Follow these steps to put a solid budget plan into action.
Every great financial plan starts with a sound budget. If you’re trying to pay off bills or save for a dream vacation, a budget is your first step toward making your financial goals a reality. Follow these steps for setting up a realistic budget.
1. Determine your income
Start with how much money you make after tax each month. If your compensation varies, using an average will be okay, but the more accurate the better. Don’t forget other income sources like alimony, child support, interest, dividends and rental income. Now that you know your income, you can review where it is going.
2. Calculate Expenses
Let’s break up your monthly spend into specific buckets. For many people this will be grouped into housing, transportation, utilities and food (exclude restaurants here). After those, you can use additional buckets like “Dining out”, “Vacation”, “Clothes”, etcetera. We have a free template you can download: Payoff Budget or create your own. Remember, some expenses may not bill monthly so review prior months to get a holistic picture of your monthly spend.
3. Calculate the difference
If your expenses are already greater than your savings, you have 2 options. Either make more money, or spend less. Generally it’s easier to reduce spending versus making more money. Look back at your budget and determine what can be reduced. Dining out less? Fewer new clothes? If you’re saving more than you’re spending, that’s great. Are you happy with the amount you’re saving? If not, what else can be eliminated?
4. Determine what to do with your savings
You have savings! Congratulations. Now, what’s the best thing to do with it? If you have high interest debt, it may be best to pay that off. You may even consolidate that debt at a lower interest rate to save more and pay it off faster. A good target is to set a savings goal of accumulating $1,000 in your savings account, and then build that into a 3 month emergency fund. If you prefer to target a percentage of your income, try starting at 5% or 10%, and then grow your savings rate over time.
5. Make it a habit
Aim for sticking to your budget by reviewing it every week or 2. This will help you quickly understand how your spend is tracking, what needs to change, and if you’re sticking your financial goals.
Good luck and remember, there are lots of online resources like, Peace by Happy Money, that can help you on your financial journey. Get started today!