If you’ve been struggling to make the most out of your financial situation for a while now, then you may have finally decided that it’s time to discover the benefits of a budget for yourself. Many of us know how vital it is to keep track of our spending habits, but it can be difficult to stick to a specific strategy at first – particularly if you’re not used to counting every penny.
Whether you’re budgeting for the first time, or you’re switching your budgeting strategy to try something new, it helps to go back to the basics and get the initial part of your plan right. Here’s your introduction to, and what you can do to boost your chances of success.
The First Steps in your Budgeting Plan
The first part of building a budget is often much simpler than you’d think. Generally, the aim is to figure out how much money you have going out of your bank account each month, and how much you have coming in. Once you know what your cash flow looks like, you can work on making sure that you’re spending less than you earn.
To start with, figure out what your income looks like after you’ve paid your tax. Remember, if you have automatic deductions on your income for things like health and life insurance, you should keep a note of those to give you a more complete overview of your expenditure. Once you know your after-tax income, you can choose a budgeting plan that’s designed to cover all of your needs and some of your wants. Remember, you also need a section in your budget for saving.
Choose a Simple Budgeting Plan
With an overview of your incoming and outgoing expenses in place, you can begin to look at a simple budgeting plan. One of the most common options splits your incoming money into three sections. The first section dedicates 50% of your overall income to the necessities that you absolutely have to pay for. The second portion puts 30% of your money towards the things that you want. Finally, the last 20% goes towards things like repaying your debts and saving for the future.
Remember, the biggest portion of your budget needs to go towards the things that you have to pay for – these are the bills and that you essentially can’t live without. Remember to keep track of irregular “necessary” expenses when budgeting here. Your needs should include things like your rent or mortgage, insurance, food, basic utilities, transportations, and child care or anything else you need to ensure you can continue to work.
Don’t Ignore the Things that You Want
If you aim to eliminate debt or reach your savings goals as quickly as possible, then you might try to cut your want percentage back . It’s completely up to you if you want to do this but remember that it’s important not to ignore what you want entirely. If you don’t leave any room at all in your budget for fun, then you’re more likely to fall off the wagon and start spending more frivolously.
If you do think that it’s a better idea to focus on your savings than what you want right now, you can always consider switching the savings part of your budget to 30% and using the 20% part for wants instead. Just remember that your budget is meant to be there as a tool to help you, not as a straitjacket that stops you from enjoying your life.
Prepare for the Future
It’s important to put at least 20% of your income away for the unexpected things in life that can always come your way. Your savings are there to help you reach your goals and ensure that you don’t fall into turmoil if something goes wrong. If it helps, think about automating your savings as much as possible, so you don’t have to think about splitting up your money each month. You can begin to think about your savings as a “necessary expense” so that you’re less likely to tap into them.
Remember that as you continue to work on your budgeting strategy and improve your spending habits, it’s important to track your progress. Recording your spending with budgeting and savings tools shows you that you’re capable of achieving your goals. What’s more, tracking your budget will remind you to come back and alter it from time to time, if necessary.