Everyone knows, budgeting sounds like a bore. But it’s a very necessary step to totally owning your financial situation, and if you have no idea where your money is going every month, you might find yourself over drafting, overspending, and therefore, over-stressing. And who wants to live life like that? If you’re a budgeting beginner, here is where to start in five easy steps.
1. Track your spending
Chances are, you track everything in your life from your Insta followers to every item in your wardrobe. So why wouldn’t you track your expenses?
The only way you can create an effective budget is if you first track your expenses for at least a month, whether it’s through a budgeting app or on pen and paper. You need to get a good grasp on your typical spending and saving habits, so that when you do create a budget, it’s one you can realistically follow.
After a month of tracking your budget, you might discover you’re spending $40 a month on lattes, so clearly, you have to cut back. But totally nixing that expense from your new budget might be setting yourself up for failure. Instead, carve out $20 a month to spend on your favorite beverage, that way you’re reeling it in without totally depriving yourself. Make sense?
2. Automate your savings
Struggling to save on a consistent basis? Join the club.
The easiest way to start socking away cash for your future self is to automate those savings. That way, you won’t even have to feel the pinch in your paycheck; if you don’t see it, you won’t miss it.
Not sure how much you should be saving? A good goal to aim for is to put 20 percent of your take-home pay toward saving, investing or paying down debt. Don’t get too hung up on that percentage, though; it could be more or less, dependent on your current financial situation. What is important, though, is that you just start saving.
3. Take stock of your wants vs. needs
After you put that 20 percent toward your financial future, you’ve got 80 percent of your take-home pay to play with.
Aim to put no more than 50 percent of that take-home pay toward essentials, and no more than 30 percent toward discretionary spending. Essential expenses should include four main categories: housing, transportation, groceries and utilities. If you find yourself stretching yourself too thin in this category, re-evaluate whether you really need to live.
Next up is that 30 percent chunk spent on discretionary spending, so things that you want, but don’t need.
Spending categories under this portion of your budget can include expenses like entertainment, dining out and your cell phone plan. These expenses are kind of like the bad-for-you part of your budget that you can often trim. If you find yourself panicking in the days leading up to payday, this is the area of your budget you should consider cutting back on. You might want that latest and greatest smartphone, but do you need it? No. And your budget can help you determine how many of those “wants” you can actually afford.
4. Figure out your paying preferences
To really maximize your money, come up with a plan as to how you’ll pay for each expense, factoring in all the credit and debit cards in your wallet.
For example, if you know that one specific card in your wallet hooks you up with double points for dining out, you’ll want to make sure you use that card when you go out to eat. Or, if another card you own gives you 6 percent cash back at supermarkets, you should make that your go-to grocery card.
Figuring out how to maximize your money with credit cards will take some time and organization, but once you write it all down and figure out which cards work best for which categories and determine any hidden fees, you’ll stretch your budget so much further. Don’t forget to establish a strict payment plan for each of your credit cards, too, making sure you factor in when every bill is due and how much you can afford to spend in order to pay if off in full every time, all the time.
5. Tackle your debt
When creating a budget, you also need to take stock of any expensive debt you’re carrying, and figure out an action plan to pay down the high interest debt first.
If you do have a ton of debt, you’re not doomed. But you should switch your budget up and put 30 percent of your take-home pay toward financial obligations and 20 percent toward discretionary spending. You won’t be stuck in payment purgatory forever, just really work hard toward paying that off!
Creating a budget is totally doable with a little discipline.