Throughout life, it’s good to create a budget and track what’s coming in and what’s going out. A budget is a financial plan that shows income and expenses over a period of time.
Budgeting might sound boring but it’s very important and the starting point for personal finance. In order to achieve your financial goals, you need to control spending.
The aim is to have a positive amount left over. Once you are making more than your spending, you can set financial goals and achieve them.
Steps for putting together a budget:
- Gather all your financial paperwork
- Bank statements
- Investment accounts
- Paystubs
- Recent utility bills
- Credit Card bills
- Receipts
- Mortgage statements
- Auto loan or lease statements
- Calculate your income for the month. Use the net income after taxes are deducted from your regular paycheck. If you are self-employed or have outside sources of income, include this into the total amount.
- List your monthly expenses
Use receipts, credit card statements, venmo transactions, and bank statements to identify all your monthly spending
- Add up your total monthly income and subtract your total monthly expenses.
If you have money left over after paying your expenses, that’s great! This money can be used to save, pay off debt, or invest.
There’s two ways to control your budget.
- Increase your income
- decrease your expenses.
So, how do you Increase your income?
- Get a (new) job
- Ask for a raise
- Start side hustle
- Make investments (Stocks, Bonds, Real Estate)
- Start a business
The other way is to decrease expenses.
When looking at expenses, you need to differentiate between needs and wants. Needs should be prioritized and your budget should cover these items first.
Needs:
The following are examples of needs:
- Groceries
- Housing
- Utilities
- Transportation
- Insurance
- Loan Payments (if applicable)
- Child care (if you have kids and need to work)
Wants:
Wants are things that you can do without if you had to.
Examples will change depending on the person but these could be
- Restaurant dinners/Eating out
- gifts
- entertainment
- concert tickets/sporting events
- personal care
- travel
- electronics
Money Saving Tip: If your expenses are high, look carefully at your spending habits. Do you need to subscribe to Netflix, Hulu, Disney+, and Amazon Prime Video?
If you find that you have a surplus, the best thing you can do is pay off high interest debt such as credit card or consumer credit debt. Once you pay off debts, transfer the same amount into savings account and build up an emergency fund.
Your budget will change throughout different life events and as you grow but keep on eye on it.
Tracking your progress is key. Are you staying on track? Did you have a shortfall?
Why does this matter?
Pay down debt, increase savings and invest, and experience the power of compounding!
If you keep this up and don’t experience too much lifestyle inflation (meaning increasing your expenses when your salary increases), you can set a goal of when you want to retire.
Retirement doesn’t have to be complicated. And for the younger people reading this post, retirement may seem a long way off but with proper planning and financial discipline, you might be able to retire by 30.
