Budgets play a crucial role in promoting financial awareness, which leads to more responsible money choices. Let’s take a look at how to create a budget and review some popular budgeting strategies.
How to create a budget:
- Track spending and income. This includes all your financial documents, like account statements, bills, and pay stubs.
- Tally up totals. Calculate the totals of your monthly expenses and all streams of income.
- List your needs. Needs include anything that is essential for living and basic functions, such as mortgage payments. As you list each need, write down its corresponding cost. Sum up the total when you’ve finished.
- List your wants. This includes anything that is not essential for living, like entertainment costs. Note the monthly cost of each item and add up the total when you’re done.
- Assign dollar amounts to your expenses. Open a new spreadsheet and copy your list of expenses, starting with fixed-cost needs, then non fixed-cost needs, and finally, wants. Assign an appropriate dollar amount for each of these costs, making sure the total does not exceed your estimated total for monthly expenses.
- Review and tweak as necessary. You will likely need to adjust the amounts in each expense category at least once a year to keep your budget relevant.
There is a wide range of budgeting systems to fit every kind of money management style.
- The traditional budget. After working out a number for every expense category, track spending throughout the month to ensure you’re sticking to the plan.
- The money-envelope system. Withdraw the amount you plan to spend on all non-fixed expenses in cash at the start of the month. Divide the cash into separate envelopes, designating one for each of these expenses. Then, withdraw cash from the appropriate envelope when making a purchase in that category.
- The 50/30/20 budget. Set aside 50 percent of your budget for needs, 30 percent for wants, and the remaining 20 percent for savings.
A well-designed budget can provide its creator with a sense of financial security and freedom. When you stick to a budget, you’ll always know you have enough to get through the month and save for the future.