Budgeting is crucial as it allows you to draw a plan for spending money. It ensures you will always have money for a secure future. To make things easy for you, here is a step-by-step guide on how to budget.
Gather Your Financial Paperwork
To make a proper budget, you need to have a clear idea about the current financial situation. Gather following financial statements including,
- Bank statements
- Recent utility bills
- Loan statements
- Credit card bills
- Auto loan statements
Depending on the state you live, you also need to gather your tax statements and investment documents. This will allow you to evaluate your current financial situation. These documents will give you a clear idea about your monthly income from all sources and expenses. The more information you dig up, the better.
If you are a salaried professional, you need to look at the net monthly payment. And if you are self-employed, you need to calculate your average monthly earnings. You should also include other sources of income, like child support, rental income, interest, dividends, and alimony.
List Your Monthly Expenses
Write down the list of expenses you expect to have every month. This list of costs can include:
- Rent or Mortgage payments
- Car payments
- Personal care
- Child care
- Eating out
- Transportation costs
You can use your credit card statements, bank statements, receipts from the last three months to know different living expenses. Group these expenses in categories. For example, you can group eating out, travel, and entertainment together.
Separate Needs and Wants
One of the essential things when learning how to budget is identifying wants and needs. When you look at the list of expenses, ask yourself a simple question. Do I want it? Or Do I need it? Set your priorities clear when spending on wants and needs. The primary objective of making a budget is to cut unnecessary expenses and save more.
Calculate the income and expenses
If your income is getting higher than your expenses, it is a good thing. If things are otherwise, you need some serious rethinking. It is a clear case of overspending. In this case, you need to cut your expenses for a better balance of monthly income and expenses.
If you have more income than expenses, a 50-30-20 budgeting strategy will work for you. In this budget strategy, 50% of the amount is allocated to meet your essential expenses or needs. 30% can be allocated to your wants. The remaining 20% is allocated for debt repayment and savings.
You know some expenses just come up like your annual membership, new shoes, or school expenses. Set aside some money every month to meet these expenses.
Design Your Budget
After you have the complete picture, you can balance the budget to accommodate essential things. If the expenses are more than income, look at variable expenses that change every month. Find areas you can cut. Look for opportunities to reduce spending. For example, you can dine out once a month instead of every weekend.
Put your plan into action
After you have prepared the budget, make sure you follow the rules, recommendations, and restrictions. This way, you can meet your budgeting objectives.
The step-by-guide on how to budget makes things easy. It helps you achieve a financial balance and build wealth in the long-term.