Do you have a specific goal in mind for your financial future? Was your New Year’s resolution to save for a mortgage, a fancy vacation, pay off debt, or create an emergency fund? If it was or you are just curious on how to budget better, here are some steps on how to create and stay on a budget.
1. Listing out Your Income
The first place to start when building any budget is your income. Both your gross income and your net income are important to know. Knowing your gross income is important for applying for things such as mortgages or auto loans, but not to helpful when building budgets. Net income, on the other hand, is what you take home after taxes and other pre-tax expenses are removed from your gross income. This makes your net income the best for building a budget because you will not have to guess how your taxes, retirement, or health care costs will impact your budget.
When listing out your income streams make sure to list each one out separately. This will let you see how much each household member or job is contributing to your total household income. Households with multiple people contributing to expenses will either divide the costs evenly, by income percentages to total income, or any other agreed on way. There is no right or wrong way to divide costs among household members so pick which method works best for your household situation.
2. Detailing Your Spending/Debt
After you have listed out your household incomes it is now time to begin with your expenses. Always begin your list of expenses with a list of non-negotiable expenses. These might include:
- Car payments
- Credit card payments
- Alimony
- Child Care
- Personal Loan payments
- Student Loan payments
- Mortgage payment
- Car insurance
- Homeowners insurance
- Property taxes
- Utilities
- Gas, Heat, Electric, Internet, etc.
- Any other expenses that must be paid month to month
Listing these out first is important because they are expenses that can only be changed with significant effort or not at all.
If you are saving for a home, you will not have a mortgage or homeowning expenses so what you have left over, minus a cushion, is what you can afford for all the home expenses. After you have completed your list of un-avoidable expenses/debts you can begin listing other expenses. It is best to get an average of at least the last 6 months for each expense. You should do this for things such as toiletries, subscriptions and dining out by going through your credit card statements and itemizing or categorizing your charges to get the 6-month average. Make sure to include what you spend every month on your credit card in your budget and not just the minimum amount you must pay. Variable expenses include but are not limited to:
- Groceries
- Dining out/take-out
- Medical Expenses (outside of insurance if taken out of paycheck)
- Prescription monthly cost (best to take the annual total and divide it by 12)
- Standard Doctor’s appointments
- Standard Dentist appointments
- Anticipated medical expenses for tests or procedures
- Vehicle maintenance costs
- Gas
- Oil changes
- Brakes
- New tires, etc.
- Pet expenses
- Grooming Expenses
- Toiletry expenses
- anticipated annual cost of shampoo, toothpaste, conditioner, etc.
- Subscriptions
- Gyms, Streaming services (Netflix, Disney+, etc.), etc.
- Cell phone
- Entertainment expenses
- Travel expenses
- Miscellaneous expenses
- (The average of any item normally purchased not included in a specific category).
- Any other expenses that you prioritize on a regular basis
After you have determined your expenses, subtract them from your net monthly income to get how much you have left over in your budget for savings goals.
3. Determine Savings Goals
Now it is time to determine what your long-term savings goals are. Are you looking to buy a new home? Is there a dream vacation you want to save for? Trying to contribute more for retirement? List out each financial goal in a list of most important to least with dates you want to have your goal met or lengths of time. The length of time or end date is important in determining how much you need to save each month.
For example, say you are looking to save $40,000 in 2 years for a down payment on a home. To get monthly increments you should do the following.
2 Years x 12 Months in a Year = 24 Monthly
$40,000 end goal / 24 months = Roughly $1,667 savings/month
Another example is $5,000 for a vacation in 6 months
$5,000 end goal/ 6 months = Roughly $834 savings/month
Now that you know how much you need to set aside each month to reach your goal you can develop a plan to reach that goal and determine if you might need to adjust your plan.
4. Make a Plan
When developing your savings plan begin with what you had left over in your unaltered budget. If you have enough in your extra savings to cover what you need for your goal, that is great! You will be able to easily set aside the money you need to meet your goal and continue to save for future needs. If you don’t have enough then the best place to start is your flexible expenses.
Flexible expenses are things like take-out, dining out, entertainment expenses, certain subscriptions and more. Begin by going through these expenses, prioritizing them, and then cutting them down as much as you think you can stick to. Once you have completed this process, if you still need to make up some savings, see how much you could save by switching to some generic brands of the everyday products you use. This might not be a lot in the short-term, but it might be enough to get you to your goal.
If you have reached the max you can cut back, then you have two routes you can take to reach your goal. You will either need to extend the amount of time you need to reach the goal or investigate the option of finding a new source of income. If neither of these steps get you to your goal you might need to change the level of your goals or types of goals.
5. Track your Progress
The final and possibly one of the most important steps is to track your progress. Once you have set a plan for yourself, you need to track your spending and saving so you can see if you are on-target, falling behind or jumping ahead of schedule. You do this by entering in your actual expenses and income each month, finding your savings amount, and comparing the total you have saved with where you should be.
For example, if you are trying to save $40,000 in 2 years and you are 6 months in you should have saved $10,000. You do this by taking how much you should save each month and multiply it by how many months you have been saving. You then take this number and compare it to your actual savings to see where you lie. This is the best way to stay accountable to yourself and make your financial goals a reality!
Best of luck!
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