For some people, budgeting is a difficult and scary prospect. The thought of allocating your income into categories can be a daunting task. Most of us consider budgeting from a negative perspective. The thought of not having our creature comforts – like morning coffee or play money – can make budgeting seem not so user friendly. The trick is to change your thinking around to the positive and realize that if you have a budget you can factor in those things you enjoy, and rest assured your bills are covered too. It should also include a certain amount to be set aside for savings. After all, at some point you will reach retirement age and you need to be ready when that time comes.
1) 50/20/30 Method
Here’s a relatively simple method which was made popular by Senator Elizabeth Warren, a bankruptcy expert. The plan is 50% of your income should go to essentials. This means your basic bills that are necessities to maintain your household. This includes rent or mortgage, heat and electricity, phone and Internet services, credit cards and car payments, insurances and so on. The next step is to set aside 20% for investment savings. This could be a 401k, an interest-bearing savings account like an IRA, and reducing debt such as student loans and credit cards you may have maxed out. The last 30% of your income is then reserved for personal spending. This can include dining out, entertainment, vacations, etc. It should also include creative ways to cut down on spending by shopping smarter – such as shopping the sales and using coupons for groceries.
2) Manage Fluctuating Income
Some people may not necessarily have the same paycheck from week to week. This can make budgeting a bit of a challenge. If you work for yourself, there are some ways to make a manageable budget. The first thing is to note your average net income. Then make a list of your essential expenses – what you need for recurring bills each month – and compare it to your average net income. Do you keep track of your time? After all, time is money as they say. If you need to increase the amount of work time to adjust for more income, it’s recommended that you plan ahead. This way you won’t fall behind on your basic bills. Once you have your basic bills covered, make a list of things you want – but may not necessarily be essential to have. Keep savings in mind with what you have leftover.
3) Track Your Spending
If you don’t know how much you spend, it may be difficult to create a budget. Experts advise keeping track of your spending for a month, so you can see what your patterns are. You may be amazed at how all those little purchases add up! When you’re tracking your spending, make a list every time you buy something. Keep the list in categories so at the end of the month you can add them up and see where you’re at with spending. List all your fixed expenses first; those bills which recur monthly. Next, list all your fluctuating expenses. These include gas, dining out, entertainment and things that vary from month to month. At the end of the month, add it all up. Then you’ll be able to see where you can cut down and possible add to your savings as a result.
4) Make a Plan
Once you’ve completed a month of tracking your expenses, it’s time to make a plan. With the information you’ve gathered, you’ll be able to see how much you need for necessities, and how much you spend on non-essentials. Use this information as a guide to formulate a budgetary plan. You’ll be much better able to predict, with a fair level of accuracy, where your money is going each month. Once you’ve included your fixed expenses, you can continue tracking your variable ones if they tend to change often. You can even go as far as to break your non-essential expenses into categories of absolute needs, and those that are just wants. From there, make a wish list. Keep it handy and each month pick something from the list. That way you don’t buy everything at once and can therefore add to your savings.