Personal Finance 101 Series : How to Create a Budget That Actually Works for You Ep. 2
How to Create a Budget That Actually Works for You
You've come to the perfect place if you want to take
charge of your money and stop wondering where it goes. Gaining control and
having a financial plan are the goals of budgeting, not restricting yourself.
I'll walk you through the process of making a budget that suits you and gives
you the ability to invest, save, and spend sensibly in this post.
Why Budgeting Is Important
Does your money seem to vanish by the time bills are due,
even after you get paid? You are not by yourself. The main goal of budgeting is
to make sure your spending is in line with your objectives. Prioritizing the
things that are important to you while still making time for the activities you
like is the goal, not deprivation. With a budget, you can take charge of your
money, save for the future, and yet have fun.
The Budgeting Basics: 50/30/20 Rule
A simple method that works for most people is the
50/30/20 rule. Here’s how it breaks down:
- 50%
for Needs: This includes essential expenses like rent, utilities,
groceries, and transportation.
- 30%
for Wants: This covers the non-essentials, such as dining out,
entertainment, or that new gadget you’ve had your eye on.
- 20%
for Savings/Debt Repayment: This could be building an emergency fund,
saving for future goals, or paying off credit card debt.
For example, if you earn $3,000 a month, your budget will
look like this:
- $1,500
for needs
- $900
for wants
- $600
for savings or debt repayment
Step-by-Step Guide to Creating Your Budget
Creating a budget is a straightforward process, and you
can start with just a few simple steps.
Step 1: Track Your Income
Begin by figuring out your total monthly income after
taxes. Include your salary, side hustles, and any other regular income streams.
Step 2: List Your Expenses
Now, write down all of your expenses. Break them into fixed
and variable categories:
- Fixed
expenses are regular bills like rent or car payments.
- Variable
expenses change each month, like groceries, entertainment, or gas.
If you're unsure about your spending, take a look at your
recent bank statements to track exactly where your money is going.
Step 3: Categorize Your Expenses
Next, assign each expense to one of these three
categories: needs, wants, or savings/debt. This is where the 50/30/20 rule
helps you prioritize. You might find that some "wants" are taking up
space in your "needs" or "savings" categories.
Step 4: Calculate the Difference
Subtract your total expenses from your income. If you're
overspending, this is where you can find areas to cut back. If you have money
left over, you can either add it to your savings or treat yourself to something
nice.
Tools and Tips for Successful Budgeting
Having the appropriate tools makes budgeting much
simpler. You may track your income and expenses automatically with a variety of
programs, such as Google Sheets, Mint, and YNAB (You Need A Budget). These
tools can help you keep track of your goals, classify your spending, and even
notify you when you're approaching your spending limitations.
Real-Life Example: Sarah’s Budget
Consider Sarah, who makes $2,500 every month. After
creating her budget, she discovered that she was splurging on subscriptions and
eating out. She was able to save money by reclassifying her "wants"
category. She is now accumulating an emergency reserve and is no longer
concerned about going over budget. Sarah enjoys live guilt-free while
maintaining her financial objectives and checking her budget on a regular
basis.
Common Budgeting Pitfalls and How to Avoid Them
- Not
Accounting for Irregular Expenses: Make sure to account for expenses that
don’t come every month, such as car insurance or gifts. These can throw
you off if you forget about them.
- Being
Too Strict: While discipline is important, being overly restrictive can
make budgeting feel like a chore. Allow for some flexibility so you don’t
feel deprived.
- Not
Reviewing Your Budget Regularly: Your budget is a living document. Check
it monthly and make adjustments as needed. Life changes, and your budget
should reflect those changes.
Wrapping Up
If you found this post helpful, don’t forget to share it
with someone who might need it! And if you have any questions, drop them in the
comments below. Budgeting doesn’t have to be intimidating — just take it one
step at a time!