The term “budgeting” isn’t one that usually elicits happiness or excitement. The word has a negative connotation, and people tend to avoid it when it’s easier to be proactive and plan.
Creating a budget shouldn’t be all about deprivation. It’s about making sure that you spend less than you earn. It’s also about ensuring that the savings will cover your immediate and long-term financial goals. No matter how much money you make, budgeting should be a cornerstone of a solid financial plan. If you make $1 million a year but spend more than that, you will eventually get yourself into trouble.
It’s imperative to know how much you’re spending and what you’re spending your money on. That’s where a budget comes in.
Think Long & Short
The first thing you’ll want to do when setting up a budget is think about your long- and short-term goals. It’s surprisingly easy to overlook these in a world of instant gratification.
But that’s not how saving and investing work. It takes time to develop a financial plan and meet your goals. So make sure you think about future expenses like buying a house and paying for your child’s education in addition to how much you’re going to spend on this summer’s vacation.
Prepare for Emergencies
One of the smartest financial moves you can make is to set up an emergency fund. Things tend to come up at the worst times and you don’t want to have to rely on high-interest credit cards or short-term loans. If your car were to break down today, would you have the money to fix it or buy a replacement?
A good rule of thumb is to save up three to six months’ worth of expenses for your emergency. But that number will depend on things like whether you own or rent your home, how secure your job is and more.
Figure Out Your Income & Your Expenses
Figuring out your income is easy if you have a single, steady job. If you have multiple income sources, it can be tricky. Try to estimate your monthly income.
It can be a little tricky to calculate all your expenses, though, since many of us pay for things with cash, credit, debit, etc. One way is to track your expenses and the categories they fall into (food and dining, entertainment, housing, etc.). Or, you can use online tools that will access all of your financial accounts and automatically categorize each transaction.
It’s not much work to keep track of the everyday expenses like going out to lunch and buying groceries but you’ll have to dig a little deeper to factor in things like monthly or yearly subscriptions, car insurance and other infrequent purchases.
Add It All Up
Once you have a list of all your expenses and all your income go ahead and subtract the expenses from the income. Don’t worry if you have a negative number! The whole point of creating a budget is to have a starting point. Figure out how much you want to save every month and adjust your spending and saving until you achieve your goal.