Step 3: Factor in Savings Goals or an Emergency Fund
While not essential for day-to-day living, saving is crucial for long-term financial security.
If there’s flexibility, between your income and essential expenses, include your savings goals in your budget, whether it’s an emergency fund, retirement savings, or a down payment on a house.
Some of these savings may be automatic such as a 401k contribution that automatically comes out via your paycheck but others may require some work from you. I would start with an emergency fund of at least $1,000 and slowly build that up to 3 to 6 months of your expenses whenever possible.
Step 4: Don’t Forget the Fun Stuff (But Keep it Realistic!)
Life isn’t all bills and responsibilities! Allocate a realistic amount for entertainment, hobbies, dining out, or social activities. This helps you stick to your budget without feeling deprived.
Still, it’s important to keep in mind your financial position. You’ve figure out what’s coming in the door each month as income and how much you have to allocate towards essential expenses. What’s left can be allocated to a variety of things and fun might not be the most important. Savings is key especially that emergency fund and some savings towards retirement but so is paying off your debt.
I mentioned a minimum payment towards your debt earlier but your long term goal should be to pay down all debt with a high interest and eventually have none(outside of a credit card you pay fully monthly or potentially a mortgage).
Step 5: Choose Your Budgeting Method
Now that you’ve figured out income, expenses and started to think about goals, it’s key to pick a long term plan you can stick to.
There are several budgeting methods. A popular choice is the 50/30/20 rule:
50%: Needs (essential expenses)
30%: Wants (entertainment, dining out)
20%: Savings and debt repayment
This simple method can help you set a goal and can easily be adjusted to your life as needed. Perhaps your needs are just a higher portion of your income and must go above 50% which may mean that your wants need to be reduced.
Perhaps you want to save a bit more so a 50/20/30 rule would be better suited to you or a 50/10/40 rule if you have a lot of debt you want to tackle faster.
Step 6: Track Your Spending
Once you’ve decided, it’s time to track. Again a spreadsheet comes in handy for this and a monthly sit down to track your spending against your income is a must to make sure you’re hitting the mark.
Sometimes it can be very easy to stray especially on the wants. The nice thing about tracking each month is that it will help you make sure you can steer the ship back in the right direction when you do. Again these are long term goals so you don’t necessarily have to be at 50/30/20 every single month but a good goal would be to hit that mark across the full year.
There might be months where you spend a lot because of a vacation leading to a 50/50/0 month but then maybe the next two months need to be 50/10/40 months to catch back up. That’s the nice thing about having a budget that’s flexible and trackable, it’s malleable to your needs and personal situation.
Step 7: Review and Adjust
Your budget is a living document, not set in stone. Regularly review your spending and adjust your allocations as needed. As you make more money, maybe consider keeping the wants the save but increase your savings to set yourself up for a better tomorrow. Having money in the back can be very freeing and valuable and might be worth more than that new item you were just going to buy and rarely use.
Remember:
Be honest with yourself: Acknowledge your spending habits and create a realistic budget you can stick to.
Automate savings: Set up automatic transfers to your savings account to pay yourself first.
Small wins matter: Celebrate your budgeting milestones, no matter how small.
Creating a budget empowers you to make informed financial decisions and take control of your financial future. So, grab a notebook or spreadsheet, and get started on building your personalized roadmap to financial freedom!