How to Build a Budget : Whether you are living paycheck to paycheck or earning big numbers, a budget is your financial compass to keep you on the right track. It is an important tool that helps you determine where your money will go so you can make your hard earned dollars work for you.
The process of budgeting is basically assigning your money a job and setting spending limits to spend your money responsibly. Not only does it offer you peace of mind but it also gives you more confidence to help you achieve your financial goals.
Getting started with your first budget might seem daunting initially. That is why this budgeting 101 guide will walk you through the whole process. This post will help you learn how to make a budget and the tips to stick to it.
How to Build a Budget : Budgeting 101
So, let’s take a dive into what a budget is and how to build one that leads you to your financial freedom!
What Is a Budget?
Simply put, a budget is a financial outline that helps you measure your overall income and all expenditures for a certain period of time, say a month or a year. In creating a budget, you are actually planning for every dollar that you have and allocating it responsibly to the most essential needs. It also helps you track your progress in spending and saving to give you a clear picture of your financial situation.
If you are thinking why you need one, the simple answer is it will help you determine where to limit your spending and where you can spend some more. There are so many tools that help you maintain a budget, from spreadsheets to budgeting apps. Often the most convenient and functional tool is a budgeting app that allows you to control your finances more effectively.
How to Make a Budget
By far the most challenging part of making a budget is to sit down and create one. Knowing where to begin is a massive hurdle. This is why we have broken down the process into a few easy-to-follow steps for you. Keep reading to find out!
Calculate Your Net Income
First things first, before anything you need to know how much amount you have every month for spending. And this just can’t be a rough estimate. In fact, an accurate monthly income is the key to a successful budget. It is almost impossible for you to allocate funds to savings, spending or for settling debt if you do not know how much you have on hand. The good thing is that you can calculate your net income in the following two steps:
- Calculate your monthly income as a salaried employee or the amount that comes from the main source of your income.
- Subtract taxes and other deductions from your net income like federal taxes, state taxes, social security taxes or any other miscellaneous deductions.
Identify All of Your Expenses
Once you have a clear cut amount of how much money is available to you for spending, the next step is to account for all the fixed and variable expenses. Fixed expenses tend to cost you the same amount every month while variable expenses, as the name suggests, vary from time to time.
Whenever you make a purchase or pay for something, note it down or enter it into your money management app. This is one of the most hands-on approaches of the whole budgeting process and must be done accurately to leave no loopholes in your budgeting.
Use a Calendar to Track Your Irregular Expenses
While having your expenses in front of you gives you an idea where your money is going, you might still notice some spending that only occurs occasionally. Your budget must also factor in the amount that has to be spent on irregular expenses, such as holidays and birthdays, etc.
Holiday debts are quite common that people often have to repay for at least three months later. The best way to find a way out of holiday debts is to budget throughout the year. This way you would have saved enough for when the holiday season, or any other event for that matter, comes around.
Set Your Personalized Financial Goals
The whole idea behind budgeting is to be able to accomplish more of your financial goals with your money. This includes both your short-term as well as long-term financial goals. Set your personalized financial goals like retirement, buying a house, paying off college debt or saving for a dream vacation.
Once you have your goals in front of you, next align your budget around achieving them. This can be done in a number of ways that might vary, depending on your monthly income, spending and savings. In any case, be specific about the amount you have to save for, remember to put a deadline to your goal, and get started.
Choose a Simple Budgeting Plan
Another key to a successful budget is to pick a suitable budgeting plan. The most popular and easy-to follow plan is the 50-30-20 budget. This plan requires you to spend roughly 50% of your after-tax income on necessities, 30% on your wants and at least 20% of it goes to your savings and debt repayments.
The best thing about this plan is the sheer simplicity of it, which allows you to keep on track. Following this plan makes your debt more manageable in the long-run, gives you enough wiggle room to have some mindful indulgence and helps you save for irregular expenses.
Budgeting is an essential foundation of every financial plan. Contrary to common belief, budgeting isn’t all about restricting yourself from spending. Rather, it is about planning how to allocate your funds in the best way while leaving wiggle room to spend some amount as you wish. Thus, use this above budgeting 101 guide to find your financial freedom.
Download the Doctor Money app to help you stick to your budget and financial goals.
When it comes to money matters, let our app do the heavy lifting for you. Using your input data, the app will create dynamic spending budgets, to ensure you remain within your means. Let this smart tool show you how the sound choices you make today will help you meet your financial goals in the future.