Simply put, a budget requires you to calculate your monthly income, pick a budgeting method and monitor your progress.
Step 1: Determine Your Net Income
The first step to creating a budget is noting the amount of money you generate from your income stream(s). Remember to account for taxes and other payroll deductions, such as Social Security, 401(k) contributions and flexible spending accounts — this is your net income.
Step 2: Track Your Spending
Begin by listing your fixed expenses. These are your regular bills such as rent or mortgage, utilities, car payments and insurance payments. Next, list your variable expenses. These change month to month, and include necessities such as groceries and gas, but also things like entertainment and shopping. If you’re working backwards to determine a budget, your credit card and bank statements often itemize all monthly expenses. If you’re working forward to achieve your monthly budget goals, record your daily spending in a notepad, on your phone or using an app.
Step 3: Set Your Goals
Make a list of the financial goals you want to achieve in the short- and long-term.
Short-term goals should take no longer than a year to achieve. Examples of short-term goals include reducing credit card debt, saving for an upcoming vacation, buying a new car, etc.
Long-term goals may take years to achieve. Examples of long-term goals include saving for retirement, saving for your child’s education, purchasing a home, etc.
Step 4: Make A Plan
Your budget is almost complete. Now that you’ve determined your income and spending, see where you have money remaining from your net income(s) to allocate toward your goals.
If you find that you need to cut back on spending, look at your variable expenses first. If numbers still aren’t adding up, see if you need to adjust your fixed expenses. Perhaps you can decrease your rent by looking for a new place to live, or cut car insurance costs, for example, by shopping around for discounts.
Small savings can add up to a lot of money, so don’t overlook the minor expenses… or minor advancements towards your goals.
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Episode 89 – Empowering You to Become Financially Sustainable With Myles Wakeham